False and Misleading Claims Regarding Nevada Corporations

A description of fraudulent or misleading marketing schemes or mis-used strategies in asset protection planning.
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False and Misleading Claims Regarding Nevada Corporations

Postby Riser Adkisson LLP » Fri Mar 13, 2009 9:23 am

Nevada Corporations

Many groups sell Nevada corporations as the “ultimate” asset protection device. Indeed, some groups even sell franchises that allow the average Joe with no experience or training to become an “asset protection consultant” and start selling Nevada incorporation services to their buddies.

The Pitch

The pitch of these groups is usually the same and focuses on Nevada allowing bearer shares and having a higher degree of secrecy and privacy. The claim is made that since the corporation has bearer shares that nobody can know who owns it. This is enhanced by the fact that Nevada gives some protection to the identities of the ownership of the corporation.

The Truth

While all this sounds good, it does not mean that the owners of the corporation can be kept hidden or that the corporation will offer special protections to either the owners of the corporation or the assets held within it. Indeed, as will be shown there are absolutely no advantages to using a Nevada corporation for somebody living outside of Nevada, or who get sued in federal court. Even within Nevada, the special benefits offered by the Nevada corporation are highly questionable.

Additionally, those who sell Nevada corporations do not fully disclose the tax effects of what they are selling – which is not surprising since they usually do not understand those tax consequences themselves (and have no education or worthwhile training on these subjects). Thus, somebody who purchases a Nevada corporation from one of these so-called “asset protection consultant” groups is probably putting themselves at risk of doing something that will unnecessarily cause them taxes down the road.

Bearer Shares

Contrary to popular misconception, the Nevada corporation statutes do not specifically authorize bearer shares. Thus, whether Nevada law even currently allows the issuance of bearer shares is a mystery, but certainly the lack of specific statutory authorization means that there is no strong public policy in favor of allowing bearer shares which are widely regarded with disrepute in nearly all other jurisdictions. Since subsequent court decisions may determine that Nevada does not allow bearer shares, and since the Nevada legislature may soon clarify the issue by disallowing bearer shares, they should be avoided. Indeed, the laws of other states that specifically disallow bearer shares may operate to disregard Nevada bearer share corporation in those states. Bearer shares should also be avoided for the other reasons which follow.

Bearer shares simply do not offer the level of secrecy claimed by the promoters. First, creditors will ask at a debtor’s examination a question like “In the last three years, have you ever held shares in any corporation?” If you ever held bearer shares during this time, you would have to answer “Yes” or else you would subject yourself to perjury.

Second, if the court cannot determine who holds the bearer shares it can simply impute ownership to the person or persons most directly involved with the corporation. Thus, if a person signs on a corporation’s bank account, that person can simply be deemed to be the owner of the corporation whether or not the bearer shares can be found.

Also, if the bearer shares cannot be located, the court may be able to simply deem the corporation to be dissolved.

If the bearer shares are located, then the court can allow questioning to determine the chain of ownership, and whether any transfer of shares amounted to a fraudulent transfer.

Then, there is this nasty little secret about bearer shares: Every time that bearer shares change hands, it is either a sale or a gift giving rise to tax consequences! So, let’s assume that a corporation has $100,000 in assets, and that the federal gift tax rate is 50%. If Dave gives his shares to his friend Bill, then Dave just triggered the federal gift tax and now owes the IRS taxes for $50,000. If Bill later gives the shares back to Dave, then another $50,000 is due.

If the bearer shares are sold instead of gifted, then there might be capital gains or losses. But however the transaction is characterized, there is now an IRS reporting requirement, meaning that IRS forms are due, and further meaning that a creditor can track those forms.

The upshot is that bearer shares are not a good thing, but a bad thing that should be avoided. Indeed, ALL of the top asset protection planners warn that bearer shares are a bad thing and should be avoided. Indeed, even most of the better offshore jurisdictions have eliminated bearer shares because people mess up with their misuse so badly.

Qualification to Do Business

No corporation can do business in a state unless (1) it is formed there, or (2) it is qualified to do business there. Thus, if a Nevada corporation seeks to do business in Oregon, it must qualify to do business in Oregon, by filing a registration statement with the Oregon Secretary of State. This is especially true if real property is involved, as it is absolutely impermissible for a corporation that is not qualified to do business in a state to hold real property there.

