WHY NEVADA CONTRACTORS SHOULD BE USING SERIES LLC’S

Introduction

The state of Nevada is one of a handful of states that has enacted “Series LLC” legislation. Series LLC’s are an invaluable tool to business owners seeking to segregate their assets. The assets and liabilities of each series are separate from those of the other series, but the administrative cost and expense can be significantly reduced in comparison to owing multiple LLC’s. Furthermore, an infinite number of series can be created without additional fees payable to the Secretary of State, or additional paperwork required by the state.

 

Benefits

For contractors, series LLC’s can provide tremendous benefits. Specifically, a contractor who puts each separate job into a separate series of the LLC can protect his overall assets, and the revenue from each specific job from liabilities that may be incurred by another job. For example, if a contractor puts a commercial office complex project in one series, and a retail shopping center project in another series, the commercial office project will be insulated from any liability that is incurred from the commercial retail center project. Therefore, if there is a warranty claim, an injury or some other liability that occurs on the commercial retail project, it will not affect the revenue that is being generated from the commercial office project.

The series LLC can also be used to reduce the contractor’s exposure to long term potential liabilities arising out of a patent defect. Specifically, in the state of Nevada, the statute of limitations for a patent defect (also called a hidden defect) is generally ten years. A contractor can limit his exposure to the long term liability, by setting up a reasonable warranty reserve to cover any warranty claims that would be excepted from a specific project, and then after a certain time, perhaps a year or two, the series can be liquidated. While the law makes a contractor generally liable for a ten year period, there is no law that says that the company (or series) that built the project has to remain in business for ten years.

 

Structure

 

The structure of a series LLC is designed to permit the members to segregate the assets and liabilities of the LLC from one another. This is one of the features that makes series LLC’s so attractive to many business owners, in particular contractors. In the past, business owners and others holding significant assets would be required to organize a separate LLC for each asset or group of assets that they wanted to segregate.

On the other hand, with a series LLC, each series of the LLC effectively serves as a “separate LLC” because the assets and liabilities of each series are separate and distinct from each other. Furthermore, the members of the LLC can create an infinite number of separate series, and can terminate a series when it no longer serves a purpose.

A contractor would only need one entity to properly house all of its operations and segregate its assets and/or separate projects, while receiving all of the benefits of having multiple entities. For example, a series LLC could be used as follows:

  1. Series No. 1 can be used as the management series (“Management Series”);
  1. Series No. 2 can be used to hold the real property and the office building (“Property Series”);
  1. Series No. 3 can be used to house tools and equipment (“Tools Series”);
  1. Series No. 4 can be used to house vehicles (“Vehicles Series”);
  1. Series No. 5 can be used for the operations of Job No. 1 (“Job No. 1 Series”);
  1. Series No. 6 can be used for the operations of Job No. 2 (“Job No. 2 Series”); and
  1. Series No. 7 can be used for the operations of Job No. 3 (“Job No. 3 Series”).

 

In the example above, the Management Series would serve an administrative function, and would not hold any significant assets. The Property Series would lease the property and the office building back to the Management Series for common use by all the series. Similarly, the Tools Series and the Vehicle Series would rent the tools and vehicles to the Job No. 1, Job No. 2 and Job No. 3 Series for use on each particular project. Finally, each of the separate series for Job No. 1, Job No. 2 and Job No. 3 would only hold the revenue from that particular job.

This structure groups each asset or group of assets into its own series so that they are insulated from each other in the event of a lawsuit. Therefore, if the contractor were to get sued for an injury or construction defect occurring on Job No. 2, the judgment creditor would only be permitted to reach the assets of Job No. 2, which, in our example would only be the revenue generated by Job No. 2. Meanwhile, the real property, tools, vehicles, and revenue from Job No. 1 and Job No. 3 would be beyond the reach of the judgment creditor.

 

Costs, Fees and Administrative Expense

 

For a business owner, such as in the example above, that does not elect to utilize the series LLC structure and opts for the more traditional multiple entity structure, the costs, fees and administrative expense associated can be significantly greater. Along with the burden of managing each individual LLC, the members would have to bear the expense of separate filing fees for each LLC, which currently total $325 annually in Nevada, as well as the expense of organizing separate entities, which can amount to quite a bit of legal fees. It is not uncommon for the price of setting up an LLC to be anywhere from $1,000 – $3,000 in legal fees alone. As such, it is easy to see that setting up multiple LLC’s can be expensive.

Another attractive aspect is that there are no additional costs or fees payable to the Secretary of State in order to create or terminate a series, nor is there is any additional paperwork that needs to be submitted to the Secretary of State.

