LLC
INFORMATION
Articles
of incorporation for a C corporation are known as articles of
organization for an LLC. 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 has 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.
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.
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. Because the corporate
income tax rates for the first $75,000 of corporate taxable income
are lower than the individual income tax rates that apply to the
taxable income of non-corporate taxpayers, it is possible a net
income tax savings can result from this tax election. 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
over partnerships. 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 are treated like the earnings from a partnership,
sole proprietorships and most S corporations. Limited Liability
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.
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