It can be tough to run a corporation and if you have been thinking of converting your Nevada corporation to an LLC, then it is a great choice. In fact, it is quite easy to do this. But it should be clear that access to the easy process of this Nevada plan of conversion should not be the reason behind your decision. It is important to know what differences are there between both the corporation and the LLC. You need to see which one is better for your business and which would help you grow and/or achieve your goals.
So, we will be looking into each to help you in making your decision before you get the Nevada Articles of Conversion and form a Nevada LLC.
Converting Nevada Corporation to LLC
Although the decision to convert a Nevada corporation to an LLC is not something that always happens, it is not unusual for the shareholders in a corporation to discuss this. And there are a number of reasons for this to happen including the business structure of an LLC is better and beneficial than the structure of the corporation. Let us get deeper into this to understand it better.
Why convert Nevada Corporation to LLC?
The main reason why people make the decision to convert their corporation and form a Nevada LLC is to add flexibility in the ownership and the management. Let us take an example with the following common scenario. There are two founders in a company – A and B where each of them owns 50% of it. But after a while, both agree that A should be getting more profits, that is 60% due to certain events. And B should get 40%, although B would control most of the company’s decisions.
Having a corporation means that this simple change would not be so simple. It will include creating several agreements, issuance of additional shares to A under certain events, or creating different classes of stock. This part has further restrictions if the corporation is an S corporation since the IRC rule for S corps is that they cannot have different classes of stocks.
Nonetheless, with an LLC, the distribution and control have nothing to do with the amount invested in the company. So, anyone can be the manager of the business and receive a disproportionate share of profits. You should also note that when you convert to an LLC, there would be tax implications too. Along with this, you will have to get the consent of lenders and other third parties that have entered into a contractual relationship with the company.
Moreover, LLC is a great choice for family businesses where the “money” partner and “worker” partner can exist easily. This means that you can easily shift the percentage of ownership in LLCs as compared to in corporations. And the management flexibility that an LLC offers is another great benefit. For instance, if you have a corporation, all the shareholders elect directors, and directors elect officers. You will need a shareholder agreement to let you all know how to vote in a particular way. But this does not bind any director to vote for certain officers.
With the LLC, the operating agreement can lay out how much or little control a member or non-member has. In short, in an LLC, it is all about the negotiation between the owners and there is no strict rule about things, unlike the corporation. In addition to this, corporations have many rules, while LLCs can contractually do almost anything. You can change the structure of your company as per your desire, plus it is not costly to change things, unlike in a corporation.
Types of Nevada Corporation
But then comes another issue – which kind of corporation do you have. There are two kinds of corporations. Let us talk about each:
Nevada C Corporation
A corporation or a C corporation is a separate legal entity where its legal obligations and tax status is separate from the owners. It has a perpetual existence. In a corporation, the creditors cannot attach the non-business assets of the shareholders for claiming their amount. To start a corporation, the Articles of Incorporation is filed with the Nevada Secretary of State. The corporation follows a set of bylaws and needs to have a minimum of two annual meetings – a board of director meeting and a shareholder meeting – where all the minutes of the meeting have to be recorded.
Records keeping is very important for the corporation to keep its status. The shareholders in the company need to elect a board of directors who manage the business for them. In Nevada, a corporation needs one shareholder and one director – they can be the same person. A corporation is taxed as a separate person. And the shareholders who get profits from the corporation also pay income tax for their earnings. This is what is called double taxation, where the profits earned by the corporation are taxed two times – one at the corporate level and then at the personal level.
The tax amount can be minimized by paying the shareholders a salary, which is then deductible on the corporate level as a business expense. If the corporation has a net loss, the shareholders cannot claim this loss on their personal income tax returns. A shareholder in the corporation can easily transfer or sell shares. So, when the shareholder dies, the corporation continues to exist. Investors tend to support corporations more and you can easily have more than 30 shareholders in a corporation. A corporation is the only one that can become a public company.
Nevada S Corporation
The second common kind of corporation is the S corporation. It is a lot like the C corporation but with some restrictions and added benefits. It meets special requirements under the Subchapter S of the IRC. In an S corporation, the corporate level tax paying is eliminated and only the shareholders need to pay tax on their profits. This means that they can claim the losses of the corporation as well.
However, there are some additional negatives that make the S corporation unappealing to many. You cannot have more than 75 shareholders and all of them have to be US citizens. All the shareholders have to agree to adopt the Subchapter S for their taxes and other parts (this is because – to create an S corporation, you form a corporation and then elect for it to be viewed as an S corporation by the IRS).
