Nevada Corporations: Myth vs Reality

nevadaYou may have heard a lot about Nevada billed as the ultimate solution for incorporation. In theory, it sounds great – asset protection, privacy protection, and tax benefits all rolled into one.

Unfortunately, most of the people still pushing this concept either have outdated information or are trying to con you out of some extra fees.

In recent years, the state has taken quite a beating. It’s not the do-all end-all it once was.

Usually when people want to form a Nevada corporation, they’re after these benefits:

1. To save on state income taxes, and/or
2. To conceal ownership of the company

Sometimes people also say they want their Nevada corporation because of the state’s excellent entity laws or they want to utilize what’s called a “series LLC.”

On the surface these sound like great reasons, but the reality reveals a dangerous half-truth. To really understand if a Nevada corporation is right for you, we need to look at each of the benefits in more detail.

Myth #1. To save taxes

Reality: If you are not based in Nevada, a Nevada corporation will only allow you to dodge income taxes on revenue derived from Nevada, or other states that do not have income tax, or foreign countries. U.S. law says that if you have a Nevada corporation but also a physical location in a state that has an income tax, then the state with the income tax can tax all income derived within its borders.

That’s why stores and other kinds of businesses that rely on their physical presence to make money are not good candidates for Nevada corporations. If you have a retail clothing store in Arizona, you’ll still have to pay Arizona state taxes regardless of your Nevada setup.

Don’t try to weasel around this – it’s not worth the heavy interest and penalties they’ll sock you with when discovered.

Myth #2. To conceal ownership

There is nothing wrong with wanting privacy. In fact we have a whole course dedicated to that very subject called “The Perfect Privacy Solution.” But if you hide your ownership of a corporation for devious purposes and end up in court, you’ll have some explaining to do before the judge. If you can’t convince him that you weren’t trying to do anything illegal, then you run the risk of the court piercing your corporate veil which means you could be sued personally for debts and liabilities.

It was once said Nevada corporations offer decent privacy protection because historically they’re the only state not to voluntarily share tax information with the IRS. It was also a little more difficult to find out who the real owner of the corporation actually was. Some people took that as a green light to do whatever they want – and most ended up in hot water. Don’t you be one of them.

The thing that helped with this in the past were “bearer shares” which are basically shares of company stock that are owned simply by someone possessing them – much like how the “owner” of a $20 bill is whoever has it in his pocket at the time. But since July 1, 2001 bearer shares have been outlawed in Nevada.

There are structures that allow for better privacy protection than the norm, but you MUST have a legitimate “business purpose” for using them! Courts will not accept “to minimize taxes” or “privacy” as a legitimate purpose. It’s got to be something else that fits in with the scope of your operation. For example, since I own a publishing company that sells to countries all over the world, that could be seen as a “legitimate business purpose” for a different type of ownership setup.

Myth #3. Best corporate laws

Technically speaking, Delaware ranks #1 in the United States for perceived fairness of its corporate laws. That’s one of the reasons why you see so many huge companies incorporated there.

Corporations are only allowed to do business in states which they are incorporated or qualified. So if a Nevada corporation is wanting to do business in say, New York, it’s got to qualify by filing a registration statement with the New York Secretary of State. And that goes double for real estate businesses because you can’t hold real estate in a state where you’re not qualified to do business.

So what happens if your business venture is deemed “unqualified” by a court? Well, they just ignore your corporate structure and rule as if it never existed. As you can imagine, that opens up all the assets you own personally to the circling vultures waiting to pluck you dry.

But even if you do qualify to do business in other states, it will be THEIR state laws, and not Nevada’s, that will govern the facts of your case. In other words, any secrecy or privacy protection from Nevada will not apply.

Nevada state law won’t help you in federal court either, because of what’s known as the Supremacy Clause in the United States Constitution. Remember, the Confederacy LOST the Civil War, so if you get sued in federal court it is federal law that applies.

Myth #4. Series LLC

Presumably this is a setup some have touted as a way to segregate and spread out liability over each series LLC that operate in the same state, as long as all activities take place in the state of formation, the plaintiff is in the state of formation, and the lawsuit is filed in the state of formation.

This is uncharted legal territory I’d just prefer to stay out of because there hasn’t been enough precedent court cases on which to base any solid plan of protection. It’s foolish to hope something unproven will work when you could just spend a little more money for an additional LLC to hold assets.

For more information on incorporating, funding, and running your business with the least amount of legal hassle, check out our “How To Outswim The Sharks” package. It will arm you with the legal tools to survive and thrive in our modern-day sue-happy society.

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