Tag Archives: Limited Liability Company

Open Shop in Reno, Save Taxes

ImageThe New York Times recently reported on Apple’s tax strategy which involves funneling profits through a Nevada corporation with offices in Reno, Nevada.  Apple has wisely taken advantage of Nevada’s non-existent corporate tax. In addition, Nevada does not have a corporate capital gains tax. While the tech giant is based out of Cupertino, California, Apple maintains a Reno office to collect and invest profits from its worldwide sales of iPods, iPhones, iPads, etc.

Estimates peg Apple’s current fiscal year profits at $46 billion, expected to be a record for an American business.  By largely avoiding California’s corporate tax rate of 8.84 percent, the tax savings are substantial.  Apple is not alone in seeking refuge in Nevada from the onerous California tax rates.  Microsoft operates a revenue recording center in Reno, Nevada to avoid the state of Washington’s royalty tax.

Not only does Nevada have low, or non-existent corporate tax rates, but also Nevada’s corporate laws are second-to-none.  Just a few of the protections afforded to Nevada entities are featured here.  If Apple and Microsoft embrace doing business in Nevada, should others consider following their lead?

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.