TABLE OF CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . 2 About Nevada Corporate Headquarters, Inc. . . . . . . . 3 Background on Corporations . . . . . . . . . . . . . 4 Limited Liability: The Corporate Veil . . . . . . . . . . 4 Limited Liability Companies . . . . . . . . . . . . . 5 When to Form Your Business Structure . . . . . . . . . 6 Which State is Right for You? . . . . . . . . . . . . . 8 Forming a Business Entity in Your Home State . . . . . . 9 Pre-Incorporation Considerations . . . . . . . . . . . 9 Why NCH Started With Nevada Entities . . . . . . . . 10 Nevada Advantages . . . . . . . . . . . . . . . . 11 Nevada Corporations and Personal Privacy . . . . . . . 11 A Word About Offshore Havens . . . . . . . . . . . 13 Unincorporated Options Sole Proprietors . . . . . . . . . . . . . . . 13 General Partnerships . . . . . . . . . . . . . 15 Limited Partnerships . . . . . . . . . . . . . 17 Limited Liability Limited Partnerships . . . . . . . . . 18 Contact Nevada Corporate Headquarters, Inc. . . . . . . 19

Why Incorporate?
Incorporating separates your business assets from your personal assets to prevent your savings, home, retirement, and other personal assets, from being targeted by any lawsuit against your business. In addition, incorporating may open up hundreds of additional tax deductions that could put money back on the bottom line of your business.

Why Incorporate in Nevada?

Nevada is known as an extremely pro-business state. In Nevada there is no corporate income tax and no franchise tax. Nevada is one of the few states in America where the corporate veil has never been pierced, except in instances of fraud.

Why Incorporate with Nevada Corporate Headquarters, Inc.?

Unlike many other incorporating companies, Nevada Corporate Headquarters, Inc. (NCH) is a one-stop full service incorporator. Senior consultants are Certified Asset Protection Professionals (CAPP). NCH is the largest incorporating service in Nevada. Staff support and systems make creating your business and protecting your assets easy, quick and convenient. Count on NCH to help you grow your business and protect your familys future.


Guide to Choosing the Right Business Structure

Thank you for requesting this free guide. We trust that it will provide you with an understanding of the benefits of forming the proper type of business entity. We also hope that when it is time for you to form your new company, you will allow us the privilege of working with you to do so. Nevada Corporate Headquarters (NCH) and its sister companies have formed more than 30,000 business entities since 1989. Clients regard NCH as a one-stop business formation company. We offer a full spectrum of business services and take great pride in helping small business owners and entrepreneurs grow their businesses and protect their personal and business assets. Many people are unaware that there are dramatic differences in state law regarding business formation and resulting asset protection features. NCH has helped more than 30,000 individuals and businesses make the right choice and enjoy the benefits of the business-friendly statutes of Nevada. Although NCH can help you form your business in any of the fifty states, we strongly believe in the advantages of incorporation in the state of Nevada. Nevada law provides personal protection for corporate officers, directors and managers that is unmatched by any other state. This guide also provides information to help you understand the different types of business entities, such as corporations, limited liability companies and limited partnerships. NCHs trained and experienced consultants will assist you in making the right decision at the outset of your business venture. NCH also provides a broad range of small business support services designed to assist you in growing your business and protecting your assets. These services include bookkeeping, tax preparation, tax consulting, estate planning and maintaining the ongoing compliance needs of your business. NCH also offers the most complete Nevada virtual office support options available anywhere at any price.

About Nevada Corporate Headquarters, Inc.

NCH has formed corporations and LLCs for worldwide clients for more than fifteen years.  Our professional staff includes attorneys, CPAs, certified estate planners and business consultants.  NCH business formation consultants can create your new company in Nevada or in your home state. NCH has formed more than 30,000 corporations and LLCs for clients.  NCH is the leading creator of Nevada corporations and LLCs, meaning more small businesses and entrepreneurs put their trust in our company than any other. NCH provides a level of support and service that is unparalleled in our industry.


