A Nevada Business Holdings Trust is a Nevada Asset Protection Trust that is designed by RDJ LAW to hold the interest in your business, to shield and protect your income flow from the business.

All too often, business owners do not think about protecting the income from their business in the event that they get sued at some point. But what happens when a business owner gets sued outside of the business front and ends up with a judgment against him/her personally? The classic example is a car accident. Imagine that you are driving one day and you get into an accident. The other party is seriously injured, sues and ends up getting a judgment against you in an amount that far exceeds your car insurance policy limits. In such a case, your auto insurance carrier will payout the policy limit (probably $25,000) to the injured party and then the insurance company is out of the picture. Now the plaintiff with a judgment can go after you personally to recover the balance of their judgment (which could very well be a multi-million dollar judgment) from your personal assets. From the time that the court enters the judgment against you, the judgment creditor may then begin to take action to collect its judgment against you by force of law. They can garnish personal bank accounts and your wages, they can seize any personal assets that you own that are not specifically exempt under the law and they can foreclose against any real estate properties that are not covered by the homestead exemption.

RECOVERING AGAINST YOUR BUSINESS INTERESTS

With regard to any businesses that you own an interest in, there is potential risk to both the business ownership interest itself and to the income flow from that business. The different types of business entities and a full discussion of what protection there may be is a lengthy discussion for another time. But briefly, for our purposes here, an LLC membership interest is generally protected from outright seizure of the membership interest by a judgment creditor through what is commonly called “charging order protection”). But an LLC membership interest in some states may have various levels of limited protection or, effectively, none at all (for example, the Hawaii LLC statue specifically allows a judgment creditor to foreclose the “lien” that a charging order against an LLC member’s membership interest creates – which means the LLC member really has no protection in Hawaii). The Nevada LLC law specifically limits a judgment creditor’s remedy against a Nevada LLC member’s membership interest to the charging order (a charging order is an order from the court in favor of the judgment creditor to the company to deliver any profit distribution or payment that is being made by the company to the judgment debtor to the judgment creditor, instead. But, under the Nevada LLC law, the charging order only enables the judgment creditor to sit an wait and hope for a profit distribution from the LLC to the member whose membership interest they have charged (effectively they have a lien against the membership interest). Under the Nevada law, they cannot force a distribution of profit and they explicitly are not allowed to try to wiggle any other remedy out of the charging order or otherwise against the LLC membership interest. That’s the good news. The bad news is that, as long as there is a judgment and a charging order against your NV LLC membership interest, you are tied up and unable to get the money out of the LLC where you need it to pay your bills and to live on. (CLICK HERE FOR VIDEO ON THIS TOPIC)

A Nevada Corporation has the same “charging order” exclusive remedy protection as an LLC or partnership does, if the corporation is not publicly traded, is not a professional corporation and has 100 or fewer shareholders (NRS 78.746). However, this protection of your stock in a corporation only applies to a Nevada corporation. If you own stock in a corporation domesticated another state, you likely don’t have any charging order or other protection at all for your stock ownership interests. This means that the judgment creditor may seize your stock in the company and they will then own the stock in your company – a very bad outcome for you and your business.

SETTING UP A NEVADA BUSINESS HOLDINGS TRUST TO OWN YOUR INTEREST IN THE BUSINESS

If you had set up a Nevada Business Holdings Trust through RDJ LAW prior to that car accident happening, your interest in the business and your income flow from it would be safe and you would have the full benefit of the profits from your business. When a Nevada Business Holdings Trust owns the interest in the company, whether it is an LLC, a partnership or a corporation, the profits from that company may be distributed into the Trust that owns your interest in the company. If the judgment creditor cannot prove by clear and convincing evidence that there was a transfer of money or assets “from you” to the Nevada Business Holdings Trust that was fraudulent as to the judgment creditor specifically, they cannot reach into the trust to recover anything to satisfy their judgment against you personally.

Profits from the business can be held in the Trust for as long as you want. If you have a judgment against you personally, the Trustees may pay your bills for you directly from the Trust being sent directly to where it needs to be paid. So, you truly have full benefit of the income from the Trust and can continue to have all of your financial needs met from the profits of your company, even though there may be a personal judgment against you and the judgment creditor cannot seize either the money in the Trust or the ownership interest in the business.

ADDITIONAL BENEFITS OF THE NEVADA BUSINESS HOLDINGS TRUST

In addition to protecting your ownership interest in the business and protecting your income flow from the business, the Nevada Business Holdings Trust will also provide for avoidance of a probate of the business interest following your death, as the business ownership interest will pass to the beneficiaries that you’ve specified in the Trust following your death, without any court involvement.

The Nevada Business Holdings Trust can also provide some anonymity of your interest in the business as well, which can also be a plus.

The Nevada Business Holdings Trust is generally established as a “grantor trust” for federal taxation purposes which means that it is a “flow-through” tax entity and will not complicate your tax filings and situation.

If you have multiple businesses, the Nevada Business Holdings Trust can hold your ownership interests in all of the businesses or they can each be “compartmentalized” for maximum exposure minimization by establishing a separate Nevada Business Holdings Trust for each business.

Don’t get caught with your pants down and your business interests exposed. Contact RDJ LAW today to schedule a free consultation and evaluation of your protection and planning needs.

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Due to changes made to Chapter 115 of the Nevada Revised Statutes (NRS) by the Nevada Legislature in 2019, the Homestead Exemption amount that a Nevada homeowner can claim has been increased from $550,000 to $605,000 in equity value. This is an increase of $55,000 in the equity value of the primary residence that will be exempt in Nevada from the claims of a judgment creditor, as long as the Homestead Declaration has been properly recorded to claim the entitled exemption.

The increase in the exemption amount is the good news. The bad news for homeowners is that NRS 115.055 has been added to the Homestead statute. NRS 115.055 limits the protection of the Homestead exempt proceeds from the sale of the home. Specifically, NRS 115.055 states that the $605,000 exempt amount from the proceeds of a sale of the home are only protected if the proceeds are reinvested in another property of like kind for which a Homestead will be made and (1) the new property to be purchased is identified not later than 45 days after the sale of the Homestead property; and (2) you take possession of the new Homestead property not later than 180 days from the sale of the original Homestead.

