Nevada Corporations, Incorporate in Nevada

Articles of incorporation for a C corporation are known as articles of organization for an LLC,( Limited Liability Company). The bylaws of a C corporation have their equivalent in the operating agreement of an LLC (neither of which is filed with the Secretary of State as a matter of public record). An LLC may be run by a manager or managers, equivalent to a C corporation’s director(s). Alternatively, it may be run by its members, which would make it most similar to an S corporation (a C corporation that elects S corporation status), allowing for profits to flow through to the members.

In many ways the LLC had been an awkward corporate form and we have seen little to no advantage in going with an LLC over a C corporation. In some cases where two or more corporations might work together on a specific project of a limited duration, an LLC has been used basically as the agreement between the cooperating parties—but why not just have an agreement? As a consequence, we have been involved in the establishment of thousands of C corporations but only a small handful of LLCs, up ’until now.

There are certain key amendments in SB51 , however, that stand to make the LLC a much more useful corporate form. One of the changes would create something called a “noneconomic member” of an LLC, a “person” (natural or corporate) who owns nothing but could control everything. Here is how it is defined:

Sec. 38. “Noneconomic member” means a member of a limited-liability company who:
1. Does not own a member’s interest in the company;
2. Does not have an obligation to contribute capital to the company;
3. Does not have a right to participate in or receive distributions of profits of the company or an obligation to contribute to the losses of the company; and
4. May have voting rights and other rights and privileges given to noneconomic members of the company by the articles of organization or operating agreement.

Put more succinctly: A “noneconomic member” may have control without ownership.

One of the keys to understanding the power of this provision is in the last 3 words: “or operating agreement”. Keep in mind that the operating agreement is not a matter of public record. This means that from the OUTSIDE, a “noneconomic member” could be indistinguishable from any other member of the LLC and thus may avail himself of PRIVACY in exercising control over the LLC.

Let’s back up a little and consider how this provision might apply to the two variations of LLCs—in the first case, whereby it is run by a manager or managers; and in the second case, used mainly as a partnership, whereby it is run by its members.

Let’s say NV ACQUISITIONS, LLC lists as its manager NV MANAGEMENT, INC. and that it operates as and is taxed as a corporation. Who owns NVA, LLC? Presumably, it is owned by its members. But its members are NOT on the public record.

Who controls NVA, LLC? Presumably, and this is all anyone may know in viewing this situation from the outside, control rests with NVM, INC. But what if NVM, INC. serves in its capacity under the control of an unlisted “noneconomic member”? NVM, INC. could be replaced as the manager at any time—by the “noneconomic member” with voting rights—perhaps even shortly after the annual list for NVA, LLC is filed.

Make a demand of NVM, INC. and it might reply that it no longer has anything to do with NVA, LLC, having had its responsibilities terminated at the direction of the “noneconomic member”. Make a demand of NVA, LLC and you are dealing only with a corporate “person”, with no way of knowing what natural persons are involved. All the while, the “noneconomic member” remains in complete control from behind the scenes. Can you see what a shell game can be established here? In essence, the corporate “person” of NVM, INC. takes on the role of the nominee used to ensure privacy in C corporations.

Let’s look at the second variation: an LLC run by its members. The members of an LLC could be any natural or corporate persons—even LLCs themselves. Who owns, say, NVB, LLC, in a case where a “noneconomic member” is involved? If the members are, say, NVC, NVD and NVE—is there any way of knowing which of these three, IF ANY, is a “noneconomic member”? Perhaps they ALL are? There simply is no way to know from the public records since a “noneconomic member” may be designated as such within the operating agreement for the LLC, which is not a matter of public record. As you can see, the provision creating a “noneconomic member” makes it impossible to determine the ownership of an LLC—from the outside.

Who controls NVB, LLC? Is there any way to know, from the outside, whether NVC, NVD or NVE hold any voting rights? Not if “noneconomic member” status is spelled out in the (non-public) operating agreement as opposed to the (publicly filed) articles of organization.

Either way, there is obvious potential for privacy of ownership and control of an LLC availing itself of the new “noneconomic member” provision in SB 51. When combined with the new provisions spelled out in Section 41 of SB 51 (which allow for an LLC to create and define different classes of members or managers with different voting rights) Nevada LLCs appear to be taking on all of the most desirable characteristics of C corporations—and taking them even further.

