A Review of Nevada’s Corporate Law
Original Publication Date: 3.11.15
This article explores the advantages and disadvantages of various types of business entities in Nevada. Generally, the main advantage of a corporate entity is to shield its owners from placing their personal assets in jeopardy for the obligations of the business. If you are unsure which entity is right for you, call today 702.667.4828 for a consultation with one of our business attorneys.
Informal Business Types
This is the easiest of all business forms to create, operate, and dissolve. The advantage of an informal business arrangement is that it is cheaper in the short term to establish and to run. Simply stated, a sole proprietorship is a business run by an individual. There is no legal distinction between the individual and the business itself. If I were to open a business and call it “Jay’s Hot Dogs”, I would need to get a business license of course, and I could call it whatever I want, but as far as the government or my creditors are concerned, I am the only one they look to for their money. A sole proprietor puts all his assets at risk for the sake of the business. If the business fails, has tax obligations, or is sued, the individual owner’s assets (bank account, home, vehicles, etc.) are at risk to pay the obligations. Sole proprietorships are taxed at the individual federal rate.
A Joint Venture, like a sole proprietorship, is not a formal business entity controlled by our legislature. It is a creature of contract between two or more individuals who agree to share the risks and rewards of pooling their assets and/or resources to run a business. The parties to the venture agree to share in profits and losses (in relation to their agreement). It is run like and is treated in the law similar to a general partnership. The parties to the joint venture place their assets at risk should the venture fail.
A partnership is defined in the law as an association of two or more persons doing business for profit. Nevada recognizes three types of partnerships – General, limited liability, and limited partnerships.
General Partnerships (“GP”) are governed by Nevada Statute, although there are no rigid requirements for the formation of a GP. A GP can generally be formed through the agreement to share profits from a business with another person. One must file a fictitious name designation in order to maintain a proper GP. The GP, like all business forms discussed below, must generally keep its books and records at its place of business and all partners have the right to inspect the same. Like a sole proprietor, each partner is fully liable to the extent of their personal assets for all the obligations of the GP. While the partners may change the relationship, unless otherwise agreed, the partners:
1) Share equally in profits and losses;
2) Have equal rights to manage the affairs of the GP; and
3) Have no right to pay for acts benefiting the partnership
Limited Liability Partnerships (“LLP”) are governed by Nevada Statutes, are required to follow organizational formalities, and offer limited liability to their partners. This entity is only available to those offering traditional professional services. Record keeping and governance of an LLP is the same as for a GP, and can be modified by an agreement between the partners. A partner in an LLP is not liable for the acts, obligations, etc. of any other partner in the LLP, but is liable personally for his own omissions, negligence, wrongful acts, misconduct or malpractice, and for that of any person under his supervision.
Limited Partnerships (“LP”) are governed by Nevada Statutes, are required to follow organizational formalities, and all partners of a limited partnership, except the general partner, enjoy limited liability. A general partner or general partners operate the business, but may grant the right to vote on governance issues to limited partners or classes of limited partners. The general partner’s rights, powers, restrictions, liabilities, etc. are the same as those in a general partnership. As the general partner has unlimited liability, we usually recommend against forming an LP; when clients insist on doing so, we recommend using an LLC or corporation as the general partner of the LP. A limited partner is only personally liable for the obligations of the LP if the limited partner is also a general partner, allows his or her name to be used in the name of the LP, or exercises control of the business. Otherwise, he/she is not liable for the obligations of the LP.
LLCs and Corporations
Limited Liability Companies (“LLC”) are governed by Nevada Statutes. It is capable of suing and being sued. It may be formed for any lawful purpose. This entity type is required to follow organizational formalities required by law, and may be operated by its members (the name for its owners) or by a hired manager who act to bind the LLC in its contractual and employment relationships. A member’s liability is generally limited to the amount of capital placed in the LLC. An LLC may elect to be taxed on a personal or corporate level.
“C” Corporations have extremely formal formation requirements governed by Nevada Statutes. A “C” Corporation is capable of suing and being sued. It may be formed for any lawful purpose. Shareholders (the name for its owners) are not personally liable for the obligations of the corporation, although in a small corporation, most major creditors will require shareholders to guarantee corporate debts. Federal taxation applies to both the money earned by the corporation as well as that distributed to its shareholders. Losses, on the other hand, are trapped within the corporation and do not flow to the shareholders. You should consult a tax professional to determine the proper tax treatment for your business.
“S” Corporations are corporations established under the formal formation of a C Corporation, but which have made a different IRS taxation selection. Earnings of S corporations are taxed directly to its shareholders, and losses may flow directly to the shareholders. You should consult a tax professional to determine the proper tax treatment for your business.