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.

Shareholder Agreement and Ownership Changes

Generally, most new businesses are closely held between family and friends. The ownership of the stock is thus held by the closely interrelated parties. Many times these stockholders may also be a part of the company, such as when a couple college friends join together to start a business.


One key part of good prebusiness planning should be an Ownership Change in the Shareholder Agreement. The Shareholder Agreement, you could call it a premarital agreement for business partners, can establish the relationship between business partners. A Shareholders Agreement would be for a Corporation that an Operating Agreement is to LLCs.


An Ownership Change Agreement, to handle how the business will be divided if the partners want to go separate ways, can be included in the Corporations By-Laws, be a portion of a Shareholders Agreement or a stand alone document.


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A common provision in Shareholder Agreements are Buy-Sell provisions. The Buy-Sell provision controls changes in the ownership, especially under certain conditions death, divorce, personal bankruptcy of one owner, retirement of an owner or simply one participant desiring to move on to other business opportunities.


Another KEY provision of a Buy-Sell Clause would be the establishing the formula for the value of the shares. The Shareholder Agreement or Buy-Sell Agreement will address not only when ownership may transfer but more importantly show who can assume control of the shock. For obvious reasons, the initial partners/investors may want to prevent outside parties from buying in to the company to prevent control of the company being passed to 3rd party individuals. Many businesses are formed so that future generations of the founding partners can take over the business. Allowing outside investors in without planning, could jeopardize that goal.


In the event of death, divorce or incapacitation of any of the original investors/partners, the remaining partners way be forced to deal with someone that is unqualified or unable to fulfill the responsibilities for which they are suddenly thrust. If the person that they are replacing was a key employee that provided specifically trained experience, the business would be missing the knowledge that person contributed. And it is possible that the new member of the management team might have a negative affect on the remaining parties. Simply consider the affect that a spousal of an original partner who never liked (personally) any of the other original partners is now a part of the management team.


Part 2

Corporation Basics: Limited Liability Company (LLC) FAQ

A limited Liability Company, normally referred to as a LLC, is a business structure that is a hybrid Partnership and Corporation.


Like a Partnership or Sole Proprietorship, income is reported on the owners’ personal tax returns but like a corporation it offers protection of personal assets for business liabilities.


A few Frequently Asked Questions about LLCs are:


    Question: Do I need a lawyer to form a LLC in Nevada?


    No. The State of Nevada allows the forming of a LLC by submitting an Articles of Organization with the Nevada Secretary of State and paying the appropriate fees. Among the required fees are a $75 filing fee, a $125 Annual Members filing fee and a $200 State Business License fee.

    Question: Do I have to pay the State Business License if I am in another state?


    Yes. Regardless of where your business may be physically located, the State of Nevada requires all business entities to pay an Annual State Business License. While you may object to paying this fee, the total fees for a Nevada entity is still much less then nearly every other state and you still enjoy the benefits of Nevada’s Corporation Shield of Assets Protections.

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    Question: How many people do I need to form a Nevada LLC?


    The State of Nevada only requires 1 person/entity to form LLC. It is not necessary that the the person/entity be a nature person. A LLC may be formed, managed and owned by one or more other LLCs, corporations or partnerships – or of course people.


    Question: Do I need a Nevada Mailing Address for my LLC?


    No. There is no requirement for a State of Nevada mailing address for the LLC, the Members or the Managers. The LLC is required to have a Registered Agent with a Nevada address.


   Question: Am I required to file an Operating Agreement with the State of Nevada?



    No. You are not required to file your Operating Agreement. However, in the event you do not have an Operating Agreement, Nevada Revised Statutes do specify certain default conditions for managing/controlling the LLC. The smarter way to handle the situation is to form an Operating Agreement in advance to keep the government out of your business. The NRS does allow, under some circumstances, that the Secretary of State’s office to demand a copy of your Operating Agreement.

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    Question: Can any type business be formed as a LLC?


    No. There are certain businesses, such as Banks, Insurance and Trust are prohibited from be LLCs. Other businesses may also be restricted, if necessary, check with Secretary of State.


    Question: What is an Operating Agreement?


    An Operating Agreement is a document that establishes the parameters by which the LLC will be formed, funded and operated. It can also handle issues such as transferring of ownership interests.


    Question: What are some differences between LLC and Partnerships?


