By Jennifer Paley
A limited liability company (LLC) is a type of business entity that combines the limited liability attributes of a corporation with the tax benefits of a partnership. Every state has its own distinct set of laws respecting LLCs.
There are several advantages to forming an LLC in Nevada. Whether or not these features will inure to a specific business owner’s advantage or not, however, hinges upon the individual facts and circumstances.
Let’s take a look at a few examples:
While LLCs themselves are not taxed by most states, their members are required to pay income tax on their proportionate share of the LLC’s income (whether or not that income is actually distributed to them). Nevada, however, does not collect income tax (individual, franchise, or corporate) or inventory tax.
This sounds tempting for sure, but there’s a catch: forming an LLC in Nevada will only allow you to avoid paying income taxes on revenues derived either in Nevada or in another state(s) that does not levy income tax (and those states currently include Alaska, Florida, South Dakota, Texas, Washington, and Wyoming). If the LLC has a presence in, and derives income from, a state that collects income tax, then that state can levy income tax on all income generated by the LLC within its borders.
In short, taxes are paid where the money is made! This principle applies even with internet-based businesses—you cannot get around your own state’s tax obligations by forming an out-of-state (i.e., foreign) LLC, even in Nevada.
While LLCs afford their members limited liability (i.e., only the LLC’s assets can be pursued in Court, not those of the individual members), Nevada, along with a handful of other states (including Delaware), specifically provides the option of establishing a “Series LLC,” a unique designation that allows for the implementation of limited liability shields within the LLC to protect multiple assets held therein without having to create additional, separate entities.
For example, if a Series LLC is erected with several units, each holding distinct assets, liability incurred by one unit does not cross over and jeopardize the asset(s) held by a different unit. In this way, multiple assets can be held in one LLC with the same liability implications as having set up separate and distinct LLCs—saving its members both time and administrative expense. Series LLCs also provide members with the opportunity to group multiple business ventures under one common banner/label.
There is a material limitation, however, respecting the effectiveness of a setting up a Series LLC in Nevada in the event of litigation. It only works if (1) all of the LLC’s assets and activities; (2) the applicable plaintiff; and (3) the applicable lawsuit, are all located in Nevada. Otherwise, the LLC laws of a different state may apply and this version of a corporate veil may ultimately be pierced.
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Nevada is known for providing a tremendous degree of privacy to businesses chartered in its state. In general, it has relatively low disclosure requirements.
For example, Nevada is not a party to the IRS’s Information Sharing Agreement (ISA), established by the IRS to share information about abusive or avoidant tax transactions, and the taxpayers who carried them out, with participating states. Currently, 33 states are parties to the ISA. Even if Nevada were a party to the ISA, it does not have income tax information to provide.
Additionally, Nevada LLCs owners are not required to identify themselves in public records, thereby making it quite challenging for government and regulatory authorities, unscrupulous creditors, and litigious attorneys to ascertain their identities.
Nevada’s privacy rules have an exception that cannot be overlooked, however: its protection does not extend to the directors, officers, managers, and members of an LLC. The laws require that an LLC’s articles of organization (a matter of public record) provide the name of at least one member. Additionally, all Nevada LLCs must file an “Annual List of Officers and Directors,” requiring disclosure of the names of all of the LLC’s officers and directors (which are then posted on the Nevada Secretary of State’s website.
Domestic vs. foreign LLC
A domestic LLC is one which operates in the state where it was organized. A foreign LLC is one which operates in a state other than where it was organized. Nevada permits out-of-state entities to form an LLC in its state (i.e., there is no residency requirement), and many businesses believe (rightfully or not, as the case may be) that they will benefit from Nevada’s LLC laws.
However, if your business is not operating in Nevada, you will be required to register the out-of-state Nevada LLC as a foreign LLC in your home state. This means that you will have to form two LLCs, requiring approximately twice the cost, if not more, of simply having established the LLC in your home state.
The organizational fees for a Nevada LLC are amongst the steepest in the country, even higher than California (which is well known for its expense). Expect to incur additional, recurring filing fees, including those associated with an annual filing of the “Annual List of Officers and Directors” and the requisite Nevada state business license (along with any other required local business licenses).
Nevada is one of only five states that requires business owners to have an in-state business license before they may file to form their company. And as previously mentioned, if you are setting up a Nevada LLC as a foreign LLC, your expenses just doubled!
Nevada, for a long while now, has a less-than-stellar business reputation. It is considered by many an outlaw to be a great place to further illicit goals, such as creditor or tax avoidance, among others. This tainted perception does not serve a new company well, and as such, provides yet another reason why Nevada may not be the best place to establish an LLC, especially for out-of-state businesses.
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