Background on Corporations
A corporation is a form of business created according to the laws of a specific state or country. It is an artificial entity created by law. A corporation consists of owners, called stockholders, and managers, called directors and officers. The structure of a corporations ownership could include individuals or other corporations; however, the management must be individuals. Nevertheless, the corporation is recognized by the law as a separate and independent entity from the individuals. In other words, the corporation is not you and you are not the corporation. The corporation is generally treated as if it were its own person. The corporation also has certain rights separate from any other person. For example, a corporation enjoys its own Constitutional protection against unreasonable search and seizures and may also invoke the attorney-client privilege of confidentiality. It may also sue for defamation of its good name. A corporation may also be separately punished if it violates the law. Each state has the authority to create corporations. The laws of each state vary somewhat in the powers and responsibilities they give to corporations formed within their boundaries. Those differences create opportunity for you to choose the set of laws that give you the greatest benefit. Because a corporation is a citizen of the state in which it was formed, you can choose to form your corporation in a state that gives you the greatest advantages and flexibility. As you will see, educated business owners are choosing to form their business entities in Nevada to take advantage of the unique features of its laws.

Liability Protection: The Corporate Veil

The corporate veil refers to the legal separation between the individual and the company. It is the single most valuable quality that the corporation offers. Care must be taken to preserve the corporate veil; if it is pierced, the corporation may have no asset protection value whatsoever. The corporation has traditionally been the first line of defense in any asset protection strategy because of the long record of ironclad statutes and case law that protects individuals from personal liability. Because of the presence of the corporate veil, the corporation has often been recommended as the entity of choice whenever a business has employees. The reason for this preference is that employees bring certain risks that require liability protection for the managers and owners of the company. Also, the corporation is easy to use; it is a familiar structure in the business world.


To maintain the corporate veil, states other than Nevada require that certain formalities must be followed. These formalities are not always attended to properly, thus corporations formed in states other than Nevada can be imperfect in protecting the individual. Even so, the corporation is usually much more effective in protecting owners and managers from liability than a general partnership or sole proprietorship.

Limited Liability Companies

The limited liability company (LLC) is a relatively new development in business law. The LLC, which is based on European tradition, was not introduced in the United States until Wyoming adopted the first LLC act in the late 1970s. An LLC is an entity that is also legally separate and distinct from its owners. For tax purposes, the LLC is usually treated as a partnership. However, the LLC can choose to be taxed as a corporation if it prefers, making the LLC a very flexible option for doing business. Depending on circumstances, the partnership tax classification can have advantages or disadvantages. The partnership tax classification avoids double taxation, but may pay tax on company income at a ridiculously high personal income tax rate, instead of at a lower corporate rate. As a partnership for tax purposes, the LLC merely files an informational tax return that details the gain and loss of the individual members. The tax liability flows through to the owners. Every state now recognizes the LLC, which is why the LLC has become so popular. Many states already file more new LLCs each year than new corporations. In some states, the statute frequently limits the lifespan of an LLC to less than thirty years. If an LLC is maintained beyond that, the Internal Revenue Service (IRS) may consider it a corporation. Ownership of an LLC cannot be freely transferred from one owner to another without restriction. Only the original members of the LLC have the power to make decisions regarding the operation and administration of the company. If an ownership interest is transferred, or sold to another party, it carries only a right to income. Personal creditors of a limited liability company member may charge the members interest with payment of the unsatisfied debt, but this provides the creditor with


only the right to an assignee of the members interest, often known as a charging order. Only four states have passed laws making the charging order the sole remedy available to a judgment creditor; Nevada is one. In the remaining states, there are several ways the charging order can be set aside, giving creditors far more power, including foreclosure and forced sale of LLC interests. One key advantage to the LLC is lack of restrictions regarding the type and number of stockholders. To appreciate this flexibility, compare the LLC with a restrictive Scorporation. The S-corporation provides corporate liability protection and flowthough tax status, but places limitations on the number and type of shareholders allowed. The LLC is not subject to restrictions on ownership applying to an Scorporation. Most trusts, estates, corporations, partnerships and other LLCs, are prohibited from owning stock in an S-corporation. The LLC is already replacing the S-corporation as the preferred tax entity. In some instances, it may also replace the limited partnership. The LLCs greatest advantage is its flexibility. It does not require the same degree of formality and record-keeping demanded of a corporation. It has flexibility in its tax status, it provides solid asset protection benefits, and when your LLC is filed in a state where the law limits a judgment creditor only to a charging order remedy (like Nevada), it becomes the ultimate business entity for many applications and uses.

