New Mecixo LLCs vs. Nevada Corporations

NEW MEXICO LLCs VS. NEVADA CORPORATIONS: WHICH IS BETTER?

NOTE: Although I do a comparison between New Mexico LLCs and Nevada corporations here, there are other states (such as Oklahoma and Indiana) that also have very favorable LLC laws.

However, their characteristics will vary slightly from that of New Mexico LLCs, and PF Shield forms different LLCs in different states depending on a client’s state of residency, goals, needs, and other circumstances.

New Mexico LLCs	Nevada Corporations
Pros	Pros
New Mexico never asks who owns and/or manages the LLC, making New Mexico LLCs a powerful privacy tool. There is no corporate/franchise tax for New Mexico LLCs. There is no state income tax if the LLC receives no income from within New Mexico. Nonetheless New Mexico expects both Nevada corporations and New Mexico LLCs receiving income within New Mexico to pay state income tax. LLCs are only required to pay an entity level tax (such as a franchise tax) if it transacts business in a very few states, such as California or Texas. In some instances, a limited partnership (LP) may be used in lieu of an LLC to avoid any franchise tax. A properly structured LP (where an LLC is the general partner) will provide asset protection, privacy, and estate planning benefits that are equivalent to that of an LLC. LLC filing costs are only $50. A resident agent is also required, which usually costs $100-150 a year if a company is hired to provide this service. Although the law requires certain records to be kept at the LLC’s principle business address, this address may be anywhere in the world (thus making a subpoena of such records extremely difficult under certain circumstances.) Failure to maintain records at the principle business address is NOT grounds for piercing the LLC veil. No annual reports are required to be filed with the state. If an LLC membership interest is placed in a Privacy Trust (which is similar to an Illinois Land Trust), then a non-interest bearing bank account may be opened that has no paper trail to any LLC member, as long as no member is a signer on any such account. This goal may also be accomplished by electing the LLC to be taxed as a C corporation, having the manager apply for a TIN not connected to an LLC member, and then opening a bank account with this TIN. Membership interests may not be seized to satisfy a creditor’s claim against the member. This is due to a statutory provision known as “charging order protection”. The creditor can only receive the right to allocations of profit and loss that the member would otherwise receive. However, a properly worded LLC Operating Agreement will allow for profits to be retained within the company and “expensed out” or funneled to the member via alternative means (such as LLC management fees.) The IRS has admitted they generally cannot seize property held in an LLC for the tax debt of its member. An LLC may choose to be taxed as an entity disregarded from its owner, a partnership, a C corporation, or an S corporation. An LLC taxed as a C or S corporation does NOT receive 1099’s from any 3rd party. Furthermore, it can apply for a Federal Tax ID # (a.k.a. TIN or EIN) that is not connected to any member’s Social Security #. However, an S corporation will issue a K-1 return to each member, which will have their SS# on it (the K-1 is sent to the IRS along with an 1120S return.) An LLC taxed as a disregarded entity has NO requirement to file an entity level tax return, although it may receive 1099’s from a 3rd party payor. The 1099 reports a payment only, however, and gives no indication to actual LLC profits. If a member is liable to pay tax for LLC profits, then he/she should file a 1040 schedule C return. Making a 2nd New Mexico LLC the 1st LLC’s member, however, ensures that there is no paper trail connecting the 1st LLC and the taxpayer together if the taxpayer reports LLC profits on his 1040 Schedule C return (as long as there is no 1099 reporting involved.) In certain situations a multi-member LLC benefits from stronger “charging order protection” than a single member LLC. However, only a single member LLC is taxed as a disregarded entity by default (no requirement to file an entity-level tax return.) Fortunately, it is possible to structure a multi-member LLC as an entity disregarded entity for the maximum benefits of convenience, privacy, and charging order protection in the same LLC. Because an LLC may be controlled by its members, it is less susceptible to an “alter-ego” theory which might pierce the LLC’s limited liability veil. An LLC may be managed by either a member or non-member manager. An LLC may be managed by another LLC. This is a benefit because if an act of negligence is claimed by a litigant, the managing LLC will be named as a co-defendant instead of a manager, director, corporate officer, etc. In this instance, a natural person may be named as a co-defendant only if the limited liability veil of the managing LLC is pierced. Like Family Limited Partnerships, an LLC (a.k.a. Family LLC) may be a powerful estate planning/estate tax reduction or elimination tool due to a technique called “valuation discounting”. Liquidation of an LLC that is taxed as a partnership or disregarded entity usually does not trigger any tax liability. Likewise, a return of capital to an LLC member usually does not trigger a tax.	Nevada corporations allow for nominee officers, so that the identities of stockholders are kept private. The corporate stock ledger (used to record the identities of stockholders) may be kept offshore, for greater privacy. Bearer shares are allowed, for an extra layer of privacy. There is no corporate tax and no income tax in Nevada. A Nevada corporation may elect S corporation tax status, to allow for pass-through taxation and the avoidance of a double tax on corporate profits. Corporations in general do NOT receive 1099’s from 3rd party payors. A corporate officer (including a nominee officer) may apply for a TIN without disclosing the Social Security number of any stockholder. A corporate bank account may be opened that has no paper trail to any stockholder, as long as no stockholder is a signer on any corporate account. Corporate stock may be quickly and easily transferred.
Cons	Cons
