Corportation Basics: S Corportations

An S corporation is a corporation that elect to pass corporate income, losses, deductions and credits to their shareholders for federal (and sometimes state) income tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns. The income is assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. This is similar to how the profits from a sole proprietorship would be taxed.

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It must be stressed that the advantages of S Corp vs C Corp for income tax purposes is a Federal one only for Nevada entities, as Nevada does not (currently) have an income tax.

Per the IRS, to qualify for S corporation status, the corporation must meet the following requirements:

• Be a domestic corporation
• Have only allowable shareholders (such as individuals, certain trusts, and estates)
• May not include partnerships, corporations or non-resident alien shareholders
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
• Additional conditions may apply to your specific business so check IRS regulations before making your election.

S Corp/orations start life as a C Corporation and then file an IRS Form 2553, “Election by Small Business Corporation” to request status change. The rules you must follow during the submission are very specific and you must wait for the IRS to let you know if you qualify.

In nearly ever other way, a S Corp operates the same as a C Corp. The shareholders elect a Board of Directors, the “Board” then hires the Officers who will run the company. The Board of Directors still have regular meetings, pass resolutions, etc. However at the end of the (income and tax) year, rather then pay dividends to the shareholders, the corporation ‘passes thru’ the profits to the stock owners. The owners then add the income to their personal tax filings and pay the appropriate income based on their total earnings.

It should be noted that in Nevada, the Stockholders could be You. You could be the elected Board of Directors. The Board could then hire You to be the Officer(s) of the company.

There are, like everything in life, advantages and disadvantages to S Corp vs C Corp vs LLC VS Partnerships. Below is a very brief list of advantages/disadvantages. This is subject to change as the tax code and business law is every changing.

Advantages

Tax Savings: Income is not first taxed on the corporation and then the earnings taxed on the shareholders.

Business Expense Tax Credits: Some expenses that partnerships/sole proprietorships and even LLCs that are not tax deductible may be under corporation rules. This changes way to often to list.

Independent Life: The S Corp has an independent life from the shareholders. This allows the ownership to be sold, transferred, re-configured, etc and the business to continue on.

Disadvantages Stricter Operational Processes. S corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance. This is identical to the requirements of C Corporations.

Shareholder Compensation Requirements. A shareholder must receive reasonable compensation. The IRS will notice red flags like low salary/high distribution combinations as an attempt to avoid taxes. If that happens, the IRS may reclassify shareholder distributions as wages and pay a higher employment tax because of an audit with these results.

Your new Nevada business in hours not weeks

Why wait to start your own business? Why continue to work for someone else? It takes a lot of hard work and a lot of long hours but you can only achieve financial freedom by working for yourself. How many kids grow up to inherit their parents' jobs?? It does not happen. If you truly want to leave a legacy for your family you need to do it with your own business.

Every day the news is full of stories about big businesses down sizing and laying off workers. Yet the government keeps reporting new jobs being created. How is this that the big companies are getting smaller but the employed people numbers are going up? Simply put, people are finally cutting the corporate umbilical cord and starting their own business.


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So you are now ready to make a change in your career path. You want to secure your family's future and create a legacy for your children to carry on. The first question is what type of business. You may have heard that if you do what you like you will not have a job but a career. That is more true now then ever. So you have decided on what you want to do – the first step is to validate the need for the business. And the absolutely LAST place you want to do is discuss the business plan with family and close friends. Yes, you want to go over the situation with family and friends but before that you should talk to uninvolved people including your future competitors. (Do not tell them you are going to start a competing business but many small business owners will gladly discuss what they like or dislike about their business. And, this happened to me, I was looking in to a type of business and found out that one I interviewed was looking to sell for a great price.)

Through out this blog, I will be discussing how to start and manage your own business.




No one ever got rich working for someone else. It is scary to cut yourself from the dependability of a corporate job, but also consider the number of your friends that have been downsized right out of a job. What happened then? Begging for unemployment and settling for a job at half the pay. You can only secure your future by putting yourself into your future by starting your own company.

Corporation Basics: Starting an LLC (Limited Liability Company)

A LLC or Limited Liability Company is a type of hybrid legal business structure that provides the liability protection features of a corporation and the tax efficiencies and operational flexibility of a partnership. The “owners” of an LLC are referred to as “members.” In the State of Nevada, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs. Yes, LLCs can be owner by corporations or other LLCs.

The LLC is formed by filing an Articles of Organization and paying the appropriate fees to the Nevada Secretary of State’s office. This can be done by yourself or you can hire an experienced person.

