| Debunking the myths of Nevada corporations | | | | passed on to the shareholders of an |
| and analysis of pros and cons of forming a | | | | S-Corporation in Nevada will be taxed at both |
| corporation. | | | | the federal level and in the state where the |
| | | | shareholder lives (this also applies to other |
| After you have decided that incorporating is | | | | pass-through entities such as LLCs). |
| beneficial for your business, some people | | | | |
| consider incorporating in states outside of | | | | Thus, as indicated in the paragraph above, |
| their home state. Most notably, Nevada has | | | | you will not be able to legally gain the |
| been promoted by many "incorporating | | | | Nevada tax benefits if you form a Nevada |
| services" as having incredible benefits as | | | | pass-through entity such as a S-corporation |
| opposed to the client's home state. Other | | | | or LLC. However, a Nevada C-corporation can |
| states such as Delaware and more recently | | | | avoid the state taxes (remember that a |
| Wyoming have also received consideration for | | | | C-corporation is subjected to double taxation |
| incorporating. In some cases, depending on | | | | at the federal level). The way a Nevada |
| the facts of your business, there are some | | | | C-corporation operating in California could |
| benefits in forming an out-of-the-home-state | | | | be structured to minimize its taxes is as |
| corporation in states such as Nevada. | | | | follows: As a C-corporation, your company |
| However, in the majority of cases the | | | | will be stuck with double taxation at the |
| benefits of forming a Nevada corporation is | | | | federal level. Rather than withdrawing the |
| simply a myth and will often be more | | | | profits from the corporation, keeping the |
| expensive and troublesome than filing in the | | | | profits within the Nevada C-corporation will |
| company's home state. | | | | allow it to grow free of any state taxes. |
| | | | |
| Law of the Land: Foreign Entities | | | | Limited Liability Protection: Whether your |
| | | | company has greater limited liability |
| This may be a surprise to many, typically, | | | | protection in Nevada versus other states is |
| corporations will be governed under | | | | debatable. Many believe that Nevada state |
| California law despite being incorporated in | | | | precedence makes piercing the corporate veil |
| Nevada. Let's assume you do file a Nevada, | | | | much more difficult. Whether this is true |
| yet you operate all of your business in | | | | will depend on the facts of your case and how |
| California. Under this scenario, you are | | | | good your lawyer is, since the test for |
| deemed to be a "pseudo foreign" corporation. | | | | piercing the corporate veil in both states |
| If the corporation is a pseudo foreign | | | | are substantially similar (both California |
| corporation, California law in many areas | | | | and Nevada require a showing that a |
| will supersede the law of the state where the | | | | substantial injustice or perpetuation of a |
| company was incorporated in. (See California | | | | fraud occurred). However, in regards to |
| Corporation Code §2115(b)). Therefore, for | | | | directors and officer liability, Nevada law |
| companies entirely based in California and | | | | provides that directors and officers are not |
| doing business in California, practically all | | | | liable for any damages resulting from a |
| of the claimed benefits of incorporating in | | | | breach of fiduciary duty unless the breach |
| Nevada are out the window. It should be noted | | | | involved intentional misconduct, fraud, or a |
| that if a Nevada corporation operating in | | | | knowing violation of the law. (See Nevada |
| California fails to qualify as foreign | | | | Rev. Stat. §78.138(7)). |
| corporation, it may be subject to a number of | | | | |
| sanctions. (See California Corporation Code | | | | Jurisdiction: This can be good or bad for |
| §§2203, 2258, 2259). | | | | your company. If you are operating in |
| | | | California but are a Nevada corporation, the |
| Nevada v. California | | | | question is which state law takes precedence? |
| | | | As indicated above, in most circumstances, |
| The benefits typically touted by a Nevada | | | | your corporation will be deemed a pseudo |
| corporation are the following: lower costs; | | | | foreign corporation and thus be subjected to |
| tax savings; and greater privacy. But is any | | | | California's laws. So if you are sued, the |
| of it true? Below we will discuss some of | | | | lawsuit would likely occur in the California. |
| these issues. | | | | However, if the plaintiff attempts to pierce |
| | | | the corporate veil, the lawsuit may occur in |
| Expense: Contrary to what many people | | | | Nevada, thus the plaintiff would have to face |
| believe, it is more expensive to file in | | | | additional expenses to travel to Nevada to |
| Nevada than in California. Here are some of | | | | try the case. Likewise, you as the defendant |
| the additional expenses: the initial filing | | | | would be required to go to Nevada as well. |
| fee is more; the Statement of Information is | | | | However, if you enter into contracts with |
| much more; you will be required to file a | | | | others, your contract can include "choice of |
| Statement and Designation of Foreign | | | | law jurisdiction" provisions, which require |
| Corporation in California; and you will be | | | | that the contract falls under the laws of |
| required to hire a Nevada Agent for Service | | | | Nevada. Similarly, "choice of forum" |
| of Process each year. For large clients, the | | | | provisions in your contracts will require |
| additional cost (of approximately $500 more) | | | | your case to be heard in Nevada. |
| is not a big consideration, but for smaller | | | | |
| businesses every dollar counts. | | | | Privacy: Nevada is generally more restrictive |
| | | | than most states in sharing information about |
| Taxes: The tax ramifications is usually one | | | | its corporations with other states and the |
| of the most important reasons for deciding | | | | government. As such, many celebrities and |
| whether to incorporate and where. Nevada's | | | | high profile individuals seeking anonymity |
| secretary of state website says that Nevada | | | | often end up incorporating in Nevada. |
| has none of the following: (1) corporate | | | | However, both California and Nevada do not |
| income tax; (2) taxes on corporate shares; | | | | require its stockholders to be listed in |
| (3) franchise tax; and (4) no personal income | | | | public records. Further, Nevada does not |
| tax. So how does this actually play out? The | | | | share information with the IRS unlike |
| bottom line is if you are doing business | | | | California. But if a Nevada corporation |
| anywhere other than Nevada, you will still be | | | | conducts business as a pseudo foreign |
| required to pay taxes in the state where you | | | | corporation in California, it would be |
| are conducting business. So if you are | | | | required to disclose the information to the |
| operating and generating business in Nevada, | | | | IRS. |
| this can be a huge benefit, otherwise if you | | | | |
| are generating money in California, you are | | | | This article is not intended as a substitute |
| required to pay California's taxes. | | | | for legal or tax advice. The specific facts |
| Furthermore, any income earned by a Nevada | | | | that apply to your matter may make the |
| business and paid out to a resident of | | | | outcome different than would be anticipated |
| another state will be subjected to the | | | | by you. You should consult with an attorney |
| taxation of that state. Therefore, the income | | | | familiar with the issues and the laws. |