# Parents, subsidiaries and groups

> Disregarded, consolidated or separate: how a subsidiary is taxed, and a $12,000 intercompany fee booked in each entity and eliminated in the group.

Source: https://lopifi.com/learn/parent-and-subsidiary-structures
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**How do parent and subsidiary company structures work for tax?** Disregarded, consolidated or separate: how a subsidiary is taxed, and a $12,000 intercompany fee booked in each entity and eliminated in the group.

A company with more than one entity is a group: a **parent** that owns one or more [subsidiaries](https://lopifi.com/md/glossary/subsidiary). Startups add them to hold a foreign team, ring-fence a risky line of business, or hold IP apart from operations. Each subsidiary is its own legal entity with its own books, bank account and filings.

Tax depends on what the subsidiary is. A wholly owned LLC that hasn't elected corporate status is a [disregarded entity](https://lopifi.com/md/glossary/disregarded-entity): its income is simply the parent's, on the parent's Form 1120. A subsidiary corporation files its own return — unless the group files a [consolidated return](https://lopifi.com/md/glossary/consolidated-return), which an affiliated group may: a common parent and corporations it owns at least 80% of by vote and by value. A foreign subsidiary files in its own country, and its US owners may have Form 5471 to file.

> “An affiliated group of corporations shall, subject to the provisions of this chapter, have the privilege of making a consolidated return”

— [26 U.S.C. §1501](https://www.law.cornell.edu/uscode/text/26/1501), The privilege of filing a consolidated return

> “(A) possesses at least 80 percent of the total voting power of the stock of such corporation, and (B) has a value equal to at least 80 percent of the total value of the stock of such corporation.”

— [26 U.S.C. §1504(a)(2)](https://www.law.cornell.edu/uscode/text/26/1504), Affiliated group: the 80% vote-and-value test

> “Certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations file Form 5471 and schedules to satisfy the reporting requirements of sections 6038 and 6046, and the related regulations.”

— [IRS, About Form 5471](https://www.irs.gov/forms-pubs/about-form-5471), Form 5471 — US persons with interests in foreign corporations

| Subsidiary | Federal income tax | Its own return |
| --- | --- | --- |
| Single-member LLC, no election | Disregarded — the parent's income | None for income tax (payroll and state returns still) |
| US corporation, 80%+ owned | May join a consolidated return | Included in the parent's, if consolidated |
| US corporation, under 80% | Its own taxpayer | Its own Form 1120 |
| Foreign company | Taxed where it is | Home-country return; Form 5471 for US owners |

A subsidiary, by what it is.

## Intercompany: real in each set of books, gone in the group's

Suppose Northwind formed Northwind Tools West, LLC, a wholly owned LLC, and billed it a $12,000 management fee. Each entity books its side — real in each. On consolidation the [intercompany](https://lopifi.com/md/glossary/intercompany) balances and the fee [eliminate](https://lopifi.com/md/glossary/elimination), because the group didn't earn anything from itself. A consolidated tax return and [consolidated financial statements](https://lopifi.com/md/glossary/consolidated) are separate things with separate control tests, and the accounting side is in [the multi-entity doc](https://lopifi.com/md/docs/domain/09-multi-entity-and-fx).

*[Figure: intercompany elimination]*

The intercompany balance meets in the middle and disappears; external balances illustrative.

**One entity**
- Pro: One set of books and filings.
- Pro: No intercompany to reconcile.
- Con: Every risk sits in the same entity.
- Best for: Staying small: one product, one country.

**Parent and subsidiary**
- Pro: Liability ring-fenced in the subsidiary.
- Pro: A local entity to employ people abroad.
- Con: A second set of books, filings and registered agent.
- Con: Intercompany agreements and pricing to keep defensible.
- Con: A consolidation every close.
- Best for: A foreign team, a separate risky line, or IP held apart.

Add an entity, or keep one.

> **A subsidiary is a separate set of books; for tax it may be the parent's (disregarded), the group's (consolidated) or its own — and intercompany always eliminates in the group.**

## Where this lesson's rules come from

- [26 U.S.C. §1501](https://www.law.cornell.edu/uscode/text/26/1501) — The privilege of filing a consolidated return (statute)
- [26 U.S.C. §1504(a)(2)](https://www.law.cornell.edu/uscode/text/26/1504) — Affiliated group: the 80% vote-and-value test (statute)
- [IRS, About Form 5471](https://www.irs.gov/forms-pubs/about-form-5471) — Form 5471 — US persons with interests in foreign corporations (irs)
- [Treas. Reg. §301.7701-3(b)(1)](https://www.law.cornell.edu/cfr/text/26/301.7701-3) — Default classification of a domestic eligible entity — the check-the-box rules (regulation)
- [Wikipedia, “Subsidiary”](https://en.wikipedia.org/wiki/Subsidiary) — Subsidiary (reference)
- [Wikipedia, “Holding company”](https://en.wikipedia.org/wiki/Holding_company) — Holding company (reference)

## Read further

- https://lopifi.com/md/docs/domain/09-multi-entity-and-fx

- **Track:** [Entity types](https://lopifi.com/md/learn/entities)
- **Lesson:** Lesson 8 of 9 — 8 min
- **Terms taught:** [Subsidiary](https://lopifi.com/md/glossary/subsidiary), [Consolidated return](https://lopifi.com/md/glossary/consolidated-return), [Disregarded entity](https://lopifi.com/md/glossary/disregarded-entity), [Intercompany](https://lopifi.com/md/glossary/intercompany), [Elimination](https://lopifi.com/md/glossary/elimination), [Consolidated](https://lopifi.com/md/glossary/consolidated)
- **Previous:** [EIN and ITIN from abroad, Entities · Lesson 7](https://lopifi.com/md/learn/us-company-for-foreign-founders/ein-and-itin)
- **Next:** [Choosing an entity in practice, Entities · Lesson 9](https://lopifi.com/md/learn/which-entity-should-i-choose)
- **The course:** https://lopifi.com/md/learn