As a sole proprietor, you are responsible for all of your business debts and liabilities, making you vulnerable to lawsuits that could wipe out your personal savings and assets. When you apply for a loan for a house, car or credit cards, the mere fact that you are being sued will render you a higher risk! But when you incorporate, a corporation, by law, is a separate legal existence apart from its owners. Hence, you, as a corporate owner are not personally liable for the corporation’s debts or liabilities, and now a lawsuit against your corporation, will leave your personal assets protected.
This is the major reason why you need to incorporate. But guess what, you don’t get something for nothing. In order to gain the liability protection of a separate legal entity like a corporation you must do a few things properly, such as the following:
You cannot co-mingle personal and business funds. For example, you cannot write a business check to pay for personal items.
You must do the formalities correctly. A corporation can do everything you can do except act and think. The way a corporation acts and thinks is through written minutes and resolutions. If you don’t complete the minutes and resolutions properly, a judge could decide that you are not treating the corporation as a separate legal entity. Even if you own a one-person corporation and you want to take a business trip for two weeks, the corporation should produce a resolution that authorized you to go on this trip. For many, this does not make sense since they own the corporation; they feel they should be able to do whatever they want with their business. They can, but the corporation must approve whatever they do.
Proper capitalization of your corporation. We have found cases where $157,000 was deemed too thinly capitalized for a corporation and the corporate veil was pierced for that reason. 1
If a judge should decide that you did not do the above three items properly, and they conclude your corporation is not a real legal entity, then, the court could hold you personally liable for the corporation’s debts. This is called “piercing the corporate veil.”
Again, if this happens, you are right back to “technically” being a sole proprietorship with UNLIMITED liability! Now, you could be paralyzed financially with a judgment against you!
When you Incorporate in Nevada, you have the best protection against piercing the corporate veil THAN IN ANY OTHER STATE. (Delaware is very good at piercing also but when you combine the veil piercing factor and protecting the board of directors factor, Nevada provides more protection).
Nevada appears like an iron fortress to your creditors. In fact, the corporate veil has only been pierced two times in Nevada in the last 24 years!! In comparison, in one out of two cases, the corporate veil is pierced in California.
When you Incorporate in Nevada and register in another state to do business, let’s say, California, your attorney could tell you that any time you get sued, it will be in California so you don’t need to incorporate in Nevada. But what your attorney may not explain is that if you get sued and the plaintiff wants to go beyond the corporation (because there is not enough money in the corporation or insurance), then the plaintiff could decide to sue you, the person, personally. This is what is known as piercing the corporate veil.
Under the Internal Affairs Doctrine, it says, “courts traditionally looking to the law of the state of incorporation in resolving questions regarding a corporation’s internal affairs
No Personal Liability of the Directors AND Officers to the Stockholders (only SIX (6) states protect both)
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 domicile in Nevada. Although a few other states soon adopted lesser versions of this law, Nevada’s law remains among the most thorough and comprehensive in the country.
One last difference concerning what is known as Inside Liability needs to reviewed. A vast majority of states have Director protection statutes, which allow for article provisions that eliminate director liability for certain breaches of fiduciary duty to corporation. In other words, directors receive protection automatically by just filing the articles because of state statute.
Nevada’s protection is provided as a matter of law; that is, no article provision is necessary. The protection available for directors is equally applicable to officers. 3
In other words, when you file Articles of Incorporation in Nevada, this protection is automatic, whereas in other states, you have to write specific language into the Articles in order to have this protection. If you file the Articles on your own or through an online Internet company, you will not get that protection.
All Nevada corporations now have a Limitation of Liability statement for Directors and Officers imposed by law.
In Nevada, when a director is not protected by a limitation of liability statement in the articles, s/he can still find solace in the business judgment rule. This is not so for officers of Delaware corporations.
In Nevada, a director is not liable to the corporation or its stockholders unless a breach of fiduciary duties involves “intentional misconduct, fraud or a knowing violation of law.” 6
In contrast, the other 27 states that do not recognize the business judgment rule, the standard is simple negligence. This is a very low standard to meet, and when it is, personal liability will follow. 7
Nevada Provides Indemnification of Officers Automatically when Articles are Filed!
Articles get automatic indemnification of officers: As of June 15, 2001, Nevada Revised Statutes (NRS) 78.037(1) allows officers to be automatically indemnified, whether it is stated in the articles or not!
Nevada has No State Corporate or Franchise Taxes!
Nevada has NO state Corporate Income Tax or Franchise Tax (if you qualify)!
Nevada does NOT Exchange of Information with the IRS!
Nevada is one of only two states that does not exchange information with the IRS. If your company has to register in another state, keep in mind, that state will probably exchange information with the IRS. Here are the facts:
Internal Revenue Code (IRC) ß 6103(a) states that tax “[r]eturns and return information shall be confidential,” and that no federal or state employee “shall disclose any return or return information obtained by him in any manner[.]” For purposes of this law, a “return” is “any tax or information return,”
§6103(b)(1), and “return information” means:
[A] Taxpayer’s identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, over assessments, or tax payments, whether the taxpayer’s return was, is being, or will be examined or subject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or the amount thereof) of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition, or offense[.]