What this (NRS 115.055) effectively means, is that, if you sell Homestead property in Nevada while there is an outstanding judgment creditor, the proceeds from the sale of your homesteaded home will only be protected for a maximum of 180 days from the date of sale – and only if the proceeds are reinvested in new Homestead qualified property on which a Homestead Declaration is recorded.

In sum, the Homestead law update is bittersweet news for Nevadans. This change underscores the importance of putting your Nevada home into a Nevada Asset Protection Trust, in order to protect the proceeds from the sale of your home beyond the limited time and manner restrictions that are now imposed by the new addition to the Nevada Homestead law.

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A Living Trust (a/k/a: Family Living Trust, Family Revocable Living Trust, Revocable Living Trust, Revocable Trust), is primarily designed to accomplish two things:

(1)        To prevent your family and your estate from having to go through the Probate Court process in order to have your assets distributed to your family (or according to your desires) following your death; and

(2)        To address the distribution of property issues following your death (i.e., spelling out “who gets what” when you die). 

How Does the Living Trust Avoid Probate?

The Living Trust prevents your estate from having to go through the probate process primarily because the Living Trust is created during your lifetime and it becomes the owner of all of your property, both real and personal.  Even though the Living Trust will own all of your property, you still control everything until the day you die or become incapacitated.  Because the Living Trust owns everything when you die, you own nothing. 

Your personal estate consists of your property that you own.  If the Living Trust owns all of your assets when you die, you own nothing and therefore have no personal estate that needs to go through the probate process. 

What is Probate?  Put simply, the Probate Process is really just the legal process of accounting for and distributing the property of the deceased person to the deceased person’s heirs.  Without the probate process, the heirs cannot receive proper legal title to any of the assets of the deceased person.  The probate proceeding is a statutory process that is designed to enable all interested parties to come and make their claims against the estate (creditors and potential heirs).  The probate process also enables validation of the Will (where there is a Will).  The legal process then determines what the valid claims against the estate are (debts & liabilities) and, ultimately, how the net proceeds of the estate shall be distributed.  [Where there is a Last Will and Testament, the provisions of the Will spell out who gets what – where there is no Will, the deceased person is said to have died “Intestate” and the Intestate laws of the state where the person dies spells out who gets what according to the law and no one has any say in the matter (your wishes and desires are irrelevant in the case of an Intestate estate)]. 

The Living Trust that is properly “funded” (meaning that it owns all of your property) will avoid the probate process all together.  This is because the Living Trust owns all of the assets and there is no estate (property) that needs to probated. 

How Does the Living Trust Work?

When you create the Living Trust (which is traditionally called “settling” the trust), you do several things in the Trust document:

            (1)        You designate the Trustee (usually you – or in the case of a married couple, usually both the husband and the wife are the Trustees);

            (2)        You designate one or more “successor trustees”.   The Successor Trustee is the person that steps into the role of Trustee upon your death, your incapacitation or your resignation.  

            (3)        You designate the lifetime beneficiary(ies).  If you are single, you are usually the sole beneficiary of your Trust during your lifetime.  If you are married and you create a joint trust with your spouse, both the husband and the wife are usually the designated lifetime beneficiaries. 

            (4)        You specify the Plan of Distribution of the assets or proceeds of the Trust following your death (i.e., you specify “who gets what”).  This is called designating the death “beneficiaries”.  In this respect, the Living Trust serves as what is often referred to as a “Will substitute”. 

During your lifetime, you (or you and your spouse) ordinarily are the Trustee and you have custody and control of all of the assets of the Trust.  You are also the beneficiary of the Trust, so everything in the Trust is for your benefit during your lifetime.  With a Living Trust, you have unfettered control over what you do with the assets and proceeds of the Trust for so long as you are the Trustee. 

Upon your death, the designated Successor Trustee becomes the acting Trustee of the Trust.  The Successor Trustee is bound by the terms of the Trust and the Trust has spelled out how the Trust will be administered and ultimately distributed.  It is ordinarily specified that, upon your death, the Successor Trustee is to liquidate the Trust and distribute the assets, or the net proceeds, of the Trust to the individuals that you have designated (for example: “distribute all to my children in equal shares”).  The Successor Trustee carries out the distributions as specified and then closes out the Trust after the final distribution is made to your beneficiaries.  THIS WHOLE PROCESS OCCURS WITHOUT THE NEED OF ANY COURT INVOLVEMENT – which can save your estate a significant amount of money (and time and hassle for your family), because attorneys fees, court costs, appraisers fees, etc. are all either avoided or minimized. 

It is as simple as that!  

In contrast, a Will is really a ticket to probate court.  This is because the Will is not an entity like the Trust. The Will is merely an instrument that spells out your desires as to who gets what when you die and who will be the executor of your probate estate.  The Will really only comes to life following your death.  The Will must be submitted to the probate court and go through the entire probate process in order for its terms to be carried out.  This can cost your estate a significant amount of money (and time and hassle for your family – sometimes several years) and the bottom line is that your family gets less of your estate and it takes them much longer to get it than they ordinarily would with a Living Trust. 

The post What does a living trust do and how does it work? appeared first on RD Johnson Law.

A Limited Liability Company (“LLC”) is a business entity form that is enabled by statute in the state where the LLC is formed. LLCs in Nevada are enabled and governed by Chapter 86 of the Nevada Revised Statutes (NRS Chapter 86) (to read the Nevada Limited Liability Company Statute click here: https://www.leg.state.nv.us/NRS/NRS-086.html ).

An LLC generally has fewer business formality requirements than a corporation does.  This is certainly true in Nevada, where the statute allows the business owners maximum flexibility on how the LLC is internally governed with no state imposed corporate-type procedural and governance formality requirements (such as annual meetings, special meetings, ownership certificates, etc.).

While the LLC does provide protection of the LLC owners (members) in the same way that a corporation does (it shields and protects the business owners from the liabilities of the company), the LLC is really structured more like a partnership than a corporation (but unlike a general partnership where the partners personally have liability for the debts and liabilities of the partnership, the LLC members are personally shielded from the LLC’s debts and liabilities). 

