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A Conversation Explaining How a Series LLC Will Protect Your Small Business

Why You Need to Reorganize Your Small Business into a Series LLC

Transcript:

(Editor's note: Brian is Clear Counsel's Communications Director. His prompts represent a conglomeration of inquiries submitted. If you have you have a question you would like answered in an upcoming video, email the inquiry to brian@clearcounsel.com)

Jonathan: Hello, my name is Johnathan Barlow. I'm a partner at Clear Counsel Law Group. Recently, this year, Google received a lot of press by announcing that they were reorganizing a parent company called Alphabet Inc., and that they were then going to essentially separate Google's operations into separate subsidiary entities underneath Alphabet Inc.

I'm going to leave the reasons why Google did that to the talking heads, but let me explain some reasons why it makes sense to you, even as a small business, that may not be a multi-million dollar business, like Google, but a small business, would take advantage of this organizing into separate legal entities.

The most important reason why you might separate your business into separate businesses, is for asset protection. For instance, let's think of a dentist's office. The dentist has different aspects of their business that they might not think about. You have the actual practice of dentistry, the seeing of patients, billing patients for dental care. The dentist also owns a lot of equipment. He owns examination chairs, X-ray machines, a lot of equipment. He may also own his building where his office is located.

If you think about all three of those different aspects, each of those three could be separated into separate business entities to take advantage of asset protection between them. For instance, if he had a problem with one of his patients, and the patient began to look for collections against the dentist, the patient would be limited to the business receipts. They wouldn't be able to take out the examination chairs. They wouldn't be able to put a lien against the building. It becomes beneficial to separate these assets into different business entities.

There's some interesting other techniques about this, and I think Brian, one of our readers here, has some questions about that. Brian, could I answer a question for you regarding that?

Brian: Sure. There's some confusion as to if a single individual could create multiple companies under a series LLC. Wouldn't they just look at all these LLCs, and go, "This is just one person." Is that really going to work?

Johnathan: You've actually brought up a really good magic word, so to speak, in Nevada. Nevada has this fascinating technique, or business entity, called a series LLC. What it does is that, with the state of Nevada, you create one LLC, just one with the state, but under that LLC, you then create separate series, and you could have series one, series two, series three, series four, and so let's use the example of the dentist.

He's going to create Dentist LLC, and in series one, he'll put his business practice. In series two he puts his dental equipment. In series three he puts the ownership of the office building. Each of those series is treated as if it was a separate LLC with asset protection between each one, and yes, one single owner can do that and take advantage of the effect of having different business entities, but using just one LLC through the different series. Does that answer that question a little bit?

Brian: It does. I have another question if that's okay?

Johnathan: Go for it.

Brian: How many of these series LLCs am I allowed to have? Is there a cap?

Johnathan: If you create one series LLC, how many different series could you have underneath that, is that ...

Brian: Correct. Yes.

Johnathan: The statute in Nevada doesn't define that answer. The statute doesn't say you can only create 10 series, so theoretically, until somebody tells us otherwise, you can create as many series as you want, and they don't all have to even be related to each other.

Again, talking about the dentist, he may have three series to go with those three aspects of his dental practice, and series four actually could be his investment property that he owns, that he rents out to Brian, to you Brian.

Brian: Big mistake.

Johnathan: It would probably be a big mistake to have you as a tenant, but let's assume that we don't you, when you fall down the stairs, for the purpose of suing the dentist, we don't want you getting into his dental assets, and so that's why we separate these liabilities between the different LLCs.

Even a small business in Nevada can take advantage of these really powerful techniques to separate liability, separate assets between different business entities, using a series LLC, or you can use different LLCs, whatever works best for you. Nevada has this really unique tool of using the series LLC. It's very flexible, and it's an awesome tool. It can be used by all Nevada business entities.

For more information on this, I encourage you to go to our blog on clearcounsel.com and read more about the series LLC, and about the Alphabet Inc. analysis, when Google transferred to that.

The Advantages of Organizing Your Company as an LLC

Why incorporate as an LLC?

