Ultimate LLC Compliance Guide. Michael Spadaccini
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state of residency and not in the state where his or her entities are chartered. For example, a California resident who operates a Nevada LLC will be subject to California’s personal income tax on LLC income paid to him or her—the same as if he or she had chosen to organize in Delaware or Wyoming or any other state.
Nevada offers a tremendous degree of privacy to owners of businesses chartered there. However, this degree of privacy is not extended to managers, directors, and officers of Nevada entities. As mentioned above, Nevada has no information-sharing agreement (ISA) with the Internal Revenue Service—and Nevada is not afraid to boast about it.
The IRS has an ISA with 34 states. The purpose of the ISA is to combat abusive tax avoidance.
The IRS and the states that have signed the ISA will share information on abusive tax avoidance transactions and those taxpayers who participate in them. As reported by the IRS, the states participating in the ISA are Alabama, Arizona, Arkansas, Connecticut, Georgia, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Minnesota, Mississippi, Missouri, Montana, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia, and Wisconsin.
Even if Nevada participated in the agreement, it would have no information to share. Because Nevada has no corporate or LLC income tax and no personal income tax, it has no corresponding tax forms and no corresponding tax department.
Along the same lines, owners of Nevada LLCs need not identify themselves in any public records. This makes it very difficult for the government, police, or third parties to determine who owns a Nevada entity.
Unfortunately, Nevada’s privacy protections are widely misused. By way of example, and not by way of recommendation, many individuals and businesses have improperly and illegally used Nevada business entities to hide assets from creditors and even their own spouses. The other obvious misuse is tax avoidance.
Despite occasional abuse, Nevada’s privacy protections do offer value to the legitimate and law-abiding businessperson. Probably the single greatest benefit of Nevada’s privacy protections is that they serve to protect business owners from unscrupulous creditors, aggressive attorneys, and frivolous litigation.
In my law practice, I have served as counsel to several companies that have been the victims of lawsuits that could only be fairly described as totally baseless. Often, the owners of businesses are dragged into suits as defendants simply as an intimidation tool. Frivolous lawsuits are an unfortunate reality in today’s business climate. Also, lawsuits are never win-win: they are always win-lose. The successful defense of a lawsuit following the time and expense of a trial is not a pure victory: it is a victory that comes at great cost.
The real victory is not to ever be sued. Experienced businesspersons and lawyers know this. Nevada’s privacy protections can go a long way toward achieving this goal by effectively hiding business owners from public view and thereby protecting them from litigation. Of course, Nevada’s privacy protections are not absolute. A good plaintiff’s lawyer with enough money and time (it would take a lot of both) could ultimately identify the owners of a Nevada entity. Overall, though, Nevada’s privacy protections are quite valuable.
The other obvious benefit of Nevada’s privacy protections for the businessperson is shelter from government prying. This benefit is obvious, even to a completely law-abiding company or company owner. Our government, police, and courts, while the finest anywhere, are capable of occasionally pursuing the innocent. Again, the successful defense of a criminal matter following the time and expense of a trial is a victory that comes at great cost.
Privacy, for lack of a better term, is good. I am quite comfortable advising my business clients to maintain their privacy as much as possible in their business affairs, regardless of the type of business they conduct. As a general rule, that which need not be disclosed should not be disclosed.
Nevada’s privacy rules have an important exception, however. They protect owners, but not company officers and managers. Nevada is one of a few states that require an organizer to appoint by name at least one initial member or manager in an LLC’s articles. The articles are a public record and anyone can request copies by paying a small fee.
Even worse, however, is the requirement that every Nevada LLC or foreign LLC qualified there file an “Annual List of Managers.” The oft-dreaded Annual List requires companies to disclose the full names of their managers or members. The information is then posted on the Nevada secretary of state’s web site and anyone can search it. This public database makes it remarkably easy for any member of the public to identify a Nevada entity’s management team. Nevada offers a great degree of privacy to owners: as long as they do not participate as managers, owners can easily remain anonymous. By comparison, Delaware and many other states do not so publicly reveal the identities of managers.
You should also consider the initial cost of organization, as well as periodic filing fees and periodic reporting requirements. The State Reference Information on the accompanying CD includes filing fees and periodic reporting requirements.
▼ Expert Tip
Nevada’s dual approach to privacy (complete anonymity for members, but complete disclosure of managers and officers) has produced an interesting new profession: the nominee director/manager. This is an appointed manager/officer who serves as the appointed public representative of an LLC or corporation. The nominee director/manager is often charged with a solemn duty: to serve as the guardian of an entity’s owners’ privacy. The entity’s owners “hide” behind the publicly disclosed nominee manager. A common use of a nominee manager is to protect assets: a Nevada entity owner that wishes to hide assets can assign them to the Nevada entity and can then appoint a nominee manager and direct that person to serve the owner’s interest. The use of nominee managers has little value to an ordinary small business, but it’s effective for asset protection.
WHY ARE YOU REQUIRED TO FILE DOCUMENTS?
When an LLC is formed, it files articles of organization. An LLC will also file periodic reports and a host of other public documents. These public filings serve the purpose of providing public notice. For example, articles of organization notify the public that an LLC has been formed and identify the person to contact in the event of a claim against the LLC, articles of merger inform the public that two companies are becoming one, and articles of dissolution inform the public that an LLC is discontinuing its business.
Notice is important. It identifies an entity, which in turn makes it easier for government agencies to assess the entity for its share of taxes and other fees. Notice also protects consumers and creditors: it lets them know whom to serve with lawsuits and where in the event of a dispute.
FINAL THOUGHTS ON LIMITED LIABILITY COMPANY ACTS
To help you remember what’s in a limited liability company act, the statutory checklist at the end of this chapter lists the items that are usually found in these acts. The second list describes the most common documents that are filed with the secretary of state. Most of these documents are required or permitted to be filed by a limited liability company act.
More important, remember that most sections of limited liability company acts are prefaced with this language: “Unless otherwise provided in the articles of organization or operating agreement. . . .” You have the flexibility to customize your LLC to fit your needs. The statutes are important, but your articles and operating agreement will more often than not establish requirements for your corporation.
Use this checklist to identify areas where you may need to refer to your state’s statute to determine the proper course of action. Many of these concepts are described in later chapters.
Checklist: Statutory Matters
• Filing requirements
• Organizers