S corporations are a preferred option for small business owners due to the advantages of pass-through taxation and limited liability they provide. However, there are several restrictions that business owners should be aware of when it comes to owning subsidiaries.
Prior to anything else, it’s critical to comprehend what a subsidiary is. A company that is a subsidiary of another company is referred to as the parent company. Typically, subsidiaries are established with a specific objective in mind, such as broadening the parent company’s business operations or entering a new market.
An S corporation may now have subsidiaries. Yes, but only under certain conditions. An S corporation may have subsidiaries, but all of the income from such companies must be disclosed on the S corporation’s tax return, according to the Internal Revenue Service (IRS). This is so that shareholders’ individual tax returns can be used to report the company’s income and losses, which are passed through to S companies as pass-through businesses.
Additionally, if you own a S corporation, you are not regarded as a self-employed person. Instead, you are a worker for the business and are compensated with pay or a salary. As a result, both you and the business are responsible for paying payroll taxes, such as Social Security and Medicare taxes.
A shareholder is referred to as the S corporation’s owner. Owners of the business are the shareholders, who choose the board of directors to run its operations. The officials that will oversee the day-to-day running of the company are then chosen by the board of directors.
Even if a S corporation is allowed to possess a sole proprietorship, doing so is not advised. The S corporation may not want to own a sole proprietorship since they do not provide the same level of limited liability protection as corporations provide.
The last reason is why a S corporation would hold an LLC. Protection from liability can be one of them. The S corporation can reduce its exposure to lawsuits and other legal actions by setting up an LLC. Additionally, an LLC could provide more management and tax flexibility. It’s crucial to remember that the S corporation’s tax return will still need the LLC to record any revenue made.
Despite the fact that a S corporation is permitted to create subsidiaries, business owners should be aware of the restrictions and potential tax consequences. It’s crucial to seek advice from a tax expert or lawyer to decide whether setting up a subsidiary is the best course of action for your company.