In a recent post, Michael Hart discussed a reported wave of shareholder lawsuits that may cause entrepreneurs to reconsider incorporating in Delaware. Now, he and Paul Wassgren note a new development in Nevada, another favorable state for entity formation, that could have the same effect there.

Copyright: klotz / 123RF Stock Photo
Copyright: klotz / 123RF Stock Photo

Despite the soaring summer temperatures in the deserts of Nevada, it appears that hell has finally frozen over in the Silver State.  Often perceived as a “tax-free state,” Nevada has enacted a commerce tax on businesses with Nevada-sourced income, effective July 1, 2015.  In truth, Nevada has had a Modified Business Tax in place for some time, but it was limited to certain industries such as gaming and mining.

The new commerce tax is more pervasive, and while still industry-specific, the tax applies to nearly all entities conducting business within the State of Nevada. In addition, all businesses are now required to file the Commerce Tax Return Form annually, even if there is no tax liability.  This is a sea change for the Silver State.

Finally, also effective July 1 of this year, the annual state business license application fee for Nevada corporations has more than doubled to $500, up from $200.  In light of these changes, entrepreneurs may start to reconsider the trend in favor of incorporating in Nevada.


Paul Wassgren is a partner in the firm’s Las Vegas and Los Angeles (Century City) offices, and Michael Hart is an associate in the Los Angeles (Century City) office.

Jeffrey M. Friedman, Andrew M. Halbert and Joseph Superstein write:

A series LLC is an entity structure permitted in certain states that allows for the formation of multiple segregated LLCs (or “series”) under the umbrella of a single “master” LLC. Generally, in the states in which they are recognized, these series LLCs are viewed as segregated entities which are permitted to have separate managers and members, distinct assets and individual operating agreements, and which can incur separate liabilities. However, the series LLC is still viewed from the states’ perspective as a single entity for filing and reporting purposes.

Copyright: tashatuvango / 123RF Stock Photo
Copyright: tashatuvango / 123RF Stock Photo

The most notable advantage of series LLCs comes in the form of cost savings associated with state business filing fees. In Illinois, where business filing fees are higher than most states, the cost to form a standard LLC is $600. While series LLC filing fees involve a higher up-front cost ($850), the benefit arises in the long-run because only a nominal registration fee is necessary to form each additional series by filing a Certificate of Designation ($50) and amending the master LLC operating agreement. To illustrate, an Illinois developer with ten properties would pay $6,000 to form a standard LLC for each property ($600 x 10 properties). Instead, by forming each entity as a series LLC, the developer would pay $1,350 in initial filing fees ($50 x 10 + $850). In some states, such as Delaware, only the initial filing fee is required to form a series LLC, and individual series can be created via the LLC operating agreement without any additional fees.

In addition to the administrative streamlining, a major benefit of series LLCs lies in the separate corporate liability protection of each series. Debts and liabilities of one series cannot spill over and be enforced against a different series so long as certain statutory conditions are met at formation. Essentially, if each series keeps separate records and bank accounts, and is treated as its own entity, the assets of each series will be unaffected by judgments against other series. However, not all state statutes regarding the series LLC are identical, and series LLCs are not available in all states. In jurisdictions where series LLCs are not available, each series may not be recognized as a separate entity or for state tax purposes.

Although the IRS has yet to issue official federal tax regulations governing the treatment of series LLCs, it has issued proposed regulations (Prop. Treas. Regs. Secs. 301.6011-6; 301.6071-2; and 301.7701.7701-1(a)(5)) providing insight into the IRS’ treatment of these entities :

  • Each series within a series LLC will be treated as a separate entity for federal income tax purposes;
  • Each series is allowed to choose its own entity classification independent of the classification of other series; and
  • Each series should only be liable for federal income taxes related to that series.

The proposed regulations do not address the entity status of a series organization for federal tax purposes nor do the proposed regulations specifically address whether each series within a series LLC should obtain a separate employer identification number (EIN) and file a separate federal tax return. It is anticipated that the Treasury Department will issue its official regulations regarding series LLCs by the end of the summer. Until final regulations are issued, we are advising clients to obtain separate EINs and file separate income tax returns for each separate series which, in turn, allows for each series to maintain their respective individual identities.