When to Form Your Business Structure

There are many good reasons for placing business activity under the umbrella of a corporation. While tax laws change occasionally, the value of the corporation remains constant. The bottom line: People who form a new company are interested in liability protection, financial privacy, lower taxes and flexibility in management and control of the business. The first question many ask about starting a business is, When should I do it? Many accountants and attorneys give their clients a standard answer. However, there are factors reaching beyond any pat answer. In fact, the complexities of laws that govern society make it impossible for such an answer to be correct in all circumstances. The right time to form a business entity depends on what you or your business have done in the past, what you are doing now and what you are trying to accomplish in the future. Often, the right time for someone to organize formally was months, or even years, before they ever get around to asking the question.

Several years ago, a nationally popular radio personality, who dealt with a variety of personal and business related issues, was asked the best time to incorporate a business. The reply was surprisingly shortsighted, but demonstrative of excessive misinformation distributed by business professionals across the country. The answer was based on the amount of revenue the business was generating and associated tax consequences. The exact figure provided by the answer is irrelevant; however, it is typical for many business advisors to recommend that incorporation is not worthwhile until the business is generating a specific number in annual revenue. There is no question there are costs associated with incorporating, and from this perspective, it makes sense to determine the break-even point is for a corporation to makeup those costs. Nevertheless, this perspective is too narrow an outlook about the value of the corporation. Anyone concerned with financial privacy should formally organize before the fact, if it is at all possible to do so. The only way to preserve your privacy is to stay out of the paper trail in the first place. Let your company do that. That way, the history of facts related to the transaction never leads directly to you, but instead leads only to your business entity. What value do you place on the protection a properly maintained business entity offers? The fact that a certain asset or activity exists under the corporate umbrella over time may save the owners millions of dollars in liability and judgments. Even from the cost / benefit perspective, there are other reasons to consider a corporation or LLC beyond revenue figures. Remember that income is used to determine your tax liability, and losses are used as deductions against your income. The less significant your income is, the lower your tax liability. That is a reason you commonly hear of huge, multinational companies reporting seemingly incredible losses. They are simply lowering their tax bill. Almost all new companies are expected to go through a period of financial struggle or loss. This period may last weeks, months or years. Why shouldnt your company be allowed to take advantage of the tax losses that are being accumulated during this initial period? Quite simply, it should. Corporate tax laws provide for taking advantage of losses through what is called a loss carry-forward. A new business entity can begin spending money immediately in many areas where you would otherwise be spending personal funds. Startup expenses may include the following: automobile leases, maintenance, insurance, taxes, airline travel, meals, entertainment (partially deductible), retirement plans, equipment purchases and miscellaneous expenses. Many of these deductions have a greater


value to the company than the individual due to individual deduction limitations. As you can see, many expenses of the entrepreneurial individual can be spent by the new entity. As you build up your loss, you create a situation where you can reduce or eliminate future taxes by using a tax loss carry-forward or income averaging against future profits. When seeking guidance on when to incorporate, be certain your advisors thoroughly recognize the factors involved. Do not allow them to set an arbitrary income incorporation line. If insisted upon, you need to seek guidance from someone with a broader sense of the business world.

Which State Is Right for You?