OWNERSHIP INTERESTS IN AN LLC

The ownership interests in an LLC are called “membership interests”.  The membership interests may be allocated among the members as percentages of the total outstanding membership interests or they may be designated as membership units (much like shares of stock in a corporation).  The members and managers of an LLC may be individuals, business entities (such as a corporation or another LLC) or they may be trusts.

MANAGEMENT OF AN LLC

An LLC does not generally have officers and directors, like corporations do. Instead, the LLC is managed by one or more of the members of the LLC (known as “managing members”) or by one or more non-member managers (a non-owner manager is called a “manager”).  In Nevada, when the LLC is formed, the Articles of Organization must specify whether LLC will be managed by one or more of its members (“member managed”) or whether it will be managed by a non-member manager (“manager managed”).

LLC OPERATING AGREEMENT

An LLC is internally governed by an “operating agreement” which is really a contract by and between the members of the LLC. The operating agreement is akin to the partnership agreement in a partnership.  The LLC laws don’t always require that the LLC have an operating agreement. In Nevada, an operating agreement is not required. However, a good operating agreement is always a good idea. This is particularly true if the LLC will have more than one member, as the operating agreement enables the members to spell out what the intentions, understandings and terms are that they agree to and that their business relationship will be governed by. A good operating agreement can help serve to actually prevent disputes and potentially costly lawsuits by and between the members, if the keys terms and provisions of their business relationship have been carefully spelled out in writing in the LLC operating agreement.  

REASONS WHY AN LLC IS PARTICULARLY ATTRACTIVE – SIMPLICITY & PROTECTION

Because of the general lack of statutorily imposed business formality requirements (which corporations generally have) and the freedom to govern the LLC internally as the members agree (preferably memorialized in a written operating agreement), LLCs have become very popular.  They are also a good business entity choice because of the fact that the LLC generally has “charging order protection” (which varies some from state to state) that prevents a judgment creditor of a member of the LLC from seizing the membership interest in the LLC.  In some states, charging order protection is only afforded if the LLC has more than one member. In Nevada, the LLC statute does not distinguish between single or multiple member LLCs with regard to the charging order. And the Nevada LLC law is particularly good, because NRS 86.401(2)(a) specifically states that this provision:

“provides the exclusive remedy by which a judgment creditor of a member or an assignee of a member may satisfy a judgment out of the member’s interest of the judgment debtor, whether the limited-liability company has one member or more than one member. No other remedy, including, without limitation, foreclosure on the member’s interest or a court order for directions, accounts and inquiries that the debtor or member might have made, is available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor’s interest in the limited-liability company, and no other remedy may be ordered by a court.”

This statutory provision is one of the primary reasons why Nevada is the best jurisdictions in which to form an LLC.

TAXATION OF LLCS

The way that a Limited Liability Company is treated for Federal Taxation purposes depends upon how many members the LLC has. A single member LLC is deemed to be a “disregarded entity” by the IRS.  What this means is that the LLC itself is not taxed, but rather it is “disregarded” for federal taxation purposes.  As such, the member of the disregarded entity LLC is essentially treated as if he/she were a sole proprietor for Federal Taxation purposes (but in the “real world”, for every other purpose, the LLC is legally separate from the member).  Therefore, the single member LLC does not file any tax return at all [even though the LLC generally will have its own federal tax identification number (EIN)].  Instead, the individual member reports the profits or losses of the LLC on schedule C of his or her personal 1040 tax return.  This is often referred to as “flow-through” or “pass-through” taxation (an S Corp, as discussed above is also a pass-through entity, but it does file a tax return to report the income or loss).  

If the LLC has more than one member (that are not husband and wife – the husband and wife scenario may be different depending on whether the husband and wife reside in a community property state or not), by default it will be treated as a “partnership” for federal taxation purposes.  The LLC that is treated as a partnership will file IRS Form 1065 with the IRS to report the profit or loss of the business, but the LLC itself does not pay any federal income taxes. Each individual member (partner) will report his/her respective percentage of the profits or losses of the LLC from the Schedule K-1 that they receive from the Partnership return.  The individuals then each report their share of the profit or loss of the LLC on schedule C of their individual 1040 tax return.  [If there are only two members and they are husband and wife and they live in a community property state, they may choose to have the LLC treated as a Disregarded Entity, as if it were a single member LLC].  

An LLC may also elect to be taxed as a C Corporation (IRS Form 8832) or as an S Corporation (IRS Form 2553) (if the LLC has under 100 members and all members would be qualifying shareholders under subchapter S – see section on S Corporations above).  If the LLC elects to be taxed as a C Corporation or as an S Corporation, as far as the IRS is concerned the LLC will be a C Corp or an S Corp as elected, even though in the “real world” it is an LLC.  The ability to elect a different entity classification for tax purpose gives the business owners the option to take advantage of the many benefits of being an LLC but still being taxed as a corporation where that is deemed to be more beneficial to the members (you should always get the advice from a qualified tax profession before determining whether or not to file an election with the IRS to be treated differently than the default taxation treatment).  

SUMMARY

In sum, an LLC is often the best business entity choice for many reasons. The Nevada LLC, in particular, provides many benefits to business and the business owners.

RDJ LAW provides business formation services. If you would like a free in-person or telephone consultation about Nevada LLCs and other business entities, please click here to contact us.

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One of the most fundamental areas of Business Law is, of course, Business Entities. That is the different type of companies that may be established to operate a business through. The primary different business entities include: sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, limited liability companies (LLC for short) and corporations.  

Business entities were created primarily with the purpose of enabling one or more individuals to create a business entity, such as a corporation, to entice entrepreneurs to engage in commerce without incurring the risk of liability to themselves individually for the business debts and liabilities. This primary purpose remains true to this day.  

Because, the business entity choice can affect how your business is governed, operated, maintained and taxed, it is important to understand the different entity options and the legal and tax implications of each, before making your entity choice.