Every S corporation has a fiscal year that ends on 31st December. Record keeping is important just like in the C corporation to keep the limited liability status. S corporations are different under how tax is paid from LLCs and partnerships where the income and deductions are allocated based on ownership interest only. If the shareholder of the company takes payment for his service as salary, he/she has to follow payroll rules.
What is Nevada LLC?
An LLC (Limited Liability Company) is much simpler. It combines the limited liability of a corporation and the flexibility of a partnership. It does not have to follow many formalities as well. The tax is paid just like it is done in an S corporation, through the owner’s personal income tax return. In Nevada, things are much easier where you can easily form an LLC with a simple registration process, enjoy relatively low corporate taxes and no state taxes. You also get strong privacy protections as a business owner with a business-friendly environment.
Pros and Cons of Nevada LLC
To help you understand better and why you should convert your Nevada corporation to an LLC, here are some of Nevada’s benefits for LLCs include:
- No formal information-sharing agreement with the IRS
- Strong corporate veil protecting individuals from liability
- A judicial system relying on case law to settle disputes
- Permissive rules on the creation of shares
- Formation of single-person corporations allowed
- Low business registration fees and quick turnarounds
- No operating agreements or annual meetings requirements
- Privacy protection for owners choosing to be anonymous
- No taxes on corporate shares or profits
- No state income, corporate, or franchise taxes
Disadvantages of a Nevada LLC
With that said, let us also look at the disadvantages that include:
- To form an LLC in Nevada is more expensive than in other states, where you will be spending about $800 to set it up.
- The privacy rules are not for everyone – there is no protection for officers, directors, or members.
- The annual list of officers and directors is posted online. So, if you want people to stay away from your home, you cannot convert your Nevada corporation to an LLC. This would mean putting up all your personal details online for anyone and everyone to find.
- Some businesses will be taxed if they make $4 million or more a year, as per the rule passed on July 1, 2015. In addition to this, there are sales taxes, industry-specific taxes, and a modified business tax that applies to some LLCs.
- Multi-state litigation may disrupt the privacy standards in Nevada. So, if you live in another state and have a case, Nevada rules cannot help you.
But although there are negatives to this, there are many positives as well. In fact, it is much better to convert your Nevada corporation to an LLC. How to do it? The next part can help you there!
Steps to Convert Nevada Corporation to LLC
In Nevada, the Nevada articles of conversion are governed by Nevada Revised Statutes § 92A.105 (2017). And as per this, a domestic entity can convert into a different kind of domestic entity, if the plan of conversion is approved. So, you can convert your Nevada corporation to an LLC.
The steps to convert a Nevada corporation to an LLC are:
- Create a plan of conversion in writing and the plan of conversion has to hold the following information:
- Name of the existing business entity
- The proposed name for the converted entity (LLC)
- Jurisdiction of the law that governs the existing business entity (corporation)
- Jurisdiction of the law that will govern the converted entity (LLC)
- In order to convert a Nevada corporation to an LLC, all terms and conditions pertaining to the conversion have to be given
- Manner and basis, if there are any, of converting the owner’s interest in the existing entity into the owner’s interests and other securities in the converted entity
- A full text of the charter documents of the Limited Liability Company
- The directors of the corporation have to approve this conversion, recommend the approval in Nevada and also recommend the plan to the respective shareholders
- A majority of the shareholders have to vote for approving this conversion as well.
- Once the plan has been approved, you need to file the Nevada articles of conversion with the Nevada Secretary of state to NV Rev Stat § 92A.205 (2017).
- The Nevada plan of conversion needs to be attached to the articles and submitted with the filing fee.
- You need to give the Article of Organization to convert your Nevada corporation to an LLC.
As soon as the conversion has been approved by the state, the process of forming the LLC would begin. You will have to complete the documentation to form the Nevada LLC. It is also important to keep in mind that you will need the social security number (SSN) or employer identification number (EIN) for your LLC so that you can fill your federal income tax easily.
Note: IncParadise can help you with filing for the EIN and the conversion as well.
Need Any Assistance in Converting Your Nevada Corporation to LLC?
Do you want to convert your Nevada Corporation to an LLC? Well, IncParadise can help you with from. We have been in business for the last few years and have not just helped entrepreneurs have their companies incorporated; we have also helped in conversions of different companies. In addition to this, we have many other services as well, including the mail forwarding service and the virtual office service. To know more or to avail any of our services, contact us today.