One of the significant differences between the various states can affect your pocketbook directly, that difference is tax. Only a couple of states impose no taxes on corporate income. State corporate income tax rates can be as high as twelve percent. Obviously, with proper planning, there can be tremendous tax savings where income is earned in a tax-free state. State corporate tax planning is a complicated area requiring professional help. NCH consultants have that expertise. As stated earlier, the corporation laws of all states vary. Each state has adopted its own version of the Corporation Code; therefore, tremendous differences exist between how corporations are handled, what powers they are given and how they can conduct their internal operations. A corporation is a citizen of the state that formed it, and is subject to the Corporation Code adopted by that particular state. The differences that exist in the laws of various states create either an advantage or a disadvantage for you and your incorporated business. Once a corporation has been formed, the Corporation Code of that state directs the basic rights and duties of its shareholders, directors and officers. Other provisions may make corporate management more restrictive and difficult. For instance, some states require three different individuals to act as corporate officers, while others require only one. Some states regulate and limit the type of stock that can be issued by the corporation, while other states allow the corporation to make that decision. Some states require extensive public disclosure of corporate ownership; a few states allow degrees of confidentiality regarding ownership issues. The ways in which these differences affect your corporation are virtually limitless. When you have a choice, choose the state that gives you the most flexibility, the most powerful protection and the greatest tax benefits.


Forming a Business Entity in Your Home State

Using a corporation formed in a tax haven like Nevada requires an understanding of several interstate issues. Suffice it to say that some businesses will not gain advantage in using an out-of-state corporation as their primary business entity. A small business that depends wholly upon a local, intrastate market, and has no intention of establishing interstate operations, is a prime candidate for local incorporation. Perhaps it makes little economic sense for the business to maintain a corporation in another state and jump through the required hoops to transact business in its home state. To all intents and purposes, it could cost more than maintaining two different domestic corporations. For example, most local retailers have a public presence in a local mall, or other commercial property, advertise extensively throughout the local area and have one or more employees. Customers come to the store to make purchases or engage their service. Under these circumstances, it makes sense to deal with only one set of state laws, preferably the laws to which your accountant and attorney are accustomed. Using a corporation formed in another state may create additional complications and costs.

Pre-Incorporation Considerations
During the pre-incorporation period, there are several items to be addressed by the individuals participating in the incorporation process. How you resolve these issues can be addressed in the bylaws, articles of incorporation or as separate written policy adopted by the board of directors. The following considerations apply: Financing. Who is to provide funds and additional assets to the corporation? In return, what considerations are they to receive? Share Structure. How many authorized shares are to be written into the articles of incorporation? Securities Regulation. Will the corporation have to comply with state and federal securities regulations? The unwary could be negating state and federal rules that limit the number of potential investors who can be approached. Tax Election. Will the corporation function as a C-corporation or S-corporation? Will advantage be taken of Internal Revenue Code (IRC) 1244 stock treatment, or IRC 351 treatment, for non-cash assets? Are there potential tax problems,


such as debt / equity ratios, personal holding company status, personal service corporation status or imputed interest problems? NCHs tax professionals can help you through this labyrinth. Management and Control. What rules need to govern the stockholders meetings and voting rights? What latitude will the board of directors be granted in daily operational decisions? Agreements. Are stock restrictions, buy / sell agreements, stock subscription agreements, employment or independent contractor agreements required? Benefits and Pension Plans. What will shareholders / employees expect in terms of benefits, and what will be the best way to provide them? NCH can refer you to experienced professionals with expertise to assist you in the resolution of such issues. Estate Planning and Liquidity. If shareholders are to invest significant portions of their estate, how are they assured of liquidity at death? How will the ownership interests transfer to heirs? Your NCH representative can introduce you to our Certified Estate Planner and in-house law firm that can address all of your estate planning issues. The reason these issues are pre-incorporation considerations is that many approaches to these areas of concern can only be effective if put into place prior to incorporation papers being filed. For example, articles of incorporation may contain any number of provisions resolving these issues to the satisfaction of involved parties, but presumes consideration was given beforehand in order for the provisions to be drafted.

Why NCH Started with Nevada Entities

Nevada has spent over two decades developing its infrastructure toward its claim as the Delaware of the West. Accordingly, Nevada has intentionally designed its laws to attract the small business owner, and is determined to remain a leader in business entity filings. In 1996, Nevada made its first appearance on the top ten list of states with the highest number of incorporations. Thats not too bad, considering there are thirty-six states with populations larger than Nevada. Over 1,500 corporations are formed monthly in Nevada, which is three times higher than in 1985. Due to Nevadas pro-business stance, Inc. and Money magazines have ranked Nevada number among all states for the most favorable business environment. In the last decade, Nevada has shown significant annual growth in new incorporating businesses. Nevada continues to support progressive amendments to corporate and LLC laws in order to maintain its competitive edge.
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Nevada Advantages
Nevada offers many advantages as a corporate haven: 1. 2. 3. 4. 5. 6. 7. Nevada has no state corporate taxes. Nevada has no franchise tax. Nevada has no tax on corporate shares. Nevada has no personal income tax. Nevada is the only state without a formal information sharing agreement with the IRS. Nevada has minimal reporting and disclosure requirements. Nevada allows for one-person corporations.