If the Nevada corporation does not qualify to do business in the state where it does business or holds property, then the state will simply ignore it as if it never existed and impute ownership to the owners.

However, once the Nevada corporation qualifies to do business in a state, then it is governed by that state’s corporation laws, and not Nevada’s. Thus, none of the secrecy or privacy provisions of Nevada law will apply out of state!

What are the costs of qualifying a Nevada corporation to do business in another state? Usually, the same costs that it would be to just form a completely new corporation in that state anyhow. So, the only real effect of using a Nevada corporation outside of Nevada is that you have doubled your annual registration fees, as well as your resident agent fees, without gaining any advantage at all over just filing a corporation in your own state in the first place!

Not surprisingly, almost none of the “asset protection consultant” groups tell their “consultants” this little tidbit of information, and thus they never pass it on to their customers. Usually, only a couple of years down the road to the clients figure out that all they have done is to impose an additional layer of fees over what they would have just paid in their own state anyway, without any increase in asset protection.

Is a state outside of Nevada required to apply Nevada law to resolve the case. NO! Some Nevada corporation agents falsely imply that if the Nevada corporation gets sued outside of Nevada, that the other state will have to apply Nevada law. This is simply not true. While the court's of most states will give comity to the choice of law as to internal disputes of the corporation between shareholders or officers, the courts of non-Nevada states are simply not required to apply Nevada law to the lawsuits of third persons outside of Nevada and who did not consent to be bound by Nevada law. It is for this reason that Nevada law will almost never apply to tort and negligence claims outside of Nevada.

Federal Courts

The federal courts are governed by the Federal Rules of Civil Procedure, and really couldn’t give a flip about contrary state law (and don’t have to under the Supremacy Clause of the U.S. Constitution). Thus, if you get sued in federal court don’t expect much help from Nevada law.

Full Faith & Credit

Nevada is bound to recognize the judgment of other states, and so therefore if a judgment is entered against the owner of a corporation in Utah, the judgment would be enforceable against the owner’s stock in a Nevada corporation.

Avoiding State Taxes

Another sales pitch of Nevada corporations is that they can be used to avoid state taxes. First, see the “Qualification to Do Business” problem, above. Second, the states are wise to arrangements where somebody living in, say, California attempts to avoid taxes by using a Nevada corporation. These states are now requiring disclosure of these arrangements, and if you get caught the interest and penalties will be bad.

Summary

Despite what the promoters say, Nevada corporations are not a panacea and indeed may cause more problems and expenses than if a corporation was just formed in the state of the owner’s residence. Indeed, most of the time people who need corporations (or limited partnerships or LLCs to which all this same analysis applies) should just form one in their own state and say “No Thanks” to Nevada corporations – unless of course you live there.

The amazingly misleading – and sometimes fraudulent – claims made to sell Nevada corporations:


CLAIM: No corporate income tax

Most states don’t impose a corporate income tax either.

Also, this only helps if the corporation is doing business in Nevada. If the business is doing business in, say, California, then the business must report its income to California or else the business owner has committed felony tax evasion as to the California taxes.

CLAIM: No information sharing with the IRS

So what? For the corporation to open a bank or financial account, it will have to have an EIN which is issued by the IRS. Once this number is issued, then the IRS is aware of the existence of the corporation and will demand annual tax returns.

Also, nothing prevents the IRS from raiding the corporate offices of your corporation services provider to gather information on tax evaders, as happened in the U.S. v. Terry Neal, et al., case which involved Nevada service provider Laughlin & Associates.

CLAIM: No Franchise Tax

Other states have no franchise taxes.

However, this is only an advantage if the corporation is only doing business in Nevada. If the corporation is doing business in a state that has franchise taxes, then the corporation will have to qualify to do business in that state and pay franchise taxes anyway.

CLAIM: Information relating to owners of corporations not listed in Nevada public records

Not aware of any state that gathers and publicly lists such information. While some states publish the names of corporate officers or directors, most states don’t.

CLAIM: Liability protection for owners of business against liabilities of business

Every state’s laws offer this protection too.
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