Transcript:

Hi, my name is Jonathon Barlow. I'm a partner at Clear Counsel Law Group. I'm frequently asked what the benefits are of using an LLC to operate a business rather than a corporation. It's a very common question, especially in the state of Nevada. An LLC is actually most preferred in the state of Nevada. Most people set up their businesses as LLCs rather than corporations. There are a few benefits that I want to point out in this segment. There are many other benefits that would take more time.

The first benefit is that the LLC doesn't have to follow the same type of formalities that a corporation has to follow. For instance, a corporation on an annual basis has to have an annual meeting of the board of directors, an annual meeting of shareholders. It has to do formal corporate resolutions and formal corporate documents. An LLC dispenses with those requirements and doesn't have to follow them unless it chooses to do so, which most don't.

The second benefit of an LLC over some corporations is that the LLC avoids double taxation at the federal income tax level. Some corporations called C-corps are taxed at the corporate level, and then again when that money is distributed to the shareholders, the shareholders are taxed on that income. An LLC is not taxed in the same way. All of the income through an LLC is passed down to the owners of the LLC called members. The members pay the income tax and the entity of the LLC does not, so it avoids that double taxation.

A big difference, though, between an LLC and a corporation is caused by a recent change the Nevada legislature put into effect earlier this year. In fact, the Nevada legislature in 2015 passed the largest tax increase in Nevada state history. That tax increase directly affects business entities, including LLCs and corporations.

For instance, let's think of two different types of businesses: an LLC that operates and that earns about $100 million a year in income. Its annual filing fee to the state of Nevada will be, at the most, $350. That includes a $150 annual list filing fee and a $200 state business license fee. Let's compare that to mom pop, who are operating a lemon stand as a corporation. Their filing fee, even though they make about $50 a year on their lemonade, is, at the very least, $650 to file to the state of Nevada to keep the corporation alive.

The interesting thing with corporations, let's say mom and pop make Lemonade Inc. go big time and they make it to a $100 million lemonade corporation. Their filing fees to the state of Nevada will increase depending on the value of the corporation up to almost $11,600. That's a huge difference between $350 for the $100 million LLC and the $100 million Lemonade Inc. it's over $11,300 difference.

Thanks to the Nevada legislature, they've even further incentivize us to use LLCs as a preferred business entity from in the state of Nevada. Corporations are simply getting left in the dust thanks to this large tax increase in Nevada history. For the many benefits that the LLC has, we encourage almost all of our business clients to use the LLC rather than a corporation. They'll see the benefits of it immediately, and especially on an annual basis as they avoid the higher annual state filing fees.

Corporations / Corporations Videos - 09/24/2015

EMV, credit card, small business, nevada, liability

Taking the Shock out of the Shock-and-Awe of EMV Liability

Nevada retailers and other merchants who accept credit card payments are rightfully confused and concerned about new EMV liability rules that will take effect on October 1, 2015. Though it is certainly disconcerting to hear that the retailer or merchant might be liable for fraudulent credit card transactions (as opposed to the credit card companies), the reality is that Nevada retailers and merchants are not facing impending doom and business ruin by not updating to EMV-compliant technology immediately. Of course, Nevada retailers and merchants should be aware of how these new rules affect their business and should make their own cost-benefit analysis before investing in new technology.

What is EMV and the “liability shift”

In the best layman’s terms I can think of, an EMV credit card includes a small chip rather than the standard magnetic stripe that we have all been used to seeing on the back of our credit cards. It is claimed that EMV-enabled cards incorporate safety features that will avoid almost all possibility of fraudulent credit card transactions. When literally billions of dollars of credit card fraud occurs every year with the standard magnetic stripe cards, this is a great development in the fight against financial fraud.

However, there has been a great amount of concern about the new EMV rules that take effect on October 1, 2015. The biggest question is about the “liability shift” that occurs on October 1, 2015. In uncomplicated terms, on October 1, 2015, retailers and merchants that accept credit card transactions that turn out to be fraudulent may be left on the hook for those losses, instead of the credit card companies who have always previously covered all instances of fraud¹⁾It is important to note that there are many businesses that will not have any liability whatsoever for various reasons. The nuances of these differences is not examined here.. In short, the new EMV rules push some of the financial loss from fraudulent credit card transactions to the retailer, rather than the credit card companies.