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Before filing, it is necessary to select an appropriate name. There are 3 basic rules that your LLC name needs to follow:
1.It must be different from an existing LLC,
2.It must indicate that it’s an LLC (such as “LLC” or Limited Company”)
3.It must not include restricted words (such as “bank” and “insurance”)

You will also need to establish an Operating Agreement. The Operating Agreement is NOT filed with the Secretary of State, however, the Secretary of State managed to get a law passed in 2013 that gives it the right to demand and receive a copy of Operating Agreement and Membership list. (Also note, that the same regulation also gives the NVSOS the right to receive Corporation Bylaws and Stock ownership ledgers for corporations.) The Operating Agreement, covered in more detail in this section, spells out important information such as how much (in dollars or percentage) that each member will contribute in cash, services, manpower or other considerations. It also defines how the income (or losses) will be distributed at the end of each year. Other information is commonly also included.

The State of Nevada charges all LLCs an Annual Members filing fee and, as with all business entities, a State Business License fee. At this time the Annual Fee is $125 and the Business License is $200. (But this is likely to change under the growing anti-small business attitude of the current Secretary of State's administration.)

Although not required by Statute, it is recommended that the LLC purchase and maintain a Secretary’s Record Book. A typical records book will contain copies of the:
Articles of Organization
The Operating Agreement
A listing of Members
Copies of Resolutions and Directives approved during Members or Managers Meetings


The book we provide for all new LLCs that we assist to establish contains samples of these and other important documents in addition to PrePrinted Member’s Certificates, which like shares of stock for a corporation, are used to record and document ownership in the LLC. Our records book also contains a Secretary’s Embossing Seal, used to stamp documents prior to inclusion in the LLCs records and files.
You may also be required to obtain additional City or County licenses prior to commencing business operations.

The State of Nevada does not allow some types of businesses to be configured as a LLC. Check current regulations for restrictions.

Avoid unnecessary delays in your starting your LLC.

Do I Need a DBA/Fictitious Name for my Corporation

Disclaimer: This is a general discussion about southern Nevada - the specifics on DBA/Fictitious Name can vary from county to county and state to state.

Many times people are confused about needing a Fictitious Name/Doing Business As (DBA) for their corporation. In general, you Fictitious Name if you are operating under a different business name then the legal name of the company.

For example, you start a business with your brothers and you set up Four Brother's Company, Inc. But then you decide to go into the auto repair business and you want a name more appropriate to the services you offer. Since you already have a company with years worth of business experience and, more importantly, business credit, you may not want to start a new business.

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In many situations, you can for a nominal fee of $20-$50 file a Doing Business As or Fictitious Name with your county clerk's office allowing you to legally operate and advertise your business in the new name. In is important to note that you may be required to have a business license for BOTH the base name of your business and the DBA. It is important to research such information carefully such requirements.

In general, you will only need the Fictitious Name/DBA in those cases where you are operating with a different name. If your business is TUVW Trucking and your advertising is in TUVW Trucking and your trucks are painted with TUVW Trucking, it is most likely that you do not need a DBA.

Sometimes people who are setting up a Nevada Corporation or LLC are told by the people that are selling them the package that the DBA is required and will charge them $100 or more for the process. Clark County, Nevada currently only charges $25 for the actual filing (which can be mailed in - does not have to be done in person) and it is valid for 5 years.

Corporation Basics: The LLC Operating Agreement Part 2

This is continued from Part 1: Corporation Basics: The LLC Operating Agreement

Defined Financial & Management Structure: especially important with multi-member LLCs, the Operating Agreement will spell out who is contributing what: Dollar, Time, Resources, Assets, other valuable consideration and in what percentage or valuation. The Operating Agreement will also define each members’ role – if any – in deciding business management authority, such as control of checking accounts and other resources.

Protecting your limited liability status: By properly establishing and following an Operating Agreement, you can lend credibility to the LLC being a legitimate business venture and not just a hobby. It also can demonstrate to the courts that certain assets – and only certain assets – are the LLCs property. This would also works with regards to debts that the LLC incurred as a part of doing business. By documenting the debts belong exclusively to the LLC, the members’ personal assets can be shielded from the debtors.

Distribution of Profits and Losses: Unless clearly defined in the Operating Agreement, the distribution of any end of year profits could become an ugly turning point. If the Operating Agreement clearly states an even distribution, it would prevent problems when one member feels they are entitled to additional compensation. There also may be a situation where one member is contributing more to the LLCs (such as all the initial working capital) in exchange for a larger end of year distribution. Any salary to be paid to members should also be included in the Operating Agreement including if the salary is to be considered a part of the end of year distribution. For example, one member may be doing all the day to day work while other members work other jobs. If the member is receiving payment for employment, they may not feel that the salary should off set their profit distributions.