    The biggest difference is the handling of Debt and Liabilities. In a partnership, all partners are generally considered equally liable for all the debts of the partnership regardless of which partner is responsible for incurring the debt. With a LLC, the members/owners are limited in their liabilities to the extent of their investment – protecting their personal assets from business debts. When it comes to taxation, LLCs and partnerships may be handled in nearly identical manners with the income being passed to the members for taxation on their personal income tax filings. The LLC, however, can have other flexibilities in the handling of profit through the use of the Operating Agreement to assign different percentages of profit to different members. LLCs also can enjoy many business expense tax deductions that are enjoyed by corporations.


   Question: Are LLCs better then Sole Proprietorships?


   Both have their advantages. The decision is a business management, a personal liability and a tax decision that should be considered carefully with the help of professionals - tax professionals and legal professionals.

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Which is better: a LLC, a C-Corporation, a S-Corporation or a Partnership?

Almost daily, the question is asked by new business owners – Which is better: a LLC, a C-Corporation, a S-Corporation or a partnership?


There is a real easy and simple answer. If there was only one BEST way, there would be only ONE way. However, just as there are many things to consider when preparing a dinner salad, there are many things to consider at establishing your business entity.




The are literally 100s if not 1000s of business variations, but most fall into five (5) main groups:

1. Sole Proprietorship: A single owner/manager who does it all.
2. Partnership: From two to unknown joint owners/investors/co-operators/co-managers.
   Partnerships them self have many different sub-styles.
3. Corporations or C-Corp: A stockholder owned business entity that is afforded many business operating and tax advantages. The corporation exists as it’s own entity and is responsible for paying taxes on any income. The stockholders may or may not be managers or employees of the company.
4. S Corporation or S-Corp: Also a shareholder owned entity but with the unique tax provision of passing income to the shareholders where they pay taxes on their personal tax returns as opposed to the corporation paying the taxes before distributing the profits.
5. LLC or Limited Liability Company: A unique business entity that combines the personal liability protection of a Corporation, with the pass thru income features of a S Corp with the simpler management and operation of a partnership.

Based on the last sentence, everyone would assume that the LLC is the best of all worlds. But, like all things, there are still disadvantages to the LLC that the others forms of business entities handle better.


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Let us first throw out Sole Proprietorship and Partnerships from this discussion as they are covered elsewhere. And normal, run of the mill C Corporations are way to complex to operate for most new business owners.

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With a LLC: profits can be divided disproportionately, meaning one owner/member can receive a larger percentage of the profits because maybe their work is more valuable. A S-Corp can only have one class of stock so all owners are paid the same dividend rate. (One owner may have more shares and thus have a bigger check, but they have more stock invested.)



With an LLC, the members and/or managers can be other filed entities: i.e. Corporations, other LLCs, Trusts, Partnerships and real people. By restriction, stockholders of S Corporations can only by US Citizens. The LLC can be owned by foreign nationals but S-Corps can not.

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Do I need a Registered Agent?

Do I need a Registered Agent?

Yes!

In the State of Nevada, all business entities (including corporations or LLCs) registered with the Nevada Secretary of State are required to have a current and valid Registered Agent at all times. The Registered Agent must be physically located in the State of Nevada and they must be available to receive service of process (notice of litigation). The use of a mail box, such as UPS Stores or Postnets are not acceptable. Many such businesses also provide this service, but using their mailbox is not acceptable by Nevada's regulations.


The Registered Agent is NOT an officer of the company if they are only the R/A. Their sole purpose is to be available during normal business hours in the event of Legal Process Service (such as your entity is sued or subpoenaed for a court process). That is not to say that an Officer or other employee of the company can not be the R/A. But, by definition, the Registered Agent is not an officer in the traditional reference such as President, Vice-President, Treasurer and Secretary.

If the Board of Directors desire, an officer of the company can also function as the R/A, as long as they physically reside with in Nevada. Out of state based companies will need a 3rd party person or entity to be their R/A. Nevada companies can use a third party or have a member of their staff fill the function.

Another erroneous mistake is that the Registered Agent can comply with Nevada law if they have mailing address, such a mailbox, in Nevada while they personally live in another state (or even another country). This is not permitted. Your agent must be in Nevada as a normal course of their employment or residence.

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There are some services that offer discount or even free Registered Agent services. Before you sign up with these service providers, ask yourself a question – how can they provide FREE services? They have to be in business to make money – just like you – so how can they be giving away their services? Somewhere, somehow, someway they have to be making money and that is often with hidden charges or bait-and-switch marketing that will cost you more money in the long run. The other concern is how long have they been in business?

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Your Registered Agent is NOT a member of your management team and they are NOT an employee of the company - but they ARE a critical contractor to your company that can save you a lot of time and money as long as you select a professional and honest one.