QSub vs. LLC: Which Subsidiary Structure Works Best for Contractors?

Federally, a QSub and a single-member LLC owned by your S corporation are taxed almost the same way: both are ignored for income tax, so everything lands on the parent’s return. The real differences are setup and California cost. A QSub needs an IRS election and an S corporation parent; an LLC is disregarded by default but pays California an $800 annual tax plus a fee measured on revenue, not profit.

What each one is

A qualified subchapter S subsidiary (QSub) is a domestic corporation 100% owned by an S corporation that has elected QSub treatment for it. Under IRC §1361(b)(3), it is then not treated as a separate corporation for federal tax purposes; its assets, liabilities, income and deductions belong to the parent. Only an S corporation can own one, so this option follows the S-corp election for contractors.

A single-member LLC has one owner. Under the check-the-box regulations (Treas. Reg. §301.7701-3), it is disregarded as separate from that owner unless it elects corporate treatment on Form 8832. When a corporation owns it, the IRS treats it as a division of the corporation.

How each one is set up

For a QSub, you first need a corporation. The parent S corporation then files Form 8869 with the IRS. The effective date generally cannot be more than 2 months and 15 days before the filing date or more than 12 months after it. An existing corporation that becomes a QSub is treated as liquidating into the parent, so have your CPA review that first. California follows the federal election with no separate state filing; the parent attaches Form 8869 to its California return for the election year and files Schedule QS each year.

A single-member LLC needs no federal election.

Federal tax: the same, with two exceptions

For income tax, the parent’s Form 1120-S reports everything. Two carve-outs apply:

• Employment taxes. A QSub is treated as a separate corporation for employment taxes (Treas. Reg. §1.1361-4(a)(7)), and so is a disregarded LLC (Treas. Reg. §301.7701-2(c)(2)(iv)). So a subsidiary with employees reports payroll as its own employer, under its own EIN.
• Certain excise taxes. Both are treated as separate for specific federal excise taxes. The Form 2290 instructions, for example, require a QSub or disregarded entity to report heavy highway vehicle use tax under its own EIN.

Liability protection

Neither is automatically stronger. California’s Franchise Tax Board says LLC members generally have the same degree of limited liability as corporate shareholders. A personal guarantee on a loan, lease or bond can make you liable under either structure.

The FTB adds that corporations must follow corporate formalities to keep the shield, while LLCs need not issue stock or hold annual meetings. A QSub is still a corporation under state law. Either way, keep the separation real: a separate bank account, contracts and equipment titles in the subsidiary’s name, and separate books with written agreements for any rent or charges between the companies.

California cost: QSub vs. LLC

For 2025 and 2026, the LLC fee is $900 at $250,000 to $499,999 of total income, $2,500 at $500,000 to $999,999, $6,000 at $1,000,000 to $4,999,999, and $11,790 at $5,000,000 or more. “Total income” is gross income plus cost of goods sold, which is essentially revenue, not profit.

When a contractor might choose each

Trade-offs to work through with your CPA:

• Equipment or real estate holding company. An LLC is simpler to set up and has fewer formalities. A QSub’s California cost stays at $800 regardless of revenue.
• A second licensed operating company. An LLC holding its own CSLB license must carry at least $1 million of liability insurance (five or fewer personnel of record, plus $100,000 per additional person, up to $5 million) and a $100,000 LLC employee/worker bond on top of the contractor bond. With the revenue-based fee, that can tilt a high-volume operating subsidiary toward a QSub.
• Adding an owner later. A single-member LLC that adds a second member becomes a partnership by default. Selling any QSub stock ends the election.

What happens when a QSub election ends

The election ends when the subsidiary stops qualifying, for example when the parent sells some of its stock or loses S status. The former QSub is treated as a new corporation that acquired its assets, and assumed its liabilities, from the parent in exchange for stock. If a stock sale caused it, the sale is treated as a sale of a proportionate share of the subsidiary’s assets, which can bring gain on depreciated equipment into play (see depreciation recapture when you sell equipment).

Afterward, a new QSub or S election generally requires waiting five years or getting IRS consent. Closing a corporation entirely has its own steps; see why shutting down an S corp is not as simple as walking away.

Frequently asked questions

Is a QSub or a single-member LLC better for taxes?

Federally, they are taxed almost the same: both are disregarded for income tax but separate for employment and certain excise taxes. The bigger difference is California cost: a flat $800 for a QSub versus $800 plus a revenue-based fee for an LLC.

Does a single-member LLC give less liability protection than a corporation?

Not as a general rule. The FTB says LLC members have the same degree of limited liability as corporate shareholders. Personal guarantees and poor separation can undermine either one.

Can a C corporation or an individual own a QSub?

No. A QSub must be 100% owned by an S corporation, which makes the election on Form 8869.

What happens if I sell part of a QSub?

The election ends, the sale is treated as a sale of a share of the subsidiary’s assets, and a new QSub or S election generally means waiting five years or getting IRS consent.

See how ASLLP works with contractors, or book a consult and we will map it out with you.

Sources: IRC §1361; Treas. Reg. §§1.1361-4, 1.1361-5, 301.7701-2, 301.7701-3; IRS Form 8869 and Form 2290 instructions; IRS single-member LLC guidance; FTB S Corporation and LLC tax booklets, LLC page, Pub. 3556 and FTB 1123; CSLB LLC licensing page.

This article is general information, not tax or legal advice for your situation.

Disclaimer: This content is provided for educational purposes only and is not legal, tax, accounting, or financial advice. Every situation is unique, so consult your own attorney, CPA, or financial advisor before making decisions based on this information.