Monthly Archives: March 2011

Advantages of Nevada Limited Liability Companies (LLC’s)

Many know that Nevada has a tax favorable climate for business and legal entities.  Nevada does not collect individual, corporate, inventory, franchise, gift, business occupation or stock transfer taxes.  One of the preferred forms of operating a business is through a limited liability company (“LLC”).

An LLC is a hybrid entity offering the legal protection of a corporation combined with the “pass through” taxation advantages of a partnership.  The owners of an LLC are called “members” (rather than partners or shareholders).  A Nevada LLC does not pay taxes and the tax consequences pass through to the LLC members.  Yet, like a corporation (and unlike a limited partnership) all of the members enjoy limited liability.  In other words, there is no one similar to the general partner in a limited partnership that must be fully liable for the debts and obligations of the LLC.  Thus, if administered properly the LLC enjoys the benefits of partnership taxation without exposing anyone to unlimited liability.

Nevada is one of the most difficult states in which to “pierce the corporate veil” or enforce personal liability for the debts and actions of the LLC on its members.  Just like a corporation, if the LLC’s owners treat it as a separate entity (e.g., they observe certain formalities, do not commingle assets, do not make personal use of company assets, etc.), then the courts will generally treat the entity as separate from the members and will not hold them responsible for liabilities of the LLC.

Under Nevada law, a charging order is the sole legal method for creditors suing you personally to attack your assets held in an LLC. For example, if you are a member of a Nevada LLC and have a day trading account, a boat and a duplex held in an LLC and are sued personally, a creditor would not be able to seize your assets. They would instead have to obtain a charging order over your membership interests in the LLC, entitling them to receive a portion of income earned by that LLC.  If the LLC did not earn any income, then there would be no profits to be distributed.  The judgment creditor cannot compel any such distribution that is not required by the company’s operating agreement and cannot force a dissolution of the company.

Members (owners) and manager of the LLC need not be residents of Nevada (or even U.S. citizens) and do not need to come to Nevada to form the LLC.  Member meetings may be held anywhere in the world.

A Nevada LLC can own property in any state without having to be incorporated in that state. Nevertheless, the Nevada LLC may need to qualify to do business in the foreign jurisdiction.  Such qualification could lead to paying foreign taxes.

The Managing Member of an LLC can deduct 100% of the health insurance premiums he or she pays, up to the extent of their pro-rata share of the LLC’s net profit, because the profit is considered earned income.  If a member has earned income, he or she will also qualify.

When considering whether to form an LLC, you consult with a trusted attorney.  Beyond the filing documents required by the Secretary of State, you must prepare appropriate governing instruments.

How Do You Hold Title to Your Assets?

How you hold title to an asset affects how it can be disposed of during lifetime and how it will be distributed upon your death. Title to property affects inheritance taxes and the extent to which probate may be needed.

Community Property. Nevada is a community property state. Property acquired during marriage by the labor of either or both spouses is deemed “community property” and each spouse has an equal interest therein.  It is possible to acquire or hold property as “community property” or as “community property with right of survivorship.” The additional language “with right of survivorship” ensures that the surviving spouse will receive title to the whole of the asset upon the death of the first spouse. Holding an asset as community property also creates a tax advantage, in that the surviving spouse will get a step up in basis on the asset to the date of death of the first spouse. In other words, the surviving spouse will not have to pay a capital gains tax on the increase in value from the date of purchase to the date of the first spouse’s death.

Separate Property. A married person may also hold property as his or her separate property. This includes property that was acquired prior to marriage, or property acquired during marriage by one spouse only as a gift or an inheritance. A spouse with separate property may make a gift of that property to the community by deeding or changing title of the asset to community property. If the spouse continues to hold the property as separate, upon death the spouse may will it to anyone he wishes; the surviving spouse does not have any legal right to it. However, if a spouse with separate property dies without a will, separate property will pass according to Nevada’s laws on intestate succession, and the surviving spouse will be entitled to a share of the property.

Joint Tenancy. Two persons, whether or not married, may hold property as joint tenants. Upon the death of one joint tenant, the surviving joint tenant becomes the owner of the whole of the property. In other words, the heirs of the first joint tenant to die do not inherit that person’s interest in the property; it passes by operation of law to the surviving joint tenant. For this reason, sometimes joint tenancy language also says “with right of survivorship.” For married couples, a partial step-up in basis is available if title is held in joint tenancy.

Couples should be aware of and sensitive to the manner in which they hold title. A change in how an asset is titled will change how the asset is distributed at death. If you have questions or concerns, you should contact a qualified Nevada attorney.

By: Sharon M. Parker, Esq.