Hello Ihsan,

Thank you for your question. The short answer is that yes, you can use an S-Corp to fund an LLC. However, there are a number of things to keep in mind when doing this.

For one thing, if your new LLC fails your S-Corp will still be responsible for repaying the loan. If you were able to get nonrecourse financing directly for the LLC and the new company failed then this wouldn’t be the case. However, since your S-Corp is essentially re-lending money that it has borrowed, you aren’t insulated if your new venture fails.

Secondly, you need to be very careful about how you move money between these entities. The rules for S-Corps and LLCs are different. For example, the IRS does not recognize the right of LLC owners to collect salaries from their company. Instead, all disbursements (except for guaranteed payments) are considered draws against profits. Even if you list your S-Corp as the owner of the LLC, if you’re a control person in the S-Corp this may prevent you from paying yourself a salary from the LLC.

If you want to use an S-Corp to fund an LLC you may do so. However, be mindful when setting up the new LLC of who the managers and members are (the S-Corp or individual people). These decisions will ultimately decide how your S-Corp and LLC fit together and how money can flow through your companies.

If you’d like more information on S-Corps, LLCs, other business entities, and their respective rules and restrictions, be sure to check out our article on LLCs vs S-Corps vs C-Corps here: https://fitsmallbusiness.com/llc-vs-s-corp-vs-c-corp/

Hope this helps,
Dock