What
Are the Three Great
Advantages to Being Based in Nevada?
- Piercing
of the Corporate Veil, and
- Choice
of Law Jurisdiction, and
- Choice
of Forum
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, these are reasons 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 it is recommended to 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!
A long story short is that Nevada says 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 Rowland vs.
Lepire (1983). As mentioned before it is recommended to 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.
This
is the number one advantage why major corporations are formed
in Nevada each year. This is true whether they have all their Nexus
in Nevada or they have to register as a foreign corporation in another
state. The goal is to protect the Board of Directors and Officers from
being sued personally. You can not buy insurance that will protect you,
like forming a Nevada corporation, in reference to protecting your corporate
veil.
Now,
let’s look at the second great advantage to forming a corporation
in Nevada, and then having to register as a foreign corporation in your
home state.
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 know that Nevada is the hardest state 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 typically occur
in California courts. However, if someone tried to pierce the corporate
veil that would occur in Nevada. Now there are additional expenses to
travel to Nevada and 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 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 not California. If there is a challenge,
you would have the laws of Nevada in your favor. This may work to 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, would have to travel
to Nevada for that lawsuit to occur. That will also 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 LLCs? 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 we have shown that you can achieve three powerful advantages
to forming a Nevada entity and registering as a foreign corporation
in your home state, let’s cover what the extra investment may be
to obtain such protection. Keep in mind, you may not even have
to take these things into consideration if you have a business operation
in Nevada. First, the strategy:
- Form
a Nevada corporation then register it as a foreign corporation doing
business in your home state.
Here is what will be required when you form a Nevada corporation then
register to do business in your home state:
- NCP
as your Resident Agent
- Filed
articles on an expedited basis
- A premier
corporate record book
- File
the corporation’s list of officers
- A certificate
of good standing
- A state
business license in Nevada
- A federal
Tax ID Number
- Check
the entity name in your home state
- Complete
the paperwork to register your entity as a foreign corporation doing
business in your home state
Then
you will have to pay your home state foreign registration fees (these
are usually $100 more than if you filed an entity in your home state)
This
is usually only a few hundred dollars more than it would cost you to
form the entity in your home state. Now you see why small and large
companies are rushing to be domiciled out of Nevada!
You
are welcome to call our office directly for a FREE consultation at (888)
466-7566.
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