Nevada retailers, particularly small businesses, should rightfully be concerned about this liability shift. One large fraudulent transaction could ruin a small business. To protect against this liability shift, the credit card companies are pressuring retailers to purchase expensive new credit card processing equipment that is EMV-compliant. Should Nevada retailers invest hundreds or thousands of dollars in new credit card processing equipment that is EMV-compliant? Should they take the risk of not having the equipment? What exactly is the risk of not paying for upgraded EMV-compliant equipment? Let’s try to take a bit of the shock out of these questions.

When a Nevada retailer might be liable for fraudulent transactions

Most importantly, Nevada retailers will be responsible for the financial losses from a fraudulent credit card transaction only in one circumstance: when a customer presents an EMV-enabled credit card, but the retailer is not using EMV-compliant credit card processing equipment to run the transaction. In this situation, if the transaction turns out to be fraudulent, the retailer will bear the liability (i.e., the financial loss) from the fraudulent transaction. It is also important to consider that if a customer presents a traditional magnetic stripe credit card, which is processed on either the old non-EMV-compliant equipment or the new EMV-compliant equipment, and the transaction turns out to be fraudulent, the retailer is not financially liable for this loss.

Should Nevada retailers take the risk?

Nevada retailers should justifiably be concerned about the financial harm to their business if the retailer is liable for a fraudulent transaction. However, as with most business matters, the retailer simply has to calculate a risk analysis and determine as a business matter whether it makes sense right now to protect against this risk by purchasing the expensive new equipment. The first consideration for Nevada retailers is the general fact that the vast majority of credit card transactions in Nevada will likely continue to be processed with the traditional magnetic stripe cards for quite some time. Only a relatively small number of credit card holders have and use an EMV-enabled card²⁾Las Vegas' retailers do more business [particularly per capita] than most American cities. When calculating your risk, know that other countries, European ones in particular, have used EMV-enabled cards for a few years now. Remember, any time that a fraudulent transaction occurs with the traditional magnetic stripe card, the retailer is not liable. Nevada retailers would do well to study their transactions in their business over the next month or two to determine how many credit card transactions are processed with EMV-enabled cards. If the number of these transactions is relatively few, the retailer may choose to take the business risk of possible liability on those few transactions.

Of course, in the next few years, we will see more and more credit cards issued with the EMV chip included, rather than the magnetic stripe. But over time, retailers will naturally purchase new credit card processing equipment as part of their normal course of business as equipment becomes outdated or broken. The retailer may choose to wait until the natural cycle of their business to change to the new EMV-compliant processing equipment. In any event, whether retailers choose to make the switch now or in the future, it is unlikely that a retailer will want to hold onto non-EMV compliant equipment forever.

Making the decision to transfer to EMV-compliant equipment is simply a business decision of weighing risks³⁾When analyzing the risk, remember to account for potential losses as a result of a being held liable for fraud and costs. Will a retailer be liable for the financial loss of a fraudulent transaction if the retailer processes an EMV-enabled card on non-EMV compliant equipment? Yes. Is that risk likely to arise? Maybe, maybe not. If the number of customers using EMV-enabled cards is low in the first place, and if the risk of the customers engaging in fraudulent transactions is even lower, a retailer may just conclude that the “liability shift” of the new EMV rules is much ado about nothing and may just choose to continue business as normal. But, as I like to say, “It doesn’t matter until it matters.” When that one ruinous fraudulent transaction does come through, do not say that you were not warned of the risk.

And, we wish you all a Happy EMV Day on October 1^st!

Footnotes[+]

Footnotes
↑1	It is important to note that there are many businesses that will not have any liability whatsoever for various reasons. The nuances of these differences is not examined here.
↑2	Las Vegas' retailers do more business [particularly per capita] than most American cities. When calculating your risk, know that other countries, European ones in particular, have used EMV-enabled cards for a few years now
↑3	When analyzing the risk, remember to account for potential losses as a result of a being held liable for fraud

Corporations / General Interest / Las Vegas / Nevada Law / News - 09/21/2015

Converting a Nevada Corporation to an LLC

Earlier this year, Nevada’s Republican-controlled Senate, Republican-controlled Assembly, and Republican Governor passed into law the largest tax increase in Nevada history¹⁾Source. Among many other tax increases, the tax package significantly affects Nevada corporations, while largely leaving other Nevada business types (such as LLCs) alone. Because of the significant financial hit on corporations, many, and possibly most, Nevada corporations should now convert their business entity from a corporation to an LLC. First, we will analyze the cost to do business as a corporation and how the new tax package affects your bottom line. Second, I will provide you with the process to convert a Nevada corporation to an LLC.