If an LLC is taxed as a C corporation, S corporation, or partnership, then the IRS expects it to file an entity level return (an 1120, 1120S, or 1065 return, respectively.) Any LLC not taxed as a corporation is subject to 1099 reporting if it receives 3rd party payments in excess of $600 annually (in the aggregate per payor). Co-mingling of personal and LLC funds may be grounds for piercing the limited liability veil of an LLC. Furthermore, although not required by law, failure to hold annual meetings and keep proper minutes and financial accounting records of LLC activity may increase the likelihood that a hostile creditor may be able to pierce the veil of the LLC through litigation. Failure of an LLC to hold sufficient capital to pay its debts as they become due in the normal course of business may also be grounds for piercing its limited liability veil. Although a creditor of a member may not gain control or ownership of an LLC or its assets, the creditor may receive an assignment of rights to receive allocations of LLC loss or profits. (However there are remedies to possibly circumvent this problem.) LLC membership interests are not as easily transferable as corporate stock.	The IRS expects every CC orporation to file an 1120 return, and every S corporation to file and 1120S return. There is no “disregarded entity” tax status available for corporations, wherein they would have no entity-level filing requirement. The only way to avoid double taxation for a corporation is to elect S corporate tax status. In this situation, the corporation will be connected to every stockholder via the stockholder’s Social Security Number, which is required to be listed on the 1120S K-1 form. An LLC taxed as a disregarded entity does not have this problem from a return-filing standpoint (although the use of a 2nd LLC may be required to legally preserve privacy if a 1040 Schedule C return is filed.) Nevada corporations must list corporate officers and their addresses on public record, even if they only serve in a nominee capacity. This makes these officers easier to locate. If these officers reside in the U.S. they may be subject to subpoena, wherein they may be forced to reveal the identity of the corporate stockholders (if they know them) while under oath. Furthermore, failure of a corporate officer to produce company records per a court order will likely subject them to a contempt of court ruling, since they are responsible for management and maintaining access to such records. Stock ownership of a Nevada corporation may be imputed through constructive evidence, even if a person doesn’t technically “own” a corporation because he doesn’t currently possess its bearer shares. Although Nevada corporate stock may have no par value, it will always have a fair market value, meaning that a transfer of bearer shares may trigger gift tax liability. Transfer of bearer shares is usually ineffective as an asset protection measure due to fraudulent transfer law. Co-mingling of personal and corporate funds may be grounds for piercing the limited liability veil of the corporation. Furthermore, holding annual board meetings and keeping proper minutes and financial accounting records of corporate activity is required by law and the failure to do so may also be grounds for piercing the corporate veil. Failure of a corporation to hold sufficient capital to pay its debts as they become due in the normal course of business may also be grounds for piercing the corporate veil. Unlike an LLC, which may be lawfully controlled by a single person, a corporation that is controlled or “dominated” by one person is vulnerable to having its corporate veil pierced. Corporate stock may be seized to satisfy the judgment debt of a stockholder. Once the creditor gains 51% or more of voting stock, he may liquidate the company to satisfy his claim! An LLC does not have this problem because it benefits from “charging order protection.” Remember, if a stockholder loses a lawsuit he will be required by law to list his stock as a personal asset at a deposition hearing. Transferring his bearer shares to a friend does not work because of fraudulent transfer law. (This may even subject the transferor to additional penalties!) Failing to abide by this rule would be to commit perjury. Although there is no Nevada corporate tax, there IS a corporate tax in most other states. Therefore, if a Nevada corporation transacts business in another state, it will most likely have to pay a corporate tax. Compare this to an LLC, which is NOT required to pay an entity level tax when operating in most states (and if it is, then an LP/LLC arrangement will usually legally avoid this tax.) Nevada charges $460 to form a Nevada Corporation. Furthermore, you must pay the state $125 a year along with the corporation’s annual report, in addition to any resident agent fees you may have to pay. Compare this to a New Mexico LLC, which only has a $50 filing fee and no annual state fees (resident agent fees may still need to be paid.) Although the stockholder of a C corporation may be another company, a corporation’s directors and officers must be natural people. Nevada corporate law allows these people to be named as co- defendants on a lawsuit against the corporation. (Compare this with a Delaware corporation which does NOT allow this, until the corporation is sued in court and loses.) Because LLC managers may be other limited liability entities, they have a strong layer of protection that corporate directors/officers do not have. You can purchase corporate officer/director insurance, but that costs money and may also be inadequate if someone sues the corporation and is awarded a large judgment. If a corporation wants to avoid double taxation, it must elect S corporate tax status. An S corporation’s stock may not be held by another corporation, limited partnership, LLC, LLP, LLLP, and certain trusts. The number of stockholders is limited to 75. Furthermore, non-U.S. citizens may not hold S corporation stock. Because corporate stock is easily transferable, it cannot be “discounted” for estate tax reduction/elimination purposes and thus it’s a much less powerful estate planning tool than FLP’s and FLLC’s are. Any liquidation of corporate assets or return of capital to a stockholder is a taxable event. Compare this to an LLC, wherein LLC members usually do NOT have to pay taxes under these circumstances.