In our day and age limited-liability companies (“LLCs”) have largely replaced corporations as the entity of choice, both as the best vehicle for doing business and for holding assets which may generate liability.
LLCs v. Corporations – Which Is Better?
LLCs have significant advantages over corporations on several fronts. Both are equally effective for protecting the owners from liabilities arising within the entity, such as a business conducted by the entity. Namely, if the business conducted by the entity. Namely, if the business is conducted through the entity as opposed to being done by the entrepreneur individually, the individual owners are shielded from liability by the corporation or LLC. The key is to conduct all business through the entity and not you personally.
Where LLCs have a real advantage is liabilities going the other way – such as if someone has sued you individually and is trying to attach valuable assets to your business. If it’s a closely held business, a judgment creditor of yours generally will be able to attach your business and all assets within your business if you have a corporation. The opposite result happens if you have an LLC instead of a corporation – your creditor cannot gain control of your business nor attach any assets of your business.
Why is an LLC Better than a Corporation?
The key lies in the statutes. Under Nevada law, a creditor of yours only gets what is referred to as a “charging order.” A charging order simply means that he can attach your membership (ownership) interest in your LLC and nothing else. This means that he can neither “pierce the veil” to attach any assets held in the LLC, nor does he gain any voting or other rights over the management or operating of the LLC. One final advantage of an LLC for small business owners is that your LLC can essentially be taxed any way you like: (1) as a “disregarded entity” for IRS purposes; (2) as an S corporation; (3) as a partnership; or (4) as a C corporation.
If you elect to be a “disregarded entity” with the IRS, you don’t even need to file a tax return for your LLC. All profits and losses are reported directly on your 1040 as if the entity didn’t exist. This can save you the cost of filing a separate income tax return for your LLC. Many people elect this for simplicity and cost-savings.
We recommend that you consult with your accountant or another tax advisor on which tax election makes the most sense for you in your individual situation.
So What Can a Creditor Do?
Not much. Essentially he is forced to sit on his hands and wait for you to make a distribution. That typically only happens after hell freezes over – and that’s never yet happened in Las Vegas. It’s a very simple decision for the owners – distribute money, and the bad guys get it or don’t distribute anything, and your creditor never gets anything.
But Wait, There’s More! K-O by K-1.
This is the part of the story where the truth really is stranger than fiction. The caption here is “the IRS is my friend.”
Under federal tax law, if a creditor has attached your membership interest in your LLC, he steps into shoes for tax purposes. This means that if your LLC generates taxable income, you can issue your creditor a K-1 and pass the tax liability along to him. Instead of receiving cash on this judgment, he gets “phantom income” which he must report on his individual income tax return. No creditor ever keeps his charging order in place after receiving a K-1 from you.
What Can I Use May LLC For?
The two most common reasons for creating an LLC are (1) to use in operating a business; and (2) to hold rental properties. We’ve already addressed the advantages of operating your business through an LLC instead of a corporation. An LLC can also be used to hold cash, securities and other investments free from the reach of creditors.
LLCs are ideal for holiday rental properties and are generally considered to be the entity of choice for these. By holding your rentals in an LLC, you protect yourself from liabilities arising on the properties. Some tenants thrive on suing landlords for real or imaginary damages. Sometimes the liabilities arise from unexpected sources.
For example, I had a client who moved from her existing home to an upgraded home. She kept her first home to be used as a rental. Her first tenant was her 80 plus-year-old mother. I suggested that she create an LLC for her home because you never can predict what may happen. She declined. It was perfectly safe to have mom there, right? In this case, no. Mom had one of her octogenarian friends over for a visit. The friend slipped and fell breaking her hip. Mom’s friend had to sue my client as the owner on the title in order to make a claim against the insurance policy, or so she said. The bottom line is that my client was personally liable for this injury and found herself named as a defendant in a lawsuit. The good news is that her insurance covered the damages. These stories don’t always have a happy ending.
Nevada: “The Delaware of the West.”
Delaware has long been recognized as a favorable place to incorporate and to do business. For those of us west of the Mississippi, Nevada is universally recognized as “having very strong and very favorable laws to protect the business, business owners, and generally anyone who has something and doesn’t want to lose it.”
If you are looking to protect your business or your assets, look no further than Nevada.
Series LLCs are the new kid on the block. Essentially, a series LLC allows you to create any number of “series” or compartments within your LLC. Each series provides asset protection as if it were a separate LLC.
Series LLCs have several advantages:
- You can create as many series within your LLC as you desire.
- When you create a new series within your LLC, nothing needs to be filed with the state, meaning that you can create a series immediately.
- There is no additional filing fee required when you create a new series.
- There is no additional annual fee required for each series – just one annual fee for the LLC regardless of how many series you have.
- You can avoid having to file multiple tax returns.
Multiple Rental Properties
Series LLCs are the perfect fit for multiple rental properties. For example, in days past I had several rental properties. I created a separate LLC for each property to protect each one individually. Now, a single series LLC with multiple series, one for each property does the trick quite nicely. Only one filing fee is required each year, a significant savings.
What if I Own Properties in Different States?
Not a problem. A Nevada series LLC can own property within or outside of Nevada.
Do You Have More Questions About Series LLCs?
Robert L. Bolick, Ltd., offers free initial consultations. Call our office today to set one up at 702-690-9090. You may also contact us online.