If our interpretation is not too far off the mark, we would expect to see a great many new LLCs formed using the first, non-flow-through variation, with a corporate “person” as the manager—and “noneconomic members” in common usage. Where the need for privacy is greatest, no doubt there will be many “layered” variations in strategic applications: LLCs established for privacy, with members also established for privacy. If each entity that is a "partner" in the LLC is a properly formed Nevada Corporation, with privacy, this tool can be an added layer of protection for all parties in the joint venture.

If this seems confusing even when it is spelled out like this—perhaps that is what was intended by those who introduced this legislation? The bottom line seems to be that the potential for privacy, even at the expense of a little more complexity, is being greatly enhanced.

How is an LLC managed?

An LLC may be managed by its members (owners) or by selected managers. If the LLC is to be managed by its members, it operates much like a partnership. Each member has an equal say in the decision making process of the company. If the members choose, they may elect a manager or managers to act in a capacity similar to a corporation's board of directors. These managers are in charge of the affairs of the corporation. Member management is the normal default rule of state law. This means that if managers are not selected in the articles of organization the members will direct the affairs of the LLC.

Taxation of LLCs

One owner LLCs are treated the same as sole proprietorships. Profits are reported on Schedule C as part of your individual 1040 tax return. Self-employment taxes on LLC net income must be paid just as you would with any self-employment business. Multiple owner LLCs are treated as a partnership by the IRS. The tax return that the LLC completes and files is IRS Form 1065, Partnership Information Return. On this form, LLC profits are reported and allocated to each of the owners according to the LLC's operating agreement. Each owner is given a Schedule K-1, which shows each owner's share of LLC income or loss. The owner then reports and pays taxes on this income on the owner's annual 1040 income tax return. Please note that as with a sole proprietorship, all profits of the LLC are taxed to the owners, even if they are not actually distributed by the LLC. This situation could happen when the LLC needs to use its profits to meet ongoing expenses. There is a possible third tax treatment that an LLC could elect if it did not want pass-through taxation. The LLC may elect to be taxed as a corporation by completing IRS Form 8832 and checking the corporate income tax treatment box. After making this election, the LLC is taxed as a C corporation by the federal government unless the LLC files a form 2253 and is taxed as an S Corporation. The state income tax treatment of LLC profits typically mirrors the IRS tax treatment as discussed above. Some states have different rules and for specific information on your state rules visit your state's web site. The web addresses can be found on our state links information page. *California LLCs are subject to a annual minimum franchise tax of $800 per year. The first payment must be made within 3 months of formation.

What are the advantages of an LLC?

LLCs offer numerous advantages. Pass-Through Taxation LLCs allow for pass-through taxation. This means that earnings of an LLC are taxed only once. The earnings of an LLC may be treated like the earnings from a partnership, sole proprietorships and most S corporations.

Limited Liability and Charging Order Protections. The LLC owner's liability is generally limited to the amount of money which the person has invested in the LLC. Thus, LLC members are offered the same limited liability protection as a corporation's shareholders. Flexible Management Structure and Flexible Ownership is Permitted Like general partnerships, LLCs are generally free to establish any organizational structure agreed on by its members. Thus, profit interests may be separated from voting interests.

Should I choose an LLC or an S corporation?

While the S corporation's special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners. An LLC may offer several classes of membership interests while an S corporation may only have one class of stock. Any number of individuals or entities may own interests in an LLC. However, ownership interest in an S corporation is limited to no more than 75 shareholders. Also, S corporations cannot be owned by C corporations, other S corporations, many trusts, LLCs, partnerships or nonresident aliens. LLCs are allowed to have subsidiaries without restriction. S corporations are not allowed to own eighty percent or more of another corporation's shares.

Advantages of a Limited Liability Company (LLC) over an S Corporation While the S corporations limit their ownership to 75 persons, a Limited Liability Company has no limit There are no restrictions regarding the character of members of the Limited Liability Company Upon formation, tax-free transfers can be made to a Limited Liability Company A Limited Liability Company can own 100% of the stock of another corporation, where an S corporation cannot be a member of any affiliated group. Members of a Limited Liability Company can get a basis increase for their share of the company’s liabilities A member can step up his basis in his share of the Limited Liability Company’s property to reflect his outside basis in membership interest

A strategy now used by many is having an LLC that is taxed as an S Corporation. You may have charging order liability protections and still have the S Corporation tax advantages.

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