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Your Operating Agreement should also spell out WHEN the profits will be distributed. One member may be counting on monthly to become a part of their monthly income, while other members may wish to keep the money with in the business to help fund future business projects and only distribute an end of year net income profit.

It is especially important that if the members will be receiving disproportion shares of the profits, that the Operating Agreement clearly spell this out in a “Special Allocations” section.



Voting Rights/Major Decisions: Some decisions may require a consensus of the members. Such things as major purchases, obtaining loans/financing and other major decisions are some examples. The Operating Agreement could address under what circumstances members must vote, who has voting authority and by what margin (simple majority, super majority, unanimous) the vote must pass.

Ownership Transitions: What happens when one or more members of the LLC want to part ways? The selling of ownership interest, the inheritance in the event of death, complete dissolution of the LLC and a termination of business, are just a few of the issues that the Operating Agreement should cover. It may be hard to consider that this carefully crafted business venture of multiple individuals could ever sour, but then few people that enter into marriage consider that theirs will be in the 50% that fail. Know in advance how to wind down the business may actually permit it to survive.

While Operating Agreements, like all legal agreements, can be a one page simple agreement or a complex 100s of pages, it is recommended that the final agreement be reviewed by legal counsel and/or tax professionals to assure that it is constructed properly and also that intended tax benefits are preserved and protected.

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Corporation Basics: The LLC Operating Agreement

A LLC (limited liability company) operating agreement allows you to structure the financial and working relationships with co-owners in a way that suits the business. With your operating agreement, all co-owners establish each owner’s percentage of ownership in the LLC, his or her share of profits (or losses), his or her rights and responsibilities, and what will happen to the business if one of owner/investor leaves.

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A LLC Operating Agreement is akin to a Corporations Bylaws.

Certain few of the key issues that should be included in the Operating Agreement
Each Members’ percentage of interests in the LLC
Each Members’ rights and responsibilities
Each Members’ voting power on business matters
How profits and losses will be allocated
Who and How the LLC will be managed
Rules for holding meetings and taking votes on business matters
Procedures for handling the event of one or more members in the LLC wanting to leave or sell their interest.


It the old days of doing business – a handshake was all that was necessary for a bonded business partnership. While the Operating Agreement may be optional under the law, it is absolutely necessary in today’s lawsuit happy society to protect each members’ position and rights. It could also be critical in protecting your personal assets from claim and seizure by clearly establishing the separation of business and personal assets.

The State of Nevada does not require an LLC to have an Operating Agreement, however, the State does have a default “standard” LLC that may take be used if you don't have an official one. The safest way to handle the situation is to have your own BEFORE you start business. Do you really want some government official or judge to be deciding the future of your business?

In Part 2, some of these area will be broken down in more detail.


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Shareholder Agreement and Ownership Changes part 2

This is part 2 of 2. See Part 1 here.

Consider the event of one stockholder/manager who experiences a personal bankruptcy. The court may likely order the transfer of the investment to someone (anyone) so that the proceeds from the sale can be used to settle total debts owed. In the event that there are no provisions for selling to insiders in the company, the stock could transfer to an investor. That investor might then demand annual dividends paid on the stock. Where the original stockholders where willing to receive no annual stock dividends so that the maximum amount of profit could be re-invested in the company, this new stockholder is more interested in the immediate income. Please note that in the event the remaining stockholders are unable or unwilling to purchase the bankrupt stockholder’s stake, the court may order it sold to the highest bidder regardless of any clause that specifies only currently existing stockholders can buy the shares. Therefore it is recommended that in the event of a personal bankruptcy of any of the stockholders, the business should contact an attorney to review the situation.

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In the event of a divorce, it would be wise to deal with the situation way before the split of property comes into play, otherwise you may be forced to deal with the ex-spouse of your ex-business partner which could result in a lot excessive headaches. Be extremely careful about this transfer to be certain that you do not run afoul of a divorce court judge with regards to improper transfer of assets.

Setting the calculation of the value of the shares in the agreement are just as important as any contingency plans regarding who can purchase the shares. Consider that you are the party that wishes to sell your part of the business to relocate to another city to chase a different business dream. If you have a requirement you can only sell to your existing partners, they actually can force you to sell for far less then desired or even what it may be worth simply because you may want out more then they want your share. Even if there is no requirement that you sell to them exclusively, you might have trouble establishing the value to outside investors.