Returns and return information . . . shall be open to inspection by, or disclosure to, any State agency, body, or commission, or its legal representative, which is charged under the laws of such State with responsibility for the administration of State tax laws for the purpose of, and only to the extent necessary in, the administration of such laws[.]
48 states have entered into “agreements of cooperation” with “the IRS on the exchange of information on taxpayers.,” according to the CCH Standard Federal Tax Reporter.
Two states that possess no such agreement with the IRS are Nevada and Texas.
Nevada has Low Fees!
Nevada has low fees especially taking into account all the benefits they offer.
Filing fees with the state of Nevada are reasonable ($125) while California is $800 and Massachusetts is $500!
A Nevada Corporation or LLC may be Thinly Capitalized!
Cases as low as $200 10 have been deemed acceptable capitalization levels in Nevada. However, in other states such as California, this amount was deemed too thinly capitalized and forced the corporate veil to be pierced!
Nevada Offers the Best Protection of Board of Directors from Shareholder Lawsuits!
In order to find the Board of Directors liable, the shareholders must prove gross negligence on behalf of the Board of Directors. The test to prove gross negligence in Nevada is to pierce the corporate veil. No other state has such a high test!
In Nevada, you must only have a Legal Purpose to Form a Corporation or LLC!
If you form an LLC, these provisions are critical. You must know whether the state of formation requires simply a legal purpose or a more detailed legal purpose. This is especially important when you form an LLC that will mainly hold safe assets. Nevada is one of the states that only requires a legal purpose.
Currently, 14 states (California, Indiana, Iowa, Louisiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Pennsylvania, Rhode Island, Texas, and Virginia) require a business purpose in order to form an LLC. Because of this, an LLC cannot be used to hold an asset to protect it from creditors, unless that is deemed a business purpose in that state.
Each of these states defines the term, LEGAL PURPOSE, in its own way. This article reviews how each of the 14 states defines the term “business purpose.” Since an attempt to form an LLC in any of these states without such a purpose is invalid, and the application presumably would be rejected by the Secretary of State’s office, it is not possible to form an LLC in these states without the requisite purpose.
And, of course, if an LLC is formed in one of the states indicated above and performs business in another state, that state’s business license statutes become applicable.
In the other 36 states, an LLC can be formed for “any lawful purpose” which includes holding personal assets. Thus, a person could form a Nevada LLC to hold personal assets, and if no business is performed, the business license statutes will not come into play. This provides an extra layer of privacy not found in the above-named 14 states.
In Nevada, there is NO joint and Several Liabilities!
The other significant change in Nevada law is the abolishment of joint and several liabilities. Joint and several liability means that should a judgment be entered against several defendants, they will each assume equal liability for the full amount of the judgment, regardless of their relative fault in causing the damages. Nevada now requires the court to assign a percentage of faults 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 judgment, no greater than his or her fault.
Nevada Only Requires the List of Officers to be Updated Annually!
If your officers change throughout the year, the corporation is not required to update the Secretary of State every time a change is made. The corporation may update it (which requires a fee) or wait until the corporation’s annual renewal is due.
In Nevada, One Person Can Hold ALL the Corporate Positions!
One person can hold the offices of President, Secretary, Treasurer, and be the sole Director in Nevada. Many states require at least three (3) officers and/or directors. Thus, you don’t need to bring other people into your Nevada corporation if you do not want to do so.
Nevada does NOT Require the Members to be Listed in State Records!
If an LLC is MANAGED BY MANAGERS, the owners are not required to be listed. This means that you do not have to list the owners on the state records with an LLC managed by managers (where in other states that may not be the case). If you are concerned about the public not easily determining who owns your LLC, Nevada makes that possible.
NRS 86.263 Annual list: Filing requirements; fees; notice.
1. A limited-liability company shall, on or before the first day of the second month after the filing of its articles of organization with the secretary of state, file with the secretary of state, on a form furnished by him, a list that contains:
(a) The name of the limited-liability company;
(b) The file number of the limited-liability company, if known; (c) The names and titles of all of its managers or, if there is no manager, all of its managing members; (this means when the LLC is managed by managers (the only way that makes sense) the list will only have to show the managers, not the members, who are the owners. You may not want the owners of your LLC listed in public records. This is very important!
(d) The mailing or street address, either residence or business, of each manager or managing member listed, following the name of the manager or managing member;
(e) The name and street address of the resident agent of the limited-liability company; and (f) The signature of a manager or managing member of the limited-liability company certifying that the list is true, complete and accurate.
Nevada does NOT Require Stockholders, Directors and Officers to be US Citizens or Live or Hold Meetings in Nevada!
Directors need not be Stockholders and Officers and Directors of a Nevada corporation can be protected from personal liability for lawful acts of the corporation.
Nevada corporations may purchase, hold, sell or transfer shares of its own stock!
Nevada may issue stock for services!
Nevada corporations may issue stock for capital, services, personal property, or real estate, including leases and options. The directors may determine the value of any of these transactions, and their decision is final.