How to create a subsidiary to your corporation

By Michael Banner - Nov 10, 2016     

We often get asked by our existing customers, who have already had us form a new corporation or LLC for them, how they can set up a subsidiary entity.

Creating a subsidiary is as easy as forming a new entity. There really isn't anything special you do except when it comes to establishing the owner of the new entity.

When we form a new corporation, we turn it over to whoever our customer designates be in control as the initial director (or directors). Then the responsibility of that (those) initial director(s) is (are) to set up the structure of the corporation (i.e. elect officers, adopt bylaws, issue stock, elect to be taxed as an "S Corp." with the IRS, etc.).

At that point, the corporation is just like you or I in that it is recognized by the law as a legal person who has rights to own and operate other assets and entities. So whether you want to personally form and own a new entity (INC or LLC) or you want to do this through your corporation, your process is essentially the same.

If you want to form a new corporation and you’ll have the existing corporation own (as a wholly owned subsidiary) the new Corp., you would follow the same process you did with your current corporation. The only difference is at the time of issuing stock, you would have corporation B (the new Corp.) issue its stock to corporation A).

Instead, if you wanted to form a new LLC instead, the process is slightly different. Check with your tax advisor on this, but often you would have the LLC managed by a manager (i.e. you) or managers, but owned by one member (membership and ownership are synonymous), your existing corporation. Often what happens after formation is that you as the initial member/manager will set up an operating agreement that states how the LLC will be operated, and how the roles are doled out: who is/are the manager(s) and the corporation is the sole member. We provide an operating agreement on CD, with two fill-in-the-blank templates to help you with this part.

That's it.

You run the underlying entity similarly to the initial (parent) entity. Keep in mind that you want to make sure the dealings between the two entities are done at arm's length. That way, the two entities are considered separate.

You'll want to run all of this by your tax advisor, both in the type of entity that is best for this and how you'll file your tax returns (i.e. as a consolidated corporate return or two separate returns).

About Michael Banner
  CEO & Founder of SmallBiZ.com, created over seventeen years ago to help small business owners simplify the process of starting & managing their small businesses. SmallBiZ.com now serves over 10,000 businesses per year with various filing and subscription services; in addition to the 1000's of daily visitors to www.smallbiz.com, accessing free services, help pages, & educational videos & webinars.


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