DIFFERENT TYPES OF BUSINESS ENTITIES:

Sole Proprietorship

While the Sole Proprietorship is usually listed on any list of business entities, a Sole Proprietorship is really simply an individual that is doing business, without establishing a separate business entity (a sole proprietorship is really no business entity at all).  The individual sole proprietor may adopt a business name that may be registered as a “dba” (doing business as) or “fictitious name” filing with the local governmental agency that governs fictitious name registrations (often this is done at the county level, rather than at the state level (usually the Secretary of State or Department of Commerce) where corporations and other business entities are registered.  A DBA or Fictitious Name registration puts the world on notice that the sole proprietor is using a name that is “fictitious” and is not the sole proprietor’s real name.  The DBA or Fictitious Name registration (some states call it a dba registration, while others call it a fictitious name registration – both terms mean the same thing) may make the sole proprietorship look like a business entity, but the reality is that the sole proprietor with a dba registration is really the individual doing business.  As such, there is no business entity that shields the individual sole proprietor from the debts and liabilities of the business, as the individual and the business are one and the same.  Therefore, while the sole proprietorship may be attractive from a simplicity and cost standpoint, it is really very unattractive from a legal liability standpoint. In general, therefore, it is virtually always a bad idea in our modern world to do business as a sole proprietorship.  


General Partnership

Whenever two or more individuals or entities come together with the intent to engage in business for profit, a General Partnership has been created, unless another business entity type has been formed. This is a General Partnership by default, which may be created at law, even though the partners did not realize that they were creating a General Partnership. Partnerships may also be created with the intent to do so.  Generally, a General Partnership will have a partnership agreement (it is always advisable to have a written partnership agreement which spells out the terms of the partnership).  In the absence of a written partnership agreement, the terms of the partnership will be based on the agreement of the partners.  If an issue of what the terms of the partnership are comes up and it results in litigation, determining the terms will be based on the evidence that is demonstrated and determined to be fact in court.  Generally, states also have a statute (law) that defines the default law in that state that governs partnerships. In many states, the partnership statutory provisions are “fall back” provisions that will govern the partnership in the absence of a partnership agreement that covers the issue in question.  

One of the biggest problems with the General Partnership structure is that the individual partners in the partnership are individually liable for the debts and the liabilities of the General Partnership.  So, like the sole proprietor, there is no shield of protection for the individual partners of the partnership from business liabilities.  Thus, the General Partnership structure is usually not the best entity choice.  A possible exception to that general rule would be a situation be where the individual partners of the General Partnership are each a business entity, such as a corporation or LLC.  In this instance, the General Partnership is often called a Joint Venture.  A Joint Venture is usually just a general partnership. Most often (but not always) a Joint Venture is comprised of two or more existing business that are engaging together in a venture for profit.  


Corporation

A Corporation is an entity that is enabled to be created by statute (under the law of the State where the corporation is incorporated).  A Corporation is a fictitious entity that exists only because the law says that it does.  A Corporation, in most or maybe all states, is defined as a “person” in that it can buy, sell, lease, conduct business, trade, invest, sue or be sued etc. in its own name.  A Corporation consists of officers, directors and shareholders.  The Shareholders of the Corporation are the owners of the company.  The Corporation, at the time of formation, authorizes a certain number of shares of stock to be issued to potential shareholders.  The shareholders (stockholders) purchase a certain number of shares of stock of the Corporation.  The Corporation is initially funded by the money (or assets) that it receives in exchange for the shares of stock that are purchased by the purchasers of the company stock.  The shares of stock that are purchased by the purchaser are “issued” to the purchaser who then becomes a stockholder (or shareholder – they are synonomous terms).  After the initial formation and issuance of all of the outstanding stock, the corporation may authorize the issuance of additional shares of stock to raise additional capital that the corporation may need.  A corporation that is not publicly traded need only have the authorization of the directors (and possibly a majority vote of the existing shareholders) in order to issue additional shares of stock in the Corporation.  A publicly traded corporation or a corporation that falls within the purview of the Securities and Exchange Commission may need to get authorization from the Securities and Exchange Commission before it can legally issue additional shares of stock.  

In terms of Officers, a corporation generally must have at least a President, a Secretary and a Treasurer.  Additional officers, such as a Vice President, Chief Executive Officer (CEO), Chief Financial Officer (CFO) may be authorized by the Corporation’s Bylaws.  The Bylaws of the Corporation will define the duties and powers of each office therein authorized. 

A Corporation must have a Board of Directors.  In some states, a corporation need only have one director.  In others, more than one director is required.  Corporations that are not closely held generally have a number of Directors that are elected to sit on the Board of Directors.  The appointment of Directors are by vote of the stockholders (usually done annually at the corporation’s annual meeting of the stockholders or by special meeting if a vacancy must be filled before the time for the annual meeting).  

The officers and directors of the Corporation must be individuals (a company or trust may not fill an officer or director position).  

The Corporation is governed by its Bylaws.  The Bylaws of the Corporation serve as a sort of constitution for the Company – in order for certain acts to be lawful, they must be in accord with the Corporation’s Bylaws.  The following matters are generally set forth in the Bylaws: procedures for annual and special meetings of the Shareholders and Directors, the offices of the Corporation are authorized and defined, the classes (types) of stock are defined and authorized. Stock certificates are authorized and any restrictions on their transfer may be set forth.  Other matters may be addressed in the Bylaws as may be desired or as may be required by the Corporate Statute (law) in the State of formation (domestication) can be spelled out in the Bylaws as well.  

The Stock of a Corporation consists of one or more classes of shares.  Common stock is the basic stock of the corporation.  Common stock shareholders receive distribution of the dividends (profits) on their stock when a dividend is declared and authorized by the Board of Directors.  Preferred Stock is a stock share that has a preferential right that common stock shareholders do not have with regard to distribution of dividends and/or amounts distributable upon the Corporation’s liquidation.  Within the different stock types, there may be multiple classes of stock (e.g., class A and class B shares of common stock) that define certain preferences such as the right to vote (some stock shares have voting rights and others are non-voting and, as such, the shareholder would have no voice/vote in important company matters but rather only a dividend/profit right).  


