Establishment of a Corporation or LLC in Nevada
In accordance with our recent conversation, you requested information with respect to the establishment of a business entity in Nevada. Both a corporation and a limited liability company (LLC) which are properly established and run within the confines of Nevada law, will provide the business owner with limited liability with respect to types of actions that may arise from the carrying on of the business.
Often times, people believe that by just establishing a corporation or LLC, they will be able to insulate themselves from personal liability. However, this is not the case. The corporation or LLC, after it is established, must be operated properly as set out in Nevada law. Therefore, these entities are not merely a vehicle to prevent personal liability with respect to one's personal affairs.
Corporate Organization
When our office establishes a corporation for one of our clients, not only do we file the Articles of Incorporation, but we prepare the Bylaws in accordance with our client's desires. The Articles of Incorporation act as the birth certificate of the corporation and the Bylaws are the rules and procedures that the corporation must follow during its lifetime.
Additionally, we will prepare the Minutes for the First Meeting of the Board of Directors where the Bylaws are adopted, the corporate seal is adopted and many decisions with respect to the operation of the business, contribution to capital (see discussion, supra) including the "S" election are discussed and decisions with respect to those items are made. We will also hold this meeting at our offices. The meeting is very informative.
A corporation that elects to be treated for tax purposes as an "S" corporation may only have 75 or fewer shareholders, and there are limitations on who may be a proper shareholder. Generally speaking the shareholders in an "S" corporation must be individuals, not trusts or other corporations.
Historically, the "S" Corporation was the preferred form of entity as it allowed an entity to be taxed as a partnership, yet maintain limited liability. However, the "S" Corporation has significant restrictions on stock ownership. Thus, prior to LLC statutes being enacted, these entities were forced to elect to either be partnerships (no limited liability for general partners) or "C" Corporations (two (2) levels of taxation).
Many individuals who are unable to elect S status with respect to the entities do not want to be hindered by the rules or tax consequences that are associated with "S" Corporations and "C" Corporations respectively. These individuals may elect to establish an entity to organize under the Limited Liability Company statutes of the respective states. For example, a corporation that would prefer to be taxed like a partnership may make an "S" election, thereby enabling it to be taxed like a partnership. The "S" election is made on a Form 2553 and it is filed with the Internal Revenue Service. However, a "S" corporation may not have more than 75 shareholders, none of the shareholders may be non-resident aliens, and with limited exceptions, none of the shareholders may be another form of entity. Thus, for the most part trusts (revocable living trusts are generally acceptable but other trusts are not) and corporations may not be shareholders in an "S" corporation.
Fees Associated With Incorporation
Generally speaking, the legal fees associated with the establishment of a corporation are quoted on a flat rate of $1,250.00 plus costs. Costs include the filing fee with the Secretary of State, in the amount of $145.00, the initial filing of the Sixty Day List of officers with the Secretary of State in the amount of $155.00, the ordering of a corporate book which will contain the stock certificates, stock ledger, corporate seal, as well as a place to maintain your Bylaws and Articles of Incorporation. The corporate book costs approximately $70.00. Additionally, if the corporation needs to be established immediately and be placed on file within 24 hours of the Secretary of State's receipt of the Articles of Incorporation, there is an additional $50.00 fee assessed by the Secretary of State's office. In addition to the costs specifically outlined above, our firm charges for copying charges, Federal Express changes mailing costs, runner charges and any long distance charges that be incurred with respect to the establishment of the corporation. Generally speaking, the costs associated with the corporation will not exceed $500.00.
Furthermore, for the first year, we will serve as your Resident Agent at no charge to you; and thereafter, we charge $250.00 to serve as your Resident Agent. However, included in the $335.00 fee is the $85.00 out-of-pocket cost that we incur with respect to the filing of your Annual List of Officers. Additionally, when we send you your Annual List to execute, we will also include basic corporate Minutes for the Stockholders and Board of Directors, so that the corporation is kept up-to-date. If any additional items need to be incorporated in the Minutes, we ask that you contact our office so that we may insert those items into the corporate minutes. Depending upon the extent of the changes, there may be hourly fees assessed with the preparation of the detailed corporate minutes.
Establishment of a Limited Liability Company
Many times people also inquire whether it is more beneficial to establish a Limited Liability Company or a corporation. LLCs are a hybrid between a corporation and a partnership. By a hybrid, what I mean is that the State of Nevada recognizes the LLC as an entity that has limited liability, just like a corporation. Yet, the Internal Revenue Service recognizes the LLC as a partnership rather than as a corporation, and thus there is only one level of taxation.
Benefits of a Limited Liability Company
The LLC is becoming a very popular form of entity for many businesses across the United States. In response, Nevada has evolved to enact some of the most business friendly LLC statutes in the United States.