8. Nevada has nominal annual fees. 9.  Nevada has established case law that prevents piercing the corporate veil. 10.  Corporate officers and directors are automatically protected from any personal liability, unless engaging in fraud. 11.  Stockholders, directors and officers are not required to live or hold meetings in Nevada, or to carry U.S. citizenship. 12.  Only names and addresses of the officers and directors are public record. No other information, listings or meeting minutes are filed with the state. 13. There is no minimum initial capital requirement to incorporate. 14.  Nevada corporations may issue stock for capital, services, personal property or real estate. Directors alone determine the value of such transactions, and their decision is final.

Nevada Corporations and Personal Privacy

For many, personal privacy is a critical issue in their financial life. In our litigious society, the less people know about your assets, the more it will be to your benefit. It is no coincidence that people without significant assets do not get sued as often as those who are perceived as having deep pockets. Individuals with any assets should anticipate the possibility of being sued within their lifetime, which is precisely the reason many incorporate their business activities. To protect your assets from the disconcerting trend toward frivolous lawsuits, you need a specific plan of action that isolates you from your assets. If someone has no reason to believe you have access to a million dollars, it is not likely they
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would pursue a million-dollar judgment against you. If your assets remain private, you will greatly reduce the likelihood of being sued. No attorney will work on a contingency against you unless they see some way of getting paid; suing poor people does not produce a wealthy attorney or law practice. The above methods make it difficult, if not impossible, to expose stockholders of a Nevada corporation. The only filing required is an annual list of officers and directors submitted to the secretary of state; this is the sole piece of information the secretary of state will have regarding a corporations ownership and management. The list deadline is the first day of the second month subsequent to incorporation and once a year thereafter. Although there is room for many names, only five require inclusion on the list. The secretary of state maintains a file to include: president, secretary, treasurer, a director, and the registered agent. The most significant factor is one person may serve in all capacities and is not required to be a stockholder. The Nevada secretary of state provides information on corporations. It is possible for a contingency-based lawyer to learn whether the corporation is in good standing with the state, as well as the names of the above listed officers. In addition, the attorney may learn whether positions are filled by the same individual (suggesting a one-person corporation) or by several individuals. The attorney may also discover that officers and directors appear to have residency in the U.S. On the other hand, they may appear to be citizens of a foreign country. The lawyer does not have access to information that is significant. The lawyer will be unable to find out the following: Who the stockholders are, how many exist or how much stock is issued. The nature of assets owned by the corporation, how much capitalization exists or corresponding value.  Whether the officers and directors have changed since the previous list was filed.

Nevada has no corporate income tax, or the inherent bureaucracy such a tax creates. There are no state corporate tax returns to view. The only document the Nevada Department of Taxation has is a filing form for the Nevada Business License, which is not immediately available as public record. If it were, the lone disclosure would be the number of hours worked by company employees. Let us assume the registered agent for a corporation has been subpoenaed for the corporate records it possesses. The Nevada registered agent is not required to have the actual stock ledger on file, or a copy, which is a requirement in most states. As
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an alternative, the registered agent is merely required to have a statement providing the name and address of the person who physically possesses the stock ledger, which can be located anywhere. At no time does Nevada law require the stock ledger to be within its borders. If the corporation desired, it could force a potential litigant to exhaust time and money in pursuing this information. As a creditor, one would have to ask themselves how much trouble it would be worth at the outcome.

