Why incorporate as an LLC?
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.