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