A Word About Offshore Havens

A great deal has been written about the benefits of international corporate havens. Places like the Cayman Islands, the Bahamas, Isle of Man, Nevis, Panama, Gibraltar, and many others, frequently promote offshore strategies as the ideal solution to protecting assets and eliminating taxes. The strict secrecy laws and favorable tax climates found in many of these jurisdictions provide the justification for incorporating offshore. While it is true that benefits can be gained by using an offshore corporation, it is not as easy or inexpensive to accomplish properly, as many promoters would like you to believe. Many people utilizing offshore corporations operate in a manner that constitutes blatant tax fraud. They rely solely on the strength of the secrecy laws of their incorporating country. If these operations were public, these people would be serving prison sentences. Due to this, and additional technical problems with offshore incorporation, NCH usually advises clients not to consider offshore incorporation unless they do, or have the distinct potential to, engage in international trade or business. Without the presence of international trade or business, the use of an offshore corporation will, presumably, constitute fraud.

Unincorporated Options: Sole Proprietorship

A sole proprietorship is the most common business entity; disturbingly so, due to the fact sole proprietorship is generally the poorest business entity. Testament to the statement, we gravitate to the level of our own laziness, the proprietorship tends to be the default entity for individuals making no effort to organize or plan their affairs. The sole proprietorship is, by definition, the business of a single individual. It is the least expensive to form in terms of legal, accounting and other
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startup fees. However, over the lifespan of your business, factors can make it the most expensive. As a sole proprietor, there is no difference between you and your business. Business liabilities are your personal liabilities. The companys bills are your bills. If your business is sued successfully, a judgment can be levied against your personal assets. The proprietorship cannot survive you, and ownership interest ends when you are deceased. In a sole proprietorship, the individual is the business, making it easy to withdraw profits. There are no difficult accounting procedures to maintain, nor is there double taxation issues normally associated with the regular distribution of corporation profits. In a proprietorship, you simply write yourself a check. For tax purposes, you do not have to file a separate business return. Instead, simply attach a Schedule C to your IRS 1040 when reporting your business income. Once added together, you will pay taxes at your personal income tax rate. Any gain or loss from the business is combined with other taxable items. The proprietor is not required to withhold federal income tax on business income (as opposed to salary income). However, if the proprietorship has any employees, there is responsibility for withholding taxes from their income. In most instances the individual proprietor will be required to make an estimated quarterly tax payment, and undoubtedly be subject to a 15.3% self-employment income tax to offset the proprietors beneficial savings on Social Security and Medicare taxes, as perceived by the government. Each asset in the sole proprietorship is treated separately for tax purposes, as compared to a part of a complete ownership interest. For example, a sole proprietor selling an entire business considers figures of gain or loss separately by asset, not on the value of the business as a whole. As there is no difference between business and personal assets, the sole proprietor risks everything every business day. If a judgment is placed against the business, every personal asset of the owner can be used to satisfy said judgment, including homes, property, automobiles, furniture, bank accounts, investments and personal effects. It can be difficult for a sole proprietorship to raise capital resources, and doing so can be accomplished only if the individual qualifies for a personal loan. Historically, a sole proprietor has been limited in the ability to participate in federally qualified pension and medical reimbursement plans available to other entities. The sole proprietor may have more trouble getting full deductions for
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varying business expenses. The IRS has a tendency to disallow expenses if any question exists as to whether the expenditure was business-related or personal. The vague line created by the lack of a legal separation between the person and the business can favor the IRS position for denying deductions. The sole proprietor has several basic planning considerations unique to their status. If the proprietor intends to pass the business on to heirs, there are numerous estate planning and taxation issues to overcome. From a practical perspective, there is no one else to rely on in the case of disability or financial hardship. Considering the factors of a proprietorship, it is not a long-term business solution. It is difficult to imagine a situation in which a proprietorship is established for use by a serious business.