Limited Liability Company (LLC)

An LLC is a business entity form that is enabled by statute in the state where the LLC is formed. An LLC generally has fewer business formality requirements than a corporation does.  While the LLC does provide protection of the business owners in the same way that a corporation does, the LLC is really structured more like a partnership than a corporation (but unlike the general partnership, the LLC members are personally shielded from the LLC’s debts and liabilities). The ownership interests in the LLC are called “membership interests”.  The membership interests may be allocated among the members as percentages of the total outstanding membership interests or they may be designated as membership units (much like shares of stock in a corporation).  The LLC does not generally have officers and directors. Instead, the LLC is managed by one or more of the members of the LLC or by one or more non-member managers.  The LLC is usually governed by an “operating agreement” which is really a contract between the members of the LLC. The operating agreement is akin to the partnership agreement in a partnership.  The members and managers of an LLC may be individuals, business entities (such as a corporation or another LLC) or they may be trusts.  Because of the general lack of statutorily imposed business formality requirements (which corporations generally have) and the freedom to govern the LLC internally as the members agree (usually memorialized in a written operating agreement), LLCs have become very popular.  They are also a good business entity choice because of the fact that the LLC generally has “charging order protection” (which varies some from state to state) that prevents a judgment creditor of a member of the LLC from seizing the membership interest in the LLC.   


Limited Partnership 

A Limited Partnership is a business entity that is enabled by statute in the state of formation.  A Limited Partnership consists of at least one “general partner” and at least one “limited partner”. The limited partner is shielded from personal liability for the debts and liabilities of the company.  The general partner is personally liable for the debts and liabilities of the company.  The limited partner may not participate in the management and affairs of the company and is as a passive investor in the company that receives profits from the partnership in his or her percentage of ownership in the partnership.  If the limited partner participates in the management of the partnership, the limited partner may be deemed to have become a general partner in the company and, as such, may become personally liable for the debts and liabilities of the partnership.  Because of the potential for liability, it is important that the passivity of the limited partners be maintained.  In addition, due to the potential for the personal liability of the general partner for the debts and liabilities of the partnership, it is wise if the general partner of the limited partnership is a business entity such as a corporation or LLC (or a trust, in states where a trust meets the legal definition of a “person” and can own property in its own right and can sue and be sued in its own right).  Like the LLC or general partnership, the partners of a limited partnership have “charging order protection.”  

Because Limited Partnerships have often been used as a component in estate plans, a Limited Partnership is ofter referred to as a Family Limited Partnership or FLP for short.  Whether it is referred to as an FLP or Family Limited Partnership, the legal reality is that an FLP is simply a Limited Liability Company.  


Limited Liability Partnership  

A Limited Liability Partnership (LLP) is an entity that is designed to protect the individual partners in the partnership from the liabilities of the other partners. The LLP structure is most often used by professionals such as lawyers, accountants and doctors.  The LLP enables the individual practitioners to have the benefit of a form of partnership together while each of the partners is protected from the other partners’ malpractice liability in the event that occurs. It can also enable referrals between the partners of the LLP where referrals otherwise may be prohibited or restricted.  


TAXATION OF BUSINESS ENTITIES 

How the business entity will be taxed can be an important issue when deciding which business entity structure to choose.  The following is a basic overview of how the different entity types are treated for Federal Taxation purposes: 

Taxation of Corporations 

C Corporation

By default (meaning unless the corporation elects to be taxed otherwise, by filing the proper election form with the Internal Revenue Service (IRS), a Corporation is taxed under 26 U.S. Code Chapter 1, subchapter C.  A corporation taxed under subchapter C is commonly referred to as a “C Corporation” or a “C Corp”.  A C Corporation is its own taxable entity, separate and apart from it’s owners/shareholders.  As such, the C Corporation files its own tax return (IRS Form 1120) and pays its own taxes.  When the corporation distributes dividends (profits) to the shareholders of the corporation, the shareholders then must report the dividend income on each of their own individual tax returns.  Thus, with a C Corporation, there is a double-taxation effect – the corporation generates profits and pays taxes on those profits and then the it distributes the profits in the form of dividends to the stockholders and the stockholder pay taxes individually on the dividends.  

S Corporation 

A Corporation that has fewer than 100 shareholders may file an election with the IRS to elect to be taxed under 26 U.S. Code Chapter 1, subchapter S.  A corporation that has elected to be taxed under subchapter S is commonly referred to as an “S Corporation” or “S Corp”.  In addition to having fewer than 100 shareholders, in order to be able to elect to be taxed as an S Corporation, the corporation must meet the following requirements: 

-all shareholders must be individuals (or certain qualifying entities such as certain trusts, estates or tax exempt organizations) 

-none of the shareholders may be a non-resident alien 

-the corporation may not have more than one class of stock 

If the corporation has effectively and timely filed the election to be treated as an S Corp (IRS form 2553), it will be deemed to be an S Corporation.  An S Corporation will file an 1120s corporate tax return to report the income or loss of the corporation, but the S Corp does not pay any taxes on its profits.  The individual shareholders each then must report their respective share of the profits or losses of the corporation on their individual tax return (IRS form 1040).  

It is important to note that the distinction between and S Corporation and a C Corporation is only for Federal Taxation purposes.  In the “real world”, outside of the “tax world”, a corporation is simply a corporation.  


Taxation of LLCs

The way that a Limited Liability Company is treated for Federal Taxation purposes depends upon how many members the LLC has.  A single member LLC is deemed to be a “disregared entity” by the IRS.  What this means is that the LLC itself is not taxed, but rather disregarded for taxation purposes.  As such, the disregarded entity is treated as if it were a sole proprietor for Federal Taxation purposes.  Therefore, the LLC does not file any tax return at all [even though the LLC generally will have its own federal tax identification number (EIN)].  Instead, the individual reports the profits or losses of the LLC on schedule C of his or her personal 1040 tax return.  This is often referred to as “flow-through” or “pass-through” taxation (an S Corp, as discussed above is also a pass-through entity, but it does file a tax return to report the income or loss).  

