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
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.
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
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!
NEVADA OFFERS THE BEST PROTECTION AGAINST PIERCING
THE CORPORATE VEIL
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, THEY CAN GO BACK TO THE STATE OF DOMICILE FOR PIERCING ISSUES.
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.
Nevada Protects the Board of Directors and Officers
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 Delaware and 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.
Only a few states, Louisiana, Maryland, New Hampshire
New Jersey, and Virginia, have laws that apply to officers. 2
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.
In most states, including Delaware, article provisions
can only cover directors. 4 When one is both a director and
an officer, actions taken solely in the capacity of an officer are not
protected by a director
protection statute. 5
According to David Mace Roberts & Rob Pivnick,
in "Tale of the Corporate Tape: Delaware, Nevada and Texas,"
52 Baylor L. Rev. 45 (2000), "Without doubt on this subject, Nevada
is more director
and officer friendly than either Delaware or Texas . . ."
All Nevada corporations now have a Limitation
of Liability statement for Directors and Officers imposed by law.
Note: Nevada, in contrast to Delaware:
When a Delaware corporation's Articles of Incorporation do not contain
a limitation of liability statement, the protection provided for directors
from personal liability is the business judgment rule. The business
judgment rule means:
It provides that courts will not second guess
the decisions of a corporation's officers or directors if those decisions
are within their authority, have a rational basis, and are made in good
faith, even if
they turn out to be mistakes in judgment.
Also, in Delaware, under no circumstance is a
director protected for acts not in good faith. However, in Nevada, such
acts are protected.
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
This is a very high standard according to attorney
David Bruno, who has done extensive research and found that other states
do not abide by this high standard.
In contrast, the other 27 states that do not recognize
the business judgment rule, the standard of liability is simple negligence.
This is a very low standard to meet, and when it is, personal liability
will follow. 7
However, in Nevada, no director "is individually
liable for a debt or liability of the corporation, unless the . . .
director . . . acts as the alter ego of the corporation." 8
Nevada Provides Indemnification of Officers Automatically when Articles
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):! 9
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"
[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[.]
§ 6103 (b)(2)(A).
Despite the confidentiality of this information:
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[.]
ß 6103(d). In the above statute, the term
"State" means any of the 50 states, Washington, D.C., Puerto
Rico, the Virgin Islands, the Northern Mariana Islands, Guam, American
Samoa, and the Canal Zone. § 6103(b)(5).
In order to put ß 6103 into action, 48 states,
Washington, D.C., Guam and American Samoa have entered into "agreements
of cooperation" with "the IRS on the exchange of information
on taxpayers," according to the CCH Standard Federal Tax Reporter,
vol. 15 (2002), 36,894.576 at 64,490.
Two states that possess no such agreement with the IRS are Nevada and
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
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
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
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.
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,
(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
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,
decision is final.
1 Remme v. Herzog, 35 Cal. Rptr. 586,
222 Cal. App. 2d 863 (1964)($
157,000 in capitalization
2 Hagglund, et al., supra, at 9.
3 See Nevada Revised Statutes 78.138(7)
4 See Delaware Gen. Corp. Law §
102(b)(7); Cal. Corps. Code § 204(a)(10)
5 See Arnold v. Society For Savings
Bancorp, Inc., 650 A.2d 1270 1288 (Del. 1994.
6 NRS 78.138 (7).
7 See Theriot v. Bourg, 691 So.2d 213
(La. App.), writ denied, 696 So.2d 1008 (La. 1997) (a series of bad
business decisions led to personal liability for five directors in the
amount of $5,798,441.
8 NRS 78.747(1)
9 In order to take advantage of the
tax laws of Nevada, your company must have employee in Nevada.
10 Paul Steelman, Ltd. v. Omni Realty
Partners, 110 Nev. 1223, 885
P.2d 549 (1994).
Questions about Forming an LLC or Corporation?
Call NCP at 1-800-351-5111