Unincorporated Options: General Partnerships

A general partnership is as easy to form as a sole proprietorship. The difference is a partnership must have at least two involved parties. If two people agree to start a new enterprise, without making the effort to set up a specific business entity, by default they become general partners. General partners are co-owners of a business and its assets; they are basically proprietors in partnership. Their ownership interests may not be equal, but each general partner has the same legal authority in relation to the business. Once a general partnership is formed, it has its own identity for most purposes, can own property, make contracts and conduct business in the name the partners have adopted for the general partnership (the business name). The IRS considers a partnership to be any ordinary partnership, syndicate, group, pool, joint venture, or other unincorporated organization, that is operating a business and that may not be classified as a trust or estate. A general partnership is different from a limited partnership in the following ways: 1. Each general partner can legally bind the partnership by his or her actions. 2. Each general partner is fully liable for all the business activities of the partnership. 3.  Each general partner must have the unanimous consent of remaining partners before admission into the partnership. 4.  If a general partner dies, or withdraws from the partnership, the partnership is dissolved unless a prior written agreement provides otherwise.
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Although a general partnership is often formed by default, not all joint business activities automatically classify as a general partnership. For instance, if two people agree to share such business expenses as a reception area or a photocopier, that does not create a general partnership. However, if they then charge customers or clients to use the photocopier, the general partnership is formed by default. Although a general partnership can exist without a formal agreement, the partners are advised to collaborate to draft a partnership agreement to govern and control the relationship. General partnerships are subject to the same limitations as sole proprietors in their ability to participate in benefit plans. Certain business expenses are not always fully deductible. Partners are subject to the 15.3% self-employment tax. The partners in a general partnership have responsibilities to each other. The partners may have assigned themselves to specific roles and responsibilities in their relationship, perhaps even by written agreement; nevertheless, they are jointly liable for activities of the business as a whole. The actions of one partner in the name of the business are bound to all partners. The effect of this reality cannot be minimized. A general partner must realize every personal asset may be used to fulfill a legal obligation created by another general partner. In other words, all assets of all partners are in constant jeopardy. It would be possible for one general partner, without the knowledge of the others, to get a multi-million dollar business loan in the name of the partnership and then fly to some remote Caribbean island with the funds to live a life of luxury. The other partners are still fully liable for the debt, possibly forcing the sale of the remaining partners personal assets to repay the loan. Each individual partner includes the income or loss from a general partnership on their tax return. The general partnership passes its income or loss directly to the individual partners avoiding double taxation issues associated with drawing profit from other forms of business. The IRS contends it is your money to do with as you please, as long as you report it and pay taxes within designated timeframes. General partnerships are usually not filed with the secretary of state; there are no uniform standards for limiting the liability of any partners involved. It is not unheard of for oral agreements to be used to form a general partnership.

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Unincorporated Options: Limited Partnerships

Limited partnerships have the same basic features as a general partnership; however, limited partnerships have limited partners, who have neither liability for business activities nor management responsibilities. General partners have the same rights, responsibilities and status as a partner in a general partnership. The limited partnership is based on a principle attempting to preserve the interests of the public good by requiring the existence of at least one general partner. As a result, someone has responsibility and liability for the activities of the partnership. However, the liability of the limited partner is limited to the amount invested in the partnership by that partner. Their role is viewed as passive, and they are not held accountable for partnership activity. The only possibility of loss is their partnership investment. Limited partnerships are created by filing a Certificate of Limited Partnership with the state, and establishing a formalized partnership agreement under that state law. The partnership agreement is a legal document specifically detailing the powers and responsibilities of partners and other factors deciding how the partnership will function and react in specific circumstances. Due to the complexity of the partnership agreement, it is important to recognize all limited partnerships are not created equal. The effectiveness a limited partnership will have in accomplishing specific goals depends a great deal on the skill and knowledge of the individual drafting the agreement. The wording of the agreement can greatly affect all aspects of the partnership, including the tax consequences of different partnership activities. For example, a common use of limited partnership is to protect assets from judgments or creditors. The value of the partnership in accomplishing that goal is dependent upon the partnership agreement addressing any eventuality that a judgment creditor can create. Unfortunately, not all partnership agreements are written with asset protection as a primary goal. Those that are written with a focus on asset protection are drafted by attorneys whose background, experience and skills vary widely. The result is poor partnership agreements. The average people, including lawyers, sometimes do not determine the difference until it is beyond their ability to change it. Limited partnerships are particularly effective in asset protection strategies, especially where primary assets are real property. The technical explanation

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is beyond the scope of this publication; however, generally neither the limited partnership interest nor the partnership assets are attachable by a creditor. This protection is often called a charging order limitation and limits a judgment creditor to what is essentially a lien against partnership income. The proper uses of a limited partnership are found in three major situations: As an asset protection tool against lawsuits or other judgments.  As a tool to spread income among family and achieve a lower overall family income tax rate. As a tool in estate planning to lower estate taxes.

There is much recent discussion about the family limited partnership (FLP), which is touted as an appropriate strategy for a variety of family and estate matters. Generally, the family limited partnership performs as advertised, but the entity is still a limited partnership and subject to corresponding laws. There can be several drawbacks to using limited partnerships. For instance, a limited partner must be careful not to take an active role in management or exercise too much control over their investment. Doing so can elevate the partners legal status to general partner. An undesirable result would be that the limited partners suddenly find themselves exposed to the aforementioned personal risks. Additionally, if the partnership has not been filed appropriately, the limited status of the partnership may be jeopardized, potentially resulting in the full liability exposure of all partners. The First District Court of Appeals for the State of California recently held that a limited partnership interest might be sold on foreclosure of a charging order lien at the request of a judgment creditor. This outcome could have been avoided had the partnership agreement been written in a different way; the incident sets an unsettling precedent.

Limited Liability Limited Partnerships: The LLLP

In 2003, the Nevada Legislature created a new form of limited partnership, the LLLP. The LLLP solves one of the largest problems created by the limited partnership. In a regular limited partnership, the general partner has unlimited liability. They have no protection whatsoever. The LLLP statute allows a regular limited partnership to register for additional liability protection for the general partner, granting the general partner the same protection corporate officers and directors receive under law. A large number of limited partnerships used as family limited partnerships may see wisdom in utilizing this option.
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Contact Nevada Corporate Headquarters, Inc.

We hope this material has helped you learn more about the choices available to you when considering incorporation. For more information, or to speak with a trained and experienced NCH corporate consultant, please contact our offices. Phone toll-free in the U.S. and Canada: 1.877.NCH.CORP (624.2677) www.nchinc.com

NCH is not a law firm. We are not engaged in rendering legal advice and cannot make recommendations regarding individual circumstances. The information in this publication is not to be construed as legal advice in any way. If legal advice is required, consult a qualified attorney. The Lawyer Referral & Information Service of the State Bar of Nevada is available from 9:00 a.m. to 4:00 p.m., Monday through Friday at 1-800-789-5747. The information in this publication is believed to be reliable at the time it was written, but it cannot be guaranteed insofar as it is applied to any particular individual or situation. The publisher has no way of knowing the specific needs of the reader. This publication is copyrighted by Nevada Corporate Headquarters, Inc. and may not be reproduced without expressed permission. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein.
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Total Asset Protection Checklist

Step One - Separate your business from yourself and your family by creating a unique business entity or multiple business entities. Step Two - Separate yourself from your business by getting the company out of your name. Step Three - Control everything and own nothing through trusts and effective tax and estate planning. Ask yourself these questions: 1. Do you need another business entity? 2. Is it time to change your corporate structure? 3. Are you doing effective, pro-active tax planning? 4. Are your books up-to-date and in order? 5. Do you need corporate coaching to keep your records in legal compliance and protect your corporate shield? 6. Is it time to finally do something about your estate planning so your assets remain protected and out of the hands of strangers in the probate process? 7. Would a trust, or series of trusts, give you and your heirs the protection you need against over zealous taxation? Asset protection requires flawless communication, now ask yourself these questions? 1. Does my business attorney ever talk to my tax professional? 2. Does my tax professional ever talk to my estate planning attorney? 3. Does my estate planning attorney ever talk to my business attorney?

If the answers are no, no and no , you simply do not have a totally coordinated, totally integrated asset protection strategy. Its time to put all your asset protection under one roof at NCH. Call NCH at 1-877-NCH-CORP (624-2677) for a free, no obligation consultation about steps you can take to reach total asset protection.

1-877-NCH-CORP (624-2677) 101 Convention Center Dr. , Seventh floor Las Vegas, NV 89109 www.nchinc.com