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socrateaser
socrateaser, Attorney
Category: Business Law
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Experience:  Retired (mostly)
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I am forming 2 entities: #1 is an LLC to work as an independent

Resolved Question:

I am forming 2 entities:

#1 is an LLC to work as an independent contractor
#2 is a startup where I'm founder/CEO and have 100% of profit but with 2 founders with equity stakes. Was advised to set this up as a Manager Managed LLC with Capital interest grant options for the 2 others (laid out in the Operating Agreement).

My question is what is the best way to structure this - can I have one LLC as a parent company with these 2 as subsidiaries?
Submitted: 1 year ago.
Category: Business Law
Expert:  socrateaser replied 1 year ago.
Hello,

The reason for multiple LLCs and a hierarchy of organizational control is generally for protection from legal action against a subsidiary, which would otherwise affect a parent. The problem with this is that in order to actually effect this protection, there must be a genuine independence in management and control of the separate organizations. Otherwise, a determined adversary may convince the court to treat all of the organizations as one.

Additionally, California taxes each LLC with a minimum $800 annual fee, so creating three LLCs, guarantees you an additional $2,400 per year in administrative expense -- and this does not include the substantial cost of conducting separate accounting and tax preparation for each LLC.

Assuming you are willing to suffer this additional time and expense, then the answer to your question is "yes," you can have a parent LLC that owns the subsidiaries. But, if your equity owners will only own a portion of a subsidiary LLC, then your parent LLC cannot possibly own 100% of the structure. So, as long as your intend is to own all of the LLCs as partners with your equity owners, then your contemplated plan is workable.

Please let me know if I can be of further assistance.
Customer: replied 1 year ago.

Thank you ST. So seems l would be better off having just 2 separate LLC's (and 2 fees/sets of books) - one for the independent contractor business and then one for the startup with partners?

Expert:  socrateaser replied 1 year ago.
Yes, I think that two separate LLCs is probably the way to go, given your description of the issues. I don't see any reason for a parent business entity.

Hope this helps.
socrateaser, Attorney
Category: Business Law
Satisfied Customers: 33870
Experience: Retired (mostly)
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