Myths of Nevada Incorporation
In the past couple of months, we’ve had several inquiries about whether to incorporate a new business in Nevada rather than Delaware or the home state of the business. In the last decade, both the state of Nevada and some internet “incorporators" have been actively promoting Nevada as the “Delaware of the West." Some of the benefits typically touted are (1) asset protection; (2) