Incorporate in Nevada
Why were nearly 45,000 entities formed last year?
Unfortunately, most for the wrong reasons;
attempting to save state income tax and privacy.
Discover the four right reasons below!
Are the Four Great
Advantages to Being Based in Nevada?
1. Piercing of the Corporate Veil, and
2. Indemnification of officers and directors, and
3. No Joint and Several Liability, and
4. Jurisdictional strategies.
Let’s examine one at a time. First, piercing the corporate veil. What does that mean? When you form a corporation whether it is in Nevada, California, Texas or wherever, certain corporate formalities must be followed. Remember, a corporation can do everything you can do except act or think, it does that through a board of directors, officers and shareholders. If the corporation does not keep accurate records of meetings through the minutes and if the corporation commingles funds, it becomes easier for someone to be able to pierce the corporate veil of this corporation if it was involved in a lawsuit. Another contributing factor as to why corporate veils get pierced has to do with low capitalization. In some states, like California, we recommend that you capitalize your corporation with at least $1,000. If not, it can be easier for someone to prove that you were simply the alter ego of the corporation (one and the same as the corporation) and pierce the corporate veil!
How does Nevada feel about this? Nevada is what is called a "thin capital state", meaning you can form a corporation in Nevada for as little as $100, or even services. Also, Nevada has a certain attitude about piercing the corporate veil.
This attitude is why major corporations are domiciled in Nevada. Let’s explain.
First, Nevada has a three-prong test that must be proven (all three parts must be proven) to pierce the corporate veil:
- The corporation must be influenced and governed by the person asserted to be the alter ego;
- There must be such unity of interest and ownership that one is inseparable from the other; and
- The facts must be such that adherence to the corporate fiction of a separate entity would, under the circumstances, sanction fraud or promote injustice.
The burden of proof of the three "general requirements" is on the plaintiff who seeks to pierce the veil, and a failure to prove any of the three will result in the veil not being pierced! Essentially Nevada says that unless you can prove fraud the corporate veil will not be pierced! That is awesome protection! The landmark case that proves this point is the case of Roland vs. Lepire (1983). As mentioned before we recommend that you keep accurate corporate records to protect the corporate veil and to have adequate capitalization also. In this case it was clear that there was inadequate capitalization, the corporation had a negative net worth at the time of the trial, there were no formal directors or shareholders meetings ever held, no dividends were paid to shareholders, nor did the officers or directors receive salaries. There was also no corporate minute book, nor was there any evidence that minutes were kept. On the other hand, the corporation managed to secure a general contractor’s license and a framing contractor’s license, "both in its name." There was also a corporate checking account. The court concluded that, ‘Although the evidence does show that the corporation was undercapitalized and that there was little existence separate and apart from [the two key shareholders]…evidence was insufficient to support a finding that appellants were the alter ego of the…corporation. The Nevada Supreme Court has made clear that unless the plaintiff is able to meet the burden of proving that "the financial setup of the corporation is only a sham and caused an injustice," the veil is unlikely to be pierced.
Nevada has the appearance of an IRON FORTRESS to creditors. The corporate veil has only been pierced once in Nevada in the last 21 years! And that was a case where the corporation was actually doing business in Nevada and had committed fraud against a Nevada resident.
Again-Only Once in the Last 22 Years has
the Corporate Veil been Pierced in Nevada!
In 1987, the Nevada Legislature passed a revolutionary law that permits corporations to place provisions in their articles of incorporation that would eliminate the personal liability of officers and directors to the stockholders of Nevada Corporations.
This is one of the main reasons large companies like Citibank are domiciled in Nevada. Delaware and a few other states soon adopted lesser versions of this law, but Nevada’s law remains among the most thorough and comprehensive in the country.
Contained in the Nevada Revised Statues (78.037), the law in part reads as follows:
"The articles of incorporation may also contain: A provision eliminating or limiting the personal liability of a director or officer to the corporation or its shareholders for damages for breach of fiduciary duty as a director or officer, but such provision must not remove or limit the liability of a director or officer for: Acts or omissions which involve intentional misconduct, fraud or a knowing violation of law"
Nevada Corporation Code allows for the indemnification of all officers, directors, employees, stockholders, or agents of a corporation for all actions that they take on behalf of the corporation that they had reasonable cause to believe was legal. This indemnification can include any and all civil, criminal and administrative action. (See NRS 78.751.) These two laws can provide complete protection for the officers and directors of Nevada corporations as long as they act prudently in their roles
The other significant change in Nevada law is the abolishment of joint and several liability. Joint and several liability means that should a judgement be entered against several defendants, they will each assume equal liability for the full amount of the judgement, regardless of their relative fault in causing the damages. Nevada now requires the court to assign a percentage of fault to each defendant, from zero to one hundred with the total equal to 100 percent. Every defendant found liable is required to pay a share of the total judgement no greater than his/her fault.
What about Nevada vs. Delaware?
The main rights in Delaware law benefit shareholders of public corporations. This attracts large, public companies that trade on various exchanges across the country to provide the best protection to their shareholders. Delaware’s corporate law, with regards to corporate takeovers is the strongest anywhere in the US.
More recently however, Nevada’s corporate law has passed Delaware in its efforts to insure the protection of the rights of small corporations. Delaware for example, has adopted a statute that allows the corporation to limit the liability of a director for monetary damages. However, it has far to go to be compared to similar statutes adopted by Nevada. For example, the following are acts for which officers and directors would be protected under Nevada law, but exposed under Delaware Statues:
- Acts or omissions not in good faith.
- Acts by officers are not exempt from monetary damages under Delaware law.
- Breach of a director’s duty of loyalty.
- Transactions involving undisclosed personal benefit to the officer or director.
- Acts or omissions that occurred prior to the date that the statute which provides for indemnification of directors, was passed and approved.
One requirement that Delaware has is that officers must reasonably believe that he or she is performing his or her duties in a manner that is in the best interests of the corporation. This requirement is not present in Nevada.
If You Are a Foreign Corporation Doing Business in
Your Home State, What State Laws Take Precedence?
Let’s say you formed a Nevada corporation for your new California restaurant. You would have to register it as a foreign corporation doing business in California (because you are physically doing business there). Why would you do that as opposed to just forming a California corporation? You now know that Nevada is the hardest state in which to pierce the corporate veil and go after the board of directors personally. This is why Tony Robbins, Citibank, Home Shopping Network and many other companies are based in Nevada.
If your California restaurant were sued, that lawsuit would occur in California courts. However, if someone tried to pierce the corporate veil, it may occur in Nevada. Now there are additional expenses involving travel to Nevada to try the case.
When you operate the Nevada corporation doing business in California you will enter into several agreements and contracts. Those contracts and agreements would mostly fall under the laws of California. But you may actually have a choice!
There is something called "choice of law jurisdiction". What does that mean? It means you can enter into a contract and decide that it falls under the laws of Nevada (state of domicile) not California (state of doing business). If there were a challenge you would have the laws of Nevada in your favor. This may work in your favor and discourage lawsuits! Recently, NCP entered into an agreement with a large tax firm. Rather than having disputes handled pursuant to the laws of New York, (the home state of this company) we asked and received a modification to utilize Nevada law. There is something also called "choice of forum". This means you may want the case to be heard in the state you choose, which in most cases would be Nevada! Someone in California, bound by a choice of forum in Nevada, may have to travel to Nevada for that lawsuit to occur. That may curb this person’s enthusiasm to sue your company!
By the way, do these three powerful advantages of having a Nevada entity, and applying piercing of the corporate veil, choice of law and forum jurisdiction in Nevada, also apply to LLC’s? Absolutely!
What is the Investment Difference Between Forming an Entity in my Home State vs. Forming a Nevada Entity and Registering to do Business in my Home State?
Now that you are convinced that there are three powerful advantages to forming an entity in Nevada first then registering as a foreign corporation in your home state, let’s cover what the extra investment may be to obtain all this great protection. Keep in mind, you may not even have to take these things into consideration if you have a business operation in Nevada.
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