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Level 1
posted Nov 9, 2020 10:52:47 AM

Does a disregarded holding company include profit and loss from C-corp subsidiaries to the individual owner?

So I'm wanting to create a holding company that will provide central management across a variety of business streams. The holding company will be a single-member LLC, disregarded, with all profit/loss showing on my individual return for the time being.

 

I want to create 2 other companies, a C-corp and another single-member LLC, that are wholly owned subsidiaries of the holding company. From what I understand, the holding company can require subsidiaries to allow the parent to file a consolidated return on its behalf.   

 

I have several questions in this scenario:

  1. Are there any filing requirements at all for the C-Corp with a consolidated return agreement? If not, what documentation is required to demonstrated this consolidated return agreement is in place (e.g. just the Articles of Incorporation or a resolution from a board meeting)?
  2. Can the profit/loss of the C-corp and other disregarded subsidiary entities such as a sibling single-member LLC be combined (for example if C-Corp lost $10k but LLC profited $10k is this a taxable profit of $0 that reports on my individual return)?
  3. Does the holding company have to file a corporate tax return on behalf of the consolidated C-corp with the consolidated return agreement in place or given it's a disregarded entity, the combined profit/loss flow to me, the sole individual member?

At a high level, I'm wanting to understand how does profit and loss work for a holding company with different types of entities (e.g. one or more C-Corps and one or more single-member, or multi-member LLC's treated as partnerships) where the holding company wants to share the tax burden across all entities (e.g. a loss of one offsets the profit of another)? From that perspective, I want to treat my holding company as an investment arm across the different business streams that acts as a capital contributor reinvesting profits from one business into growing another business as needed.

 

Thanks!

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1 Best answer
Level 13
Nov 9, 2020 12:58:05 PM

I definitely agree with @Critter-3 in that you need to seek some professional tax advice where you can have a one on one discussion of your goals.

Having said that, your one on one discussion with a tax professional will provide you with some guidance as based on your current facts, you are off track.

  • Based on your current facts, you don't have a structure that will require or allow a consolidated tax return.
  • Your holding company, a SMLLC, is a disregarded entity, and as such, will be reported directly on your tax return.
  • If you want to set up a C corporation, you can do that, but using your SMLLC will be treated as if you owned it directly; sole shareholder.
  • The C corporation can certainly have a SMLLC, but this is once again treated as a disregarded entity and will essentially be treated as a division on the C corporation tax return.  This SMLLC is not a subsidiary since it is disregarded.
  • So at the end of the day, based on your current facts, you will have:
    • A C corporation that owns a SMLLC that is disregarded and will be treated as a division.  So all earnings of this SMLLC will be reported on the C corporation tax return; form 1120.
    • You will be the sole shareholder of the C corporation.  There will be nothing to report from the C corporation since it is a separate tax paying entity and all the tax will be paid at the C corporation level.
    • You will have taxable income should the C corporation pay out a dividend.  Paying out a dividend will require understanding the computation of earnings and profits which is not the same as retained earnings.

Once again, get some professional guidance.

3 Replies
Level 15
Nov 9, 2020 10:59:22 AM

You need to seek local professional guidance to do anything like what you want to do ... a tax attorney or one that understands tax/business laws are preferred.   Getting this kind of advice in a nameless faceless public forum is not the best idea. 

Level 13
Nov 9, 2020 12:58:05 PM

I definitely agree with @Critter-3 in that you need to seek some professional tax advice where you can have a one on one discussion of your goals.

Having said that, your one on one discussion with a tax professional will provide you with some guidance as based on your current facts, you are off track.

  • Based on your current facts, you don't have a structure that will require or allow a consolidated tax return.
  • Your holding company, a SMLLC, is a disregarded entity, and as such, will be reported directly on your tax return.
  • If you want to set up a C corporation, you can do that, but using your SMLLC will be treated as if you owned it directly; sole shareholder.
  • The C corporation can certainly have a SMLLC, but this is once again treated as a disregarded entity and will essentially be treated as a division on the C corporation tax return.  This SMLLC is not a subsidiary since it is disregarded.
  • So at the end of the day, based on your current facts, you will have:
    • A C corporation that owns a SMLLC that is disregarded and will be treated as a division.  So all earnings of this SMLLC will be reported on the C corporation tax return; form 1120.
    • You will be the sole shareholder of the C corporation.  There will be nothing to report from the C corporation since it is a separate tax paying entity and all the tax will be paid at the C corporation level.
    • You will have taxable income should the C corporation pay out a dividend.  Paying out a dividend will require understanding the computation of earnings and profits which is not the same as retained earnings.

Once again, get some professional guidance.

Level 1
Nov 13, 2020 11:55:40 AM

Thanks for giving this context. This helps a lot!