The establishment of a LLC in Nevada after 1997, requires only one shareholder. This is a change from the LLC law previously enacted in this state which required an LLC to be formed with two (2) or more shareholders. This aspect of Nevada law, which is not shared by all states, brings important liability and tax implications.
First, an individual can form an unlimited number of wholly-owned LLCs. Each LLC would have limited liability. Thus, a business person holding multiple income producing entities (ie. multiple industrial complexes) can form an LLC for each. This allows legally separating each entity from liability incurred from the operation of the other entities.
Second, even though a person holds multiple LLCs, only one tax return will need to be filed. Additionally, the 1997 amendments in the Nevada LLC statutes no longer provide for an automatic member right of withdrawal. This amendment allows an LLC to become a valuable estate planning tool by providing for the possibility of obtaining minority discounts on shares given via gift or bequest.
Finally, there are no residency or citizenship requirements nor is there a maximum on the number of members. Thus, the Limited Liability Company is becoming a very popular form of entity.
Organization of a Limited Liability Company
The organization of a Limited Liability Company is similar to that of establishing a corporation. The Limited Liability Company is organized with Articles of Organization. These are similar to Articles of Incorporation. The Limited Liability Company, rather than having Bylaws, has an Operating Agreement. The Operating Agreement is somewhat a cross between a Partnership Agreement and Corporate Bylaws. Both Limited Liability Companies and Corporations must have resident agents.
Statutory Requirements of a Limited Liability Company
The Internal Revenue Service treats business organizations that lack two corporate characteristics as partnerships. Thus, in order to qualify as a Limited Liability Company, the entity must not have Two (2) corporate characteristics. There are Four (4) corporate characteristics. These characteristics are:
1. Continuity of Life. A Corporation may live forever. A Limited Liability Company may also.
2. Free Transferability of Interest. Corporate stock, normally, may be freely transferred. An interest in a Limited Liability Company may only be transferred in accordance with the Operating Agreement and/or Articles of Organization. An unapproved transferee of an interest in a Limited Liability Company, in accordance with Nevada law will only receive a right to profits and other distributions. The unapproved member may not participate in management.
3. Centralized Management. A Corporation normally has centralized management. A Limited Liability Company may either have management by all of its members or by a designated manager(s). If the Limited Liability Company is managed by a designated group, the Articles must provide for centralized management.
4. Limited Liability. Corporations have limited liability. A Limited Liability Company may elect to have limited liability as well.
Thus, a LLC must lack at least two (2) of these corporate characteristics. Most LLCs elect to lack both Continuity of Life and Free Transferability of Interest. However, some entities substitute Free Transferability of Interest(1) for Centralized Management. Less frequently although not unheard of, some Limited Liability Companies elect to lack three (3) corporate characteristics.
Contributions to Capital
Contributions to a LLC may be in any form, including cash, property, promissory notes, even services. However, like stock for services in a corporation, membership for services also carries with it probable unfavorable tax results for the service provider.
Name Restrictions
A Limited Liability Company must have the word "limited liability company" or LLC in its name. Nevada law requires that the words "Limited Liability Company" or LLC appear on all correspondence, invoices, checks, and other papers.
Dissolution
A Limited Liability Company may be dissolved upon the death, withdrawal, bankruptcy or dissolution of any member, unless the Limited Liability Company is to be continued in accordance with the terms of the Articles and Operating Agreement and the unanimous consent of the members. Moreover, many Limited Liability Companies opt to have a buy-sell arrangement incorporated into the Operating Agreement so as to prevent the premature dissolution of the entity.
Use of Limited Liability Companies in other States
Limited Liability Company statutes have been enacted by almost all of the States. There are a few states that have elected not to enact such legislation for a variety of reasons, namely loss in tax revenue. Thus, if the entity will be doing business in another state, it is important to determine whether that state respects Limited Liability Companies. All of our neighboring states: California; Arizona; Utah; and Oregon have Limited Liability Company statutes.
Costs Associated with the Establishment of a Limited Liability Company
Similar to a Corporation, the Limited Liability Company must pay certain fees to the Secretary of State when it is organized. The fees charged by the Secretary of State for a Corporation are approximately the same as the fees charged by the Secretary of State for a Limited Liability Company. Additionally, the Limited Liability Company will need to have a Limited Liability Company Book, where it keeps its Articles, Operating Agreement, Minutes, Membership List and Membership Certificates. The book is almost identical to a corporate book. Generally speaking the costs total approximately $500.00. The legal fees are also quoted as a flat fee of $1,250.00 plus costs. Thus, the Limited Liability Company is a bit more expensive than a Corporation
Where Do you Begin?
After you have had an opportunity to review this information and you have determined whether a Limited Liability Company or Corporation should be further explored as a form of entity for your business venture, please give me a call to set up an appointment so that we may discuss the specifics of your proposed Limited Liability Company or Corporation.