          In terms of record keeping, a series LLC is no more work than owning multiple LLC’s, as the members of the series LLC will be required to keep separate books and records for each separate series. However, unlike owning multiple LLCS, the members of the series LLC will not be required to have separate bank accounts, which will cut down on the time needed to manage the entity. In addition, the business owner must be relatively diligent in setting up a new series for each project, and at the consummation of the project shutting down the separate series that was used for a specific project. Nonetheless, the administrative burdens are far outweighed by the benefits.

 

Examples

In order to illustrate how beneficial segregating assets of a business can be, let’s use our contractor above as an example and examine how a lawsuit would affect the contractor’s business.

 

Scenario No. 1

In this Scenario our contractor, let’s call him Bob the Builder, is a sole proprietorship. Bob does not have a corporation or an LLC, and is merely doing business under his own name. If Bob were to get sued for a construction defect occurring on Job No. 2, the judgment creditor would be permitted to reach all of Bob’s business and personal assets. The creditor could foreclose on Bob’s property, sell his tools and vehicles, and would be entitled to any other cash or assets that Bob has, including his personal assets, up to and including the entire amount of the creditor’s judgment amount. In other words, if the assets of the business were not sufficient to satisfy the judgment, Bob would have to take money out of his pocket to pay the judgment.

 

Scenario No. 2

          In Scenario No. 2, Bob operates his business using an LLC. All of Bob’s assets are held by the LLC including the real property and office building, tools, vehicles and all of the revenue that Bob’s business brings in. In this case, the judgment creditor would not be able to reach the assets themselves of the LLC. However, the creditor would be able to obtain a charging order, which would permit the creditor to receive distributions from the LLC that would have otherwise been distributed Bob, as a member of the LLC, in the total amount of the creditor’s judgment.

 

Scenario No. 3

In Scenario No. 3, Bob operates his business utilizing the series LLC structure detailed above. Similar to Scenario No. 2, if the LLC were to get sued for a construction defect existing on Job No. 2, the judgment creditor would be able to obtain a charging order, which would permit the creditor to receive distributions from the LLC. However, the creditor would by statute only be entitled to distributions made by Job No. 2 Series. In comparison to Scenario No. 2, this difference is critical because in Scenario No. 2 the creditor is entitled to distributions from the entire LLC. The vast majority of LLC’s are structured in such a way that distributions to the members are taken from net profits of the LLC. Therefore, in Scenario No. 3, the creditor is only entitled to distributions from the net profits of Job No. 2 Series, rather than from the net profits of the entire LLC, which is the case in Scenario No. 2.

If you would like additional information concerning the use of series LLC’s, please contact Nevantage Law Group, and we would be happy to provide you with a no obligation half hour consultation where if you decide that a series LLC is not beneficial for your needs then there will be no charge. However, if you do decide to use a series LLC, then we will role the consultation into the flat fee cost for setting up your series LLC.

 

 

Beware: Transfer of Real Property to Entity May Void Title Insurance Policy

Many people these days are transferring real property to a trust or an LLC for asset protection or estate planning purposes. If you have recently done this or are planning to, there is something that you should know. The type of deed by which the real property is transferred is extremely important.

Real property is transferred by deed. Deeds come in a variety of forms including General Warranty Deeds, Special Warranty Deeds, Bargain and Sale Deeds and Quitclaim Deeds. Each of the General Warranty Deed, Special Warranty Deed and Bargain and Sale Deed contain warranties regarding the title to the property, which are provided by the Grantor to the Grantee. A Quitclaim Deed, on the other hand, makes no warranties. In practical terms, the Quitclaim Deed only conveys the interest held by the Grantor.

While there is not a lot of legal precedent regarding this topic, a Michigan Appellate Court was presented with this issue. In that case, the 100% shareholder of a corporation purchased a building. The title insurance policy issued for the property named the corporation as the insured. For estate planning purposes the property was transferred by Quitclaim Deed from the corporation to the shareholder’s wife. After the transfer to the wife, it was discovered that the property was burdened by an undisclosed easement, and the corporation sued under the title policy.

The Court found that upon execution of the Quitclaim Deed transferring the property from the corporation to the wife that the coverage under the title insurance policy terminated. The Court stated that the policy terminated because the corporation did not retain an interest in the property. A Maryland Court has also held that a similar transfer by a Special Warranty Deed voided the title policy.