If the LLC has more than one member (that are not husband and wife – the husband and wife scenario is discussed later), by default it will be treated as a partnership for federal taxation purposes.  The LLC that is treated as a partnership will file IRS Form 1065 with the IRS to report the profit or loss of the business, but the LLC itself does not pay any federal income taxes. Each individual member (partner) will report his/her respective percentage of the profits or losses of the LLC from the Schedule K-1 that they receive from the “Partnership” (LLC).  The individuals report their share of the profit or loss of the LLC on schedule C of their individual 1040 tax return.  [If there are only two members and they are husband and wife and they live in a community property state, they may choose to have the LLC treated as a Disregarded Entity, as if it were a single member LLC].  

An LLC may also elect to be taxed as a C Corporation (IRS Form 8832) or as an S Corporation (IRS Form 2553) (if the LLC has under 100 members and all members would be qualifying shareholders under subchapter S – see section on S Corporations above).  If the LLC elects to be taxed as a C Corportation or as an S Corporation, as far as the IRS is concerned the LLC will be a C or an S corporation as elected, even though in the “real world” it is an LLC.  The ability to elect a different entity classification for tax purpose gives the business owners the option to take advantage of the many benefits of being an LLC but still being taxed as a corporation where that is deemed to be more beneficial.  

Taxation of Partnerships 

As already discussed, a partnership is not a separately taxable entity.  The partnership will file a tax return to report the profit or loss of the partnership.  The partnership will issue a schedule K-1 to each partner. The individual partners will each then report their respective shares of the partnership’s profits or losses from the schedule K-1 on their individual tax returns.  

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A Nevada Business Holdings Trust is a Nevada Asset Protection Trust that is designed by RDJ LAW to hold the interest in your business, to shield and protect your income flow from the business.

All too often, business owners do not think about protecting the income from their business in the event that they get sued at some point. But what happens when a business owner gets sued outside of the business front and ends up with a judgment against him/her personally? The classic example is a car accident. Imagine that you are driving one day and you get into an accident. The other party is seriously injured, sues and ends up getting a judgment against you in an amount that far exceeds your car insurance policy limits. In such a case, your auto insurance carrier will payout the policy limit (probably $25,000) to the injured party and then the insurance company is out of the picture. Now the plaintiff with a judgment can go after you personally to recover the balance of their judgment (which could very well be a multi-million dollar judgment) from your personal assets. From the time that the court enters the judgment against you, the judgment creditor may then begin to take action to collect its judgment against you by force of law. They can garnish personal bank accounts and your wages, they can seize any personal assets that you own that are not specifically exempt under the law and they can foreclose against any real estate properties that are not covered by the homestead exemption.

RECOVERING AGAINST YOUR BUSINESS INTERESTS

With regard to any businesses that you own an interest in, there is potential risk to both the business ownership interest itself and to the income flow from that business. The different types of business entities and a full discussion of what protection there may be is a lengthy discussion for another time. But briefly, for our purposes here, an LLC membership interest is generally protected from outright seizure of the membership interest by a judgment creditor through what is commonly called “charging order protection”). But an LLC membership interest in some states may have various levels of limited protection or, effectively, none at all (for example, the Hawaii LLC statue specifically allows a judgment creditor to foreclose the “lien” that a charging order against an LLC member’s membership interest creates – which means the LLC member really has no protection in Hawaii). The Nevada LLC law specifically limits a judgment creditor’s remedy against a Nevada LLC member’s membership interest to the charging order (a charging order is an order from the court in favor of the judgment creditor to the company to deliver any profit distribution or payment that is being made by the company to the judgment debtor to the judgment creditor, instead. But, under the Nevada LLC law, the charging order only enables the judgment creditor to sit an wait and hope for a profit distribution from the LLC to the member whose membership interest they have charged (effectively they have a lien against the membership interest). Under the Nevada law, they cannot force a distribution of profit and they explicitly are not allowed to try to wiggle any other remedy out of the charging order or otherwise against the LLC membership interest. That’s the good news. The bad news is that, as long as there is a judgment and a charging order against your NV LLC membership interest, you are tied up and unable to get the money out of the LLC where you need it to pay your bills and to live on. (CLICK HERE FOR VIDEO ON THIS TOPIC)

A Nevada Corporation has the same “charging order” exclusive remedy protection as an LLC or partnership does, if the corporation is not publicly traded, is not a professional corporation and has 100 or fewer shareholders (NRS 78.746). However, this protection of your stock in a corporation only applies to a Nevada corporation. If you own stock in a corporation domesticated another state, you likely don’t have any charging order or other protection at all for your stock ownership interests. This means that the judgment creditor may seize your stock in the company and they will then own the stock in your company – a very bad outcome for you and your business.

SETTING UP A NEVADA BUSINESS HOLDINGS TRUST TO OWN YOUR INTEREST IN THE BUSINESS

If you had set up a Nevada Business Holdings Trust through RDJ LAW prior to that car accident happening, your interest in the business and your income flow from it would be safe and you would have the full benefit of the profits from your business. When a Nevada Business Holdings Trust owns the interest in the company, whether it is an LLC, a partnership or a corporation, the profits from that company may be distributed into the Trust that owns your interest in the company. If the judgment creditor cannot prove by clear and convincing evidence that there was a transfer of money or assets “from you” to the Nevada Business Holdings Trust that was fraudulent as to the judgment creditor specifically, they cannot reach into the trust to recover anything to satisfy their judgment against you personally.

Profits from the business can be held in the Trust for as long as you want. If you have a judgment against you personally, the Trustees may pay your bills for you directly from the Trust being sent directly to where it needs to be paid. So, you truly have full benefit of the income from the Trust and can continue to have all of your financial needs met from the profits of your company, even though there may be a personal judgment against you and the judgment creditor cannot seize either the money in the Trust or the ownership interest in the business.

ADDITIONAL BENEFITS OF THE NEVADA BUSINESS HOLDINGS TRUST

In addition to protecting your ownership interest in the business and protecting your income flow from the business, the Nevada Business Holdings Trust will also provide for avoidance of a probate of the business interest following your death, as the business ownership interest will pass to the beneficiaries that you’ve specified in the Trust following your death, without any court involvement.

The Nevada Business Holdings Trust can also provide some anonymity of your interest in the business as well, which can also be a plus.

The Nevada Business Holdings Trust is generally established as a “grantor trust” for federal taxation purposes which means that it is a “flow-through” tax entity and will not complicate your tax filings and situation.

If you have multiple businesses, the Nevada Business Holdings Trust can hold your ownership interests in all of the businesses or they can each be “compartmentalized” for maximum exposure minimization by establishing a separate Nevada Business Holdings Trust for each business.

Don’t get caught with your pants down and your business interests exposed. Contact RDJ LAW today to schedule a free consultation and evaluation of your protection and planning needs.

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What happens to your pets after you have passed on? That is an important question – and one that people often worry and wonder about. Fortunately, the Nevada legislature has specifically enabled pet owners to provide for their pets after their passing. Specifically, NRS 163.0075 enables the creation of a Pet Trust, in order for pet owners to create the Trust and spell out how you desire the pets to be taken care of and who will be designated to be their caretaker. Since this is statutory law in Nevada, there will be no question of the validity of a properly established Pet Trust. When creating a Pet Trust, there are some issues that you should carefully consider. First of all, you should carefully consider who the Trustee/Caretaker of the Pets will be. Of course, it is best if you designate someone that will love and take care of your Pets the way that you would want them to be taken care of. You may also want to designate one or more alternative Trustees/Caretakers, in the event that the person that you have designated dies or becomes unable or unwilling to take care of the Pets. You should also carefully consider how much money that you should “fund” the Pet Trust with, to ensure that your Pet Trust will have sufficient funds to provide for the Pets’ food, shelter and veterinarian care needs.You should consider what happens to the funds remaining in the Pet Trust, if you Pet(s) pass away before the Trust funds are depleted. You may want to have the remainder distributed to family members, friends or to a charity (perhaps, your favorite animal charity).
If you would like to schedule a free consultation to discuss establishing a Pet Trust, click the following link to contact us: https://www.rdjohnsonlaw.com/contact/

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What is a Nevada Real Estate Trust?

A Nevada Real Estate Trust is a Trust that is designed by R.D. Johnson Law Offices for the purpose of holding title to real estate investment properties.

It accomplishes three essential things for the individual Real Estate Investor:

1) It is designed to protect the real estate property from your own future personal judgment creditors, in the event that you personally get sued in the future (from a claim unrelated to the property, such as a car accident or some other unforeseen event) and end up with a money judgment awarded against you (first and foremost, you should plan to protect your investments
from this kind of risk);

2) Because, under Nevada law, the Trust is legally its own “person” (just as a corporation or LLC is) that is legally separate and apart from you individually, the Trust will shield you
personally from liability that may arise from the property (such as a slip and fall incident or other tenant or guest claim against the property owner/landlord) and any claimant would have to look to the Trust alone for any recovery;

3) Because the Trust serves as what is essentially a “Will replacement” as to the property that the Trust owns, it will avoid probate of the real estate property and the property will pass to the beneficiaries that you designate in the Trust document – without having to go through the long and expensive probate process (as with a revocable living trust, you will specify in the Trust document who you want to receive the property or proceeds upon your death and the successor trustee will be bound to carry out your wishes and make the distributions as you’ve specified in the Trust). The Nevada Real Estate Trust won’t interfere with your other estate planning measures that you may have for your personal assets.
Unlike an LLC or corporation, the Nevada Real Estate Trust is not registered with the secretary of state’s office and it has no government registration requirements. As such, you will not have to pay any initial or annual filing fees to the secretary of state or to a resident agent, as you would with an LLC, Corporation or Limited Partnership. This fact alone can save you thousands of dollars over time.

The Nevada Real Estate Trust is ordinarily established as a “grantor trust”, which means that it is a “flow-through” entity for federal taxation purposes. Much like a single member LLC, any income or loss from the real estate investment will ultimately be reported on your individual tax return. So, there is no negative tax impact to you for having the real estate property in the Trust.*

Although there is no limit on the number of real estate investment properties that you put into the Nevada Real Estate Trust, as with any business entity that you establish to hold your real estate investment properties, it is wisest to separate your real estate properties into separate entities (traditionally, separate LLCs have been used for that purpose), so that multiple properties are not exposed to and subjected to liability and risk of loss, if an injury or other event on one property causes a lawsuit. As with LLCs, you can establish a separate Nevada Real Estate Trust to hold each real estate investment property, to minimize your exposure. There is no legal limit on the number of Trusts that you have.
In sum, the Nevada Real Estate Trust works much like a traditional real estate holdings LLC, but the Nevada Real Estate Trust has benefits and protections to go beyond that of an ordinary LLC. Contact R.D. Johnson Law Offices today for a free consultation and evaluation to determine if a Nevada Real Estate Trust is right for you. (create link to:
https://www.rdjohnsonlaw.com/contact-us/ )

*You should always consult with and use a qualified tax professional to properly advise you on taxation issues and for filing your personal and business tax returns. R.D. Johnson Law Offices, LLC does not engage in tax planning, it does not give tax advice nor does it file any tax returns.

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Klabacka v. Nelson, 133 Nev., Advance Opinion 24 (Nev. May 25, 2017)

Since 1999, Nevada Statutory law (Chapter 166 of the Nevada Revised Statutes – “the Nevada Spendthrift Trust Act”) has enabled a person to establish their own spendthrift trust (also commonly known as a Nevada Asset Protection Trust, Nevada Domestic Asset Protection Trust, Nevada Wealth Protection Trust and a few other nicknames) that is designed to protect the assets of the Trust from future judgment creditors and other claimants.

The Nevada Spendthrift Trust law was designed by the Nevada legislature to carefully balance the necessary provisions for true protection of the assets in the Trust from an outside attack with the legislature’s clear intent of enabling the person creating the trust (traditionally referred to as: “the Settlor”, “the Grantor” or “the Trustor”) to have control of both the trust and the assets in the Trust. While the Nevada Spendthrift Trust statute is binding law in Nevada that governs the establishment and validity of the Nevada Self-Settled Spendthrift Trust (hereinafter referred to as “Nevada Asset Protection Trust”), until recently there was no binding case law precedent in Nevada that dealt with a challenge to a Nevada Asset Protection Trust or the Nevada Spendthrift Trust Act. That void was filled in May of 2017, when the Nevada appellate court issued an opinion in the case of Klabacka v. Nelson.

“until recently there was no binding case law precedent in Nevada that dealt with a challenge to a Nevada Asset Protection Trust or the Nevada Spendthrift Trust Act.”

While the Klabacka case addresses a number of issues, the important issue of the case for those other than the parties to that specific case was whether the Nevada Asset Protection Trust that was established by the husband in the case was protected from the husband’s personal obligation to pay child support and alimony. On those issues, the Court held that the District Court had erred in awarding child support and alimony obligations against the husband’s Nevada Asset Protection Trust, in addition to him personally. While that is the main thrust of the case, there were several other very important issues that the Court addressed and made statements of opinion on. A few of those items are as follows:

“Breaching trust formalities of an otherwise validly created SSST does not invalidate a spendthrift trust; rather, it creates liability upon the trustee(s) for that breach. Indeed, if, after an SSST is validly formed, the trust formalities are breached by a trustee, the proper remedy is a civil suit against the trustee – not an invalidation of the trust itself” (referencing NRS 163.115). (“SSST” is short for Self-Settled Spendthrift Trust).

The court also, interestingly, held that it was error for the district court to allow parol evidence (evidence this from outside of the trust document itself) to determine the Settlors’ intent with regard to the respective trusts (this will serve as a legal basis to establish that parol evidence should be excluded if it is attempted to be introduced to demonstrate that the Settlor intended to “hinder, delay or defraud” a creditor).

Also, of significant note, the Klabacka case was a situation where the settlors were their own trustees and their Trusts each had a third party “distribution trustee” – which gives added credence to that set up which the statute has always specifically provided for (for years some attorneys and others have continued to assert that the Trust must have an independent trustee that is someone other than a settlor – I believe that the Nevada appellate court has now effectively put that question to rest).

All in all, the Klabacka case will serve as very good and solid legal precedent for the Nevada Asset Protection Trust.

The post Nevada Appellate Case Gives Major Boost to NV Asset Protection Planning appeared first on RD Johnson Law.

1. When a Home is the only significant asset.  When a retired person who has no plans or ability to acquire additional income or assets and he or she owns only a home and nothing else of significance, the person may not need to do a Last Will and Testament or a Trust.  Creating a Will and having the estate be distributed through the Will in the probate process will certainly take care of the planning need in terms of spelling out who will receive the home following the person’s death. However, the probate process takes a significant amount of time and expense which may not be justified if the home is all there is (note that, if the home is held in joint tenancy with a spouse or some other person as the co-owner, upon the death of the first joint tenant to die, the surviving joint tenant will receive full ownership of the real estate, without the need for any court or other formal proceeding). A Trust (which would avoid the need of a probate proceeding) too may be more expense than is justified in this situation. In Nevada, a good alternative to the above two options would be to do a “Deed Upon Death”. 

Deed Upon Death.  NRS 111.655 – 111.699 provides for the opportunity for a person, while they are still living, to record a Deed Upon Death in the County Recorder’s office where the real estate property is located. The Deed Upon Death specifies that it is effective upon the death of the current property owner.  The Deed Upon Death will specify one or more persons to whom the property will be conveyed to, following the property owner’s death. When the property owner passes away, all the person that is designated to receive the property will need to do is to present a certificate of death and record an Affidavit of Death of the property owner in the County Recorder’s real estate record for the property. When the Affidavit of Death is recorded, the conveyance to the transferee is then effective and the beneficiary becomes the owner of the real estate. If this is the only asset to deal with, the Deed Upon Death will be a very cost-effective means of providing for the passing of property to whomever the property owners wishes to receive it when they pass away. 

2.  When there are only Retirement Accounts, Bank Accounts and/or Investment Accounts. All retirement accounts, bank accounts and financial investment accounts nowadays will allow you to designate a “pay on death” (P.O.D.) beneficiary on the account.  In fact, if you hold any of these accounts (other than retirement accounts) that are not in a trust, you should always designate a pay on death beneficiary (in every case).  The pay on death designation will avoid probate of the account. Following the death of the account holder, all the beneficiary will need to do is to go to the bank or financial institution and present identification and a certificate of death of the account holder.  After they institution has verified the beneficiary’s identity and the death of the account holder, they will be able to distribute the account proceeds to the beneficiary and close out the account.  If there is no pay on death designation and the account is not held by a trust, the only way for the heirs to receive the proceeds of the accounts will be to open up a probate case (which is called an “intestate” estate when there is no Will) and go through the probate process (note that Nevada does have a provision for a small estate that can be handled without probate or an abbreviated probate in Nevada, but, unless it is an actual court order, banks and financial institutions routinely refuse to recognize an “affidavit of entitlement”). Even if you have a trust but you have one or more accounts that are not in the Trust, you should at least do a P.O.D. designation on the account and name the Trust or an individual as a P.O.D. beneficiary.  

3.  Life Insurance and Annuities.  A life insurance policy or annuity through an insurance company will always have a beneficiary designation. The death beneficiary designation will avoid the probate process.  Similar to the pay on death beneficiary, the insurance or annuity beneficiary will need to notify the insurance company of the death of the insured, present a death certificate and proof of identification. If the deceased person’s only asset was a life insurance policy, then there should be no need for a Will or Trust, because there will be no assets other than the payout of the insurance policy or annuity. 

If there are assets, other than the foregoing types, the person should certainly do a Will or a Trust. In choosing whether to do a Will or a Trust, remember that a Will is a ticket to probate court and a Trust (if properly “funded” with all of the assets) will avoid the probate process and will generally save the family of the deceased a significant amount of time and cost to the estate.  Also, do not forget the necessary planning for incapacity through a General Durable Power of Attorney and a Health Care Power of Attorney, which will enable someone to handle your financial transactions and health care decisions if you become incapacitated.  

For a free consultation regarding Estate Planning at our Summerlin office, contact R.D. Johnson Law Offices: https://www.rdjohnsonlaw.com/contact/ 

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