Operating Agreement Language for a Parent LLC Owning Subsidiary LLCs

Our general guide to holding company operating agreements covers the six articles every operating agreement should include: basic information, management and voting, capital contributions, distributions, membership changes, and dissolution. That's the right starting point for any LLC, including a holding company itself.

What that general guide doesn't get into is the specific language that belongs in a subsidiary's operating agreement when its sole (or controlling) member is a company rather than a person. That's the gap this article fills.

The membership section should identify the member by its full legal entity name, state of formation, and the capacity in which it holds its interest, for example: "[Parent LLC Name], a Wyoming limited liability company, holding 100% of the membership interests of the Company." This sounds obvious, but it's routinely skipped when owners recycle a template built for an individual member, and it matters later if the parent's own ownership changes or the interest is transferred.

Because the member is itself a company, the agreement needs a signature block and an authority clause identifying the natural person authorized to act for the parent, for example its manager or an officer designated by resolution, and stating the source of that authority (such as "acting pursuant to authority granted under the operating agreement of [Parent LLC Name]"). Without this, it can be unclear who was actually authorized to bind the subsidiary on the parent's behalf, especially years later.

Because keeping each subsidiary isolated depends on proving it was actually run as its own business, it's worth building that requirement directly into the operating agreement rather than leaving it to informal practice. Typical language includes provisions that the subsidiary will:

• Maintain its own bank accounts, books, and records separate from the parent and from any other subsidiary;
• Not commingle its funds or assets with those of the parent or any affiliate;
• Hold itself out to third parties under its own name and, where applicable, its own contracts, invoices, and insurance;
• Pay its own expenses and liabilities from its own funds, except as otherwise documented in a written intercompany agreement; and
• Observe its own company formalities, including documenting material member decisions in writing.

These are sometimes called separateness covenants, and lenders on commercial real estate or other secured financing often require an even more detailed version of them, along with requirements like an independent manager or a "springing member" provision that activates if the parent becomes insolvent. A basic holding company structure doesn't need the full lender-grade version, but the core idea, writing down that the subsidiary must be run separately, is worth including either way. For the broader reasoning behind this, see our companion article on structuring a holdco so a lawsuit against one subsidiary can't reach the others.

If the parent will charge the subsidiary a management fee, lease it equipment, license it a name or trademark, or lend it money, the operating agreement should reference that those arrangements exist under separate, written intercompany agreements at commercially reasonable terms, rather than describing the terms informally inside the operating agreement itself. Keeping intercompany deals as their own signed documents, reviewed and updated as needed, creates a cleaner paper trail than folding them into the operating agreement's text.

The distributions article should say plainly that distributions are paid to the member (the parent company) in proportion to its membership interest, and should specify whether the manager has discretion over timing and amount or whether distributions follow a set formula. Because there's usually only one member, this section is simpler than in a multi-member LLC, but it shouldn't be left out entirely; it's the clause that governs how cash actually reaches the holding company to be retained or paid out further.

Many parent companies add a clause requiring the manager to obtain the member's (parent's) written consent before selling, mortgaging, or otherwise encumbering the subsidiary's major assets, guaranteeing another entity's debt, or admitting a new member. This keeps decision-making authority clearly with the parent even though the parent isn't involved in day-to-day operations, and it creates a documented approval trail if a major transaction is ever questioned later.

If the subsidiary is a single-member LLC wholly owned by the parent, it will default to being a disregarded entity for federal tax purposes unless an election is made otherwise. It's worth having the operating agreement state the intended tax classification and who has authority to make or change tax elections (such as electing corporate or S-corp taxation), since that decision can have significant consequences; see our article on whether a holding company can own an S-corp if S-corp status is under consideration for any entity in the structure.

A common shortcut is drafting one document meant to cover the parent and every subsidiary at once. Resist it. Separate operating agreements for the parent and for each subsidiary reinforce that each company is its own legal entity, which matters for both the tax treatment of each entity and the liability isolation discussed in our article on holding company vs. parent company terminology. A qualified business attorney can draft or review language tailored to your specific structure. Contact us or call +1 (307) 683-0983 to get started.