In each case, the Michigan and Maryland Courts would have likely ruled differently if the property was transferred by General Warranty Deed. A General Warranty Deed provides specific warranties from the Grantor to the Grantee that the Grantor will forever defend the Grantee from and against any defects existing in the title to the property, excepting the exclusions that are mentioned in the title insurance policy. Therefore, if the properties in the above cases were transferred by a General Warranty Deed, the Grantee would sue the Grantor for the defects in title based on the warranties made in the General Warranty Deed, and the Grantor would sue the title company under the title policy.

For little or no additional time or expense a General Warranty Deed can be utilized in favor of a Quitclaim Deed, which will likely insulate the downstream Grantee in the event of title defects. Contact the attorneys at Nevantage Law Group to discuss the best way to transfer your real property to a trust or LLC.

Nevada’s Cure for Out-of-Sight IncomeTaxes

If you live in a state with high income taxes, such as California, and are looking for a way to significantly reduce that tax, there is an estate planning technique in Nevada that may be the solution you are looking for. Last year the IRS issued Private Letter Ruling 201310002 approving the use of a Nevada Incomplete Non-Grantor Trust (“NING Trust”). This Private Letter Ruling confirms numerous letter rulings dealing with similar trusts formed in Delaware, as well as a California Franchise Tax Board Technical Advice Memo.

A properly structured NING Trust may permit a resident of a state with high income taxes to avoid state income taxes on interest, dividends and capital gains. The reason that the NING Trust is able to offer such benefits is that the trust is a hybrid structure between a grantor trust and a non-grantor trust, which combines beneficial qualities of each to create a powerful tax mitigation vehicle.

The NING trust must be carefully drafted in order to avoid “Grantor” status by giving up a sufficient amount of control over the assets in the trust, but not giving up too much control, which would create a completed gift and trigger Federal gift tax obligations. The Grantor is the person establishing the trust. The income of a Grantor Trust is taxed to the Grantor, while with a Non-Grantor trust, the trust is a separate tax-paying entity and the trust is responsible for paying taxes on its income.

The foregoing Private Letter Ruling provides that a trust must possess all of the following characteristics in order to qualify as a NING Trust (i) the trust is self-settled, and provides the Grantor with an ability to receive discretionary distributions; (ii) the Grantor is not taxed on the trust income in the Grantor’s state of residence because the trust is a non-grantor trust; and (iii) the Grantor has a non-general power of appointment, which means that the Grantor has the ability to decide when and how much trust property will be distributed and (iv) the assets transferred to the trust are transferred in a manner that does not constitute a complete gift.

While many states have passed laws that permit the creation of a self-settled trust that creditors are not able to reach, the laws in Nevada are more beneficial than any other state to those seeking to take advantage of this vehicle. The reason is that Nevada permits the Grantor of the trust to maintain a lifetime power of appointment over the assets in the trust, but does not permit creditors to reach the assets of the trust. In layman’s terms, the person setting up the trust may maintain control over the assets placed in the trust. As such, not only does this trust provide tax savings, but it also provides asset protection. However, one caveat is that pursuant to Nevada law, in order for the trust to qualify as a Nevada trust, the trust must have at least one natural person serving as trustee that resides in Nevada, or have a bank or trust company, located in Nevada, serve as trustee. Additionally, the tax savings only occur while the grantor retains only a discretionally right to receive distributions. If the grantor’s right to received distributions becomes fixed, or to the extent distributions from the trust are received by the grantor, then state tax liability would be incurred.

Example of Tax Savings: Taxpayer, a California resident has $2 million investment portfolio that produces $120,000 of interest, dividends and capital gains each year. Given California’s current state of income tax rate of 12.3% on most high net worth individuals (13.3% on those with California taxable income greater than $1M), the taxpayer could save almost $15,000 each year in California taxes by transferring the portfolio to a NING. Additionally, if the taxpayer can reinvest the annual tax savings at six percent after tax return, the saving would grow to $542,995 after 20 years. If you would like to reap the benefits of using a Nevada Incomplete Non-Grantor Trust, contact the attorneys as Nevantage Law Group, and they will sit down with you and explain how you can benefit from this powerful tool.

Using a Nevada LLC to Protect your Personal Property

Your personal property is essentially any item that you own besides real estate. Your car, your boat and your bank account are examples of personal property. A record of the owner of some personal property assets is typically maintained such as the title to your car, stock certificates or title to intellectual property, while there is no record of the owner of other assets like your household furniture or your personal effects.

From an asset protection standpoint, some assets are more attractive to creditors than others. Naturally, those assets that are most valuable are of particular interest. However, the liquidity of the assets is also an important factor considered by creditors that are determining which of your assets to target to satisfy the judgment or lien they have against you or your business.

Over the past 10 – 15 years, the limited liability company (“LLC”) has become the entity of choice for entrepreneurs and business owners for a number of reasons. Most people do not think of utilizing an LLC as a holding company, but they should. For many of the same reasons that the LLC has become the most popular entity for business owners, LLCs can be effectively used to hold/shelter your valuable personal property.

Nevada law provides that an LLC may be operated solely for the purpose of holding investments and managing assets. This quality sets the Nevada LLC apart from those of most other states, because in other states an LLC is required to have a business purpose. In other words, the LLC must be utilized to operate a restaurant, nail salon or conduct some other business activity. That is not to say that using a Nevada LLC to hold personal property in another state is a cure-all for asset protection purposes. Nonetheless, with careful planning and drafting such protection is available to residents of states other than Nevada.

Once the LLC is set-up with the Nevada Secretary of State and the organizational documents are in place, assets that are transferred into to the LLC receive the same asset protection that a business would. The likelihood of the LLC actually getting sued is minimal because the LLC is not likely doing anything that would expose it to liability. In the more likely circumstance that the owner (member) of the LLC gets sued personally, and a creditor seeks to satisfy the judgment with the assets of the LLC, the only remedy available to such creditors would be a charging order. The charging order does not entitle the creditor to anything except distributions from the LLC, and the LLC can be structured/managed such that distributions will not likely be immediately forthcoming.

A relatively small amount of money can go a long way toward protecting your assets, and the time to put this firewall in place is now – not when the creditors are knocking on the door. Contact the attorneys at Nevantage Law Group to discuss how a Nevada Investment Holding LLC can protect your personal property.

Asset Protection for Nevada Business Owners

Many business owners do not take appropriate measures to protect their personal wealth from business liabilities until that wealth is in jeopardy. Once you are involved in a lawsuit or being pursued by creditors, it is usually too late to employ strategies to protect your business or personal assets. Nevada business owners have several asset protection options they can implement to protect their assets, including:

Practice Asset Segregation – This goal of this strategy is to minimize the number of assets held by you, personally, or the business, while still maintaining control. Shifting some of the equity from your business into a separate entity can provide added security against potential liabilities, as well as often provide tax savings.

Examples of this strategy might include:

    1. If you own the building from which your business operates, form a limited liability company (“LLC”), then transfer the land and building into the LLC and have your company rent/lease the building from the LLC.
    2. Transfer ownership of equipment, intellectual property, and/or other assets into separate entities and then lease/license the assets back to your business.

The benefit of this strategy is that only part of your business assets are at risk to a business creditor.

Use Series LLC’s – Series LLC’s are a type of LLC permitted by Nevada law, which allow the creation of a LLC that has an indefinite number of “Series”. The assets and liabilities of each Series are separate and distinct from the LLC and the other Series. The Series LLC is more efficient and cost-effective than a typical LLC, as the owner can create or terminate an individual Series without additional fees or reporting requirements to the state. In the asset segregation example above, a business owner could place the operating business in one Series, the land and building in another Series and the intellectual property in a third Series, rather than forming separate LLC’s to hold each asset.

Set-up an Asset Protection Trust – If properly set-up, an individual’s personal property assets, including the stock or membership interest of the business, can be placed in a Nevada Asset Protection Trust. The assets held by the trust can, after a two-year period, be completely protected from creditors of the business and personal creditors that are attempting to reach your personal assets. However, this is not something that can be done on the eve of litigation. Advance planning is critical and should be done with the guidance of an experienced business and estate planning attorney.

Establish a Captive Insurance Company – Captive Insurance Companies have been around for quite a while, but only fairly recently have become a tool utilized by small and medium-sized business for self-insurance, asset protection and tax mitigation purposes. The fact that over 90% of Fortune 500 companies currently have a captive insurance company is a testament to the usefulness of this mechanism for businesses. A few of the most attractive features of a Captive are deductive to the Company and then are that up to $1.2 Million in annual premiums paid by the Company to the Captive are not taxable to the Captive at the Federal or state level for income tax purposes, and all of the premiums paid into the Captive are 100% protected from creditors of the business. As the owner of the Captive Insurance Company, the profits of your business can be removed tax-free to the Captive and then can be grown on a pre-tax basis. The profits of the business transferred to the Captive can later be distributed from the Captive to you on a capital gains basis.

These are just a few strategies available to Nevada business owners to provide protection for business and personal assets. The most important thing to remember is that they need to be put in place before a creditor starts knocking on the door.

Nevantage Law Group focuses on asset protection strategies for Nevada business owners. Contact us for the legal expertise you need to protect personal assets from potential business liabilities.