It is obvious that state law has significant influence when it comes to corporate law. As a result, it often happens that a client will ask if he should create a “Nevada corporation” or form his entity in a different state. However, the reasons why many people perceive Nevada as a good option are not necessarily correct. To analyze which states entities are best incorporated in, you need to consider the types of liabilities that tend to arise in business and what benefit leveraging a specific channel would do to your particular deal. From my experiences, there are some common incentives that drive people who believe they should seek the most opportune incorporation status.
The first reason is that it is widely perceived as better for liability to incorporate in a state like Nevada, with the idea that Nevada has less liability than more liberal states such as California. While this may be true, it is flawed reasoning to believe that you will be able to reap the benefits of Nevada’s best laws simply by incorporating there. In reality, if you have a business in the state of California, but register it as a corporation in Nevada, the chances of your case ever occurring in Nevada are slim. For example, if you own a corporation in Nevada, but your main office is in San Diego, you are unlikely to go to court anywhere other than San Diego, which adheres to California law, not California law. from Nevada. What this means is that most external liabilities are going to occur in the state where you actually conduct business, not the state where you incorporate.
Therefore, to avoid general liability, there are not many advantages to be gained from out-of-state corporate registration. Also, doing this forces you to pay double annual fees, as you would still need to register your Nevada corporation in the state where you actually do business.
The second reason people want to incorporate in a state like Nevada is because there are certain states that do not require investors to disclose. The appeal of this is that by creating a Nevada corporation, you have the potential to circumvent your potential creditors by discovering that you own shares in a thriving Nevada corporation. The problem with this, however, is that in order to avoid disclosure that you are associated with a Nevada corporation, you must avoid being recognized as an investor and as an officer or director, and while Nevada does not require registration on the investor side, it does require registration. register of officers and directors.
Going unnoticed, so to speak, in a Nevada corporation would require you to hire both an officer and a director who would work for you and be listed on the annual list of officers and directors. When this practice occurs, the officers and directors are called nominee officers and nominee directors. However, the use of nominee officers and directors is not exactly the most desirable business approach. This practice can cost several thousand dollars each year and add substantial complication to their business. Also, there is a chance that by doing this, you may not be protected in the event of normal liability. While this process makes it more difficult for a creditor to reveal their assets, it does not prevent them from suing you and eventually discovering you and your entity. In short, trying to cover up your dealings is a complicated process whose end will not necessarily be justified by the means.
A third reason why Nevada is presented as a better jurisdiction is that this state has no corporate taxes or individual state taxes. But as with the previously discussed “benefits” from Nevada, there are also questions about this perceived benefit. In order for your business to take advantage of Nevada’s favorable tax laws, you must have an office in Nevada that is the primary or only office for your corporation. However, when your income is withdrawn from your corporation, the personal tax you pay is also the state you live in. Therefore, the only truly feasible way to avoid state taxes is to reside in Nevada and operate your business from a Nevada office, which, again, is often more trouble than it’s worth.
The last most common reason people believe it is better to incorporate in a state like Nevada is that they think they will have access to a more profitable shareholder law. Unlike the three reasons mentioned above, this fourth justification actually has merit. In Nevada, bylaws have the ability to be changed by only a majority of investors voting, allowing for corporate restructuring and major corporate decisions without minority investor approval. In terms of management rights, Nevada business laws are generally more favorable because there is no mandatory provision allowing cumulative voting as there is in California business laws. Also, in Nevada, companies can exchange shares for services in the future, while this is not the case in many other states.
If your company is going to have investors, then it may be worth the effort to seek incorporation in Nevada. Just keep in mind the first three reasons people believe Nevada is a better jurisdiction and weigh the fees associated with duplicating your filings. After doing these things, if you think you’ll have investors and can afford the cost of the extra hassle, then incorporating in Nevada might be worth it. However, the state does not necessarily have to be Nevada. There are other states that also offer similar advantages of incorporation. If you intend to have investors, you will most likely have an attorney to help you. In which case, you can seek their advice on which jurisdiction will be best for your business. However, for small businesses, it is generally more effective to incorporate in your own state and stay free from getting involved in the hassles of chasing the Nevada myth.