The New Nevada Corporation Taxes and Fees

All Nevada business entities, whether a corporation or an LLC or a partnership, etc., are required to file an Annual List with the Secretary of State that includes the names and addresses of the entity’s management. The Annual List is due every year on the anniversary of the incorporation or organization of the entity. Failure to file the Annual List will eventually lead to the Secretary of State revoking the entity’s Charter to do business in Nevada. Prior to the new tax package, the filing fee for the Annual List was $125 for all business entities that are NOT for-profit corporations (such as LLCs, partnerships, etc.). For corporations, however, the annual filing fee ranged from as low as $125 to a maximum of $11,125 depending on the value of the total authorized stock of the corporation.

The new tax package increases the Annual List filing fee to a minimum of $150 for all entities, including corporations and LLCs. However, the filing fee for corporations continues to increase, as previously, depending on the value of the stock. Thus, the tax package does not cause a huge change from the previous fee schedule; basically, an increase of $25 across the board on the bottom end.

However, the new tax package really smacks corporations with the filing fee for the Nevada State Business License. In addition to paying the filing fee for the Annual List, all Nevada business entities²⁾I say all, but really not all entities are implicated. For instance, non-profit corporations are not issued a State Business License and some other types of entities are exempted from the requirement. must also pay for the Nevada State Business License on an annual basis at the same time as the filing of the Annual List. Prior to the tax increase, the fee for the Business License was $200 across the board for all entities. Now, thanks to the tax hike, the filing fee for Nevada corporations was increased to $500. Meanwhile, the filing fee for LLCs (and other entities) remained at $200. The effect of the tax increases to the Annual List and the State Business License filing fees is that a corporation now must pay a minimum of $650 every year to the State of Nevada for the privilege of doing business in Nevada³⁾This amount does not include local business license fees charged by cities and counties.. Meanwhile, LLCs pay only $350 total every year.

Governor Sandoval's new tax plan adds two new reasons⁴⁾there are many more to why forming an LLC is preferable to a corporation formation:

(1) the Annual List filing fee for corporations increases depending on the value of the stock of the corporation, while the filing fee for an LLC stays the same regardless of the value of the LLC; and (2) a corporation will pay $300 more for its annual State Business License than will an LLC. Over the course of several years, these differences will add up.

How to convert a Nevada Corporation to an LLC

As you can see above, converting your Nevada corporation to an LLC makes great business sense given the new law. In order to do so, a corporation must do the following:

First, the board of directors of the corporation must adopt a resolution adopting a plan of conversion and make a recommendation to the corporation’s shareholders to approve the plan of conversion.

Second, the shareholders of the corporation must vote to approve the plan of conversion.

Third, upon approval by the board and shareholders, the corporation files Articles of Conversion with the Nevada Secretary of State.

And Voila! Your Nevada corporation is now an LLC, and you are saving yourself at least $300 (and maybe more) each year in annual filing fees to the State of Nevada⁵⁾There is a filing fee of $325 for the Articles of Conversion, but saving one year’s worth of the increased State Business License fee makes this filing fee a wash in a short amount of time..

For nearly all businesses, the Nevada corporation is a dying dinosaur in the world of business entities. An LLC has many advantages over a corporation, while the advantages of a corporation over an LLC are quite few. If you are currently operating your business as corporation, you are not stuck! There is a plan of rescue to convert to an LLC with all of its advantages. Give me a call to talk about adopting a plan of conversion and change your entity to an LLC today.

Footnotes[+]

Footnotes
↑1	Source
↑2	I say all, but really not all entities are implicated. For instance, non-profit corporations are not issued a State Business License and some other types of entities are exempted from the requirement.
↑3	This amount does not include local business license fees charged by cities and counties.
↑4	there are many more
↑5	There is a filing fee of $325 for the Articles of Conversion, but saving one year’s worth of the increased State Business License fee makes this filing fee a wash in a short amount of time.

Nevada Law / News / Politics - 08/05/2015

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