While the series LLC may appear to be an attractive investment vehicle, it does not come without risks. Series LLCs have largely been untested in the courtroom, and there is not much precedent as to how these entities will be respected going forward. In addition to questions regarding whether the separate liability protection of the series LLC structure will be respected in states that do not recognize series LLCs, various issues exist regarding how series LLCs will be handled in bankruptcy proceedings, and it is possible that a bankruptcy court will not recognize the separateness of the series within the LLC. As a result, until more courts have ruled on the legality of the series LLC structure, it is unclear whether the series LLC will be afforded all of the protections intended by the state statutes.


Jeffrey M. Friedman is a partner, Andrew M. Halbert is an associate and Joseph Superstein is a summer associate in Fox Rothschild’s Chicago, IL office.

Pennsylvania is becoming an easier place to do business – for both emerging and established companies.  The Entity Transactions Law (“ETL”), effective July 1, 2015, ushers in a simplified, state-of-the-art regime for Pennsylvania businesses engaging in fundamental transactions.

Copyright: somartin / 123RF Stock Photo
Copyright: somartin / 123RF Stock Photo

Two features of the new law are likely to decrease costs and increase efficiency.  First, the ETL streamlines certain fundamental business transactions.  For example, conversions are greatly simplified.  A “conversion” is used when a business wants to change from one entity form to another, such as changing from a LLC into an S corporation.  Under prior Pennsylvania law, a business owner (and his or her legal team) had to create an S corporation and then merge the LLC into the S corporation – often a complex and costly process.  Under the ETL, a conversion is a simple, single-step transaction.

Second, the ETL provides uniform procedures for businesses undertaking four kinds of fundamental transactions:

  • Mergers of one entity into another;
  • Conversions of one entity into another form of entity;
  • Interest Exchanges between two entities (which permit one entity to control another without requiring a merger); and
  • Domestications in Pennsylvania of an entity originally formed in another state.

Under prior Pennsylvania law, each different entity form (corporation, LLC, partnership, etc.) had to comply with its own set of governance rules.  The inconsistent treatment caused increased complexity and transaction costs when different types of entities engaged in certain transactions with one another. Under the ETL, common provisions apply across entity forms, governing fundamental transactions among them and sharing an approach and vocabulary for approving such transactions.  The result is intended to make such transactions simpler, reduced costs and promote corporate growth.

The ETL was signed into law by Governor Corbett as Act 172 in October 2014.  It was drafted by a committee of the Business Law Section of the Pennsylvania Bar Association and based on the Model Entity Transactions Act and Article 1 of the Uniform Business Organizations Code.

If you’re about to form a start-up, you may be trying to decide between forming a corporation or an LLC.  Although many considerations go into this determination, important factors for you to consider are your proposed funding and hiring plans.

Funding Plan

If you’re expecting to raise $1 million or more in your first round of financing, then you will likely be seeking venture capital.  Venture capital firms, which are typically limited partnerships, generally prefer to invest in a C-corporation rather than an LLC.  A venture capital firm will often shy away from investing in an LLC (i) to avoid the profits and losses of the LLC (and the tax implications related thereto) being attributable to the individual partners of the venture capital firm, as an LLC is a “pass through” entity for tax purposes (see Business Week Article)[1], (ii) so that a venture capital firm’s otherwise tax-exempt partners (e.g., pension funds, charities, endowments) are not subject to unrelated business income tax (UBIT) (see 26 U.S.C. § 511 et. seq.)[2], and (iii) due to a venture capital firm’s general familiarity with investing in C-corporations.

However, if your start-up does not need outside capital, or is able to raise capital from individuals or from investors who prefer or are comfortable with flow-through tax treatment, an LLC may be appropriate.

Hiring Plan

If you intend to hire individuals who are to be incentivized by the issuance of stock options or restricted stock, you should form your start-up as a corporation.  A corporation may generally set up an incentive stock option and restricted stock plan in a cost-efficient manner and incentive stock options and restricted stock may be issued by the corporation to its employees in a tax-efficient manner.  Just as importantly, most employees are familiar and comfortable with both stock options and restricted stock.

On the other hand, stock option plans for LLCs are not permitted by IRS rules.  Instead, LLCs may adopt phantom equity or profits interest plans.  Although employees are less familiar with these types of plans and such plans can be less cost-efficient to put in place and less tax-efficient with respect to the employee recipients of phantom equity or profits interests, these types of plans are viable alternatives if there are other compelling reasons to form your start-up as an LLC.