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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 had been an awkward corporate form and we had 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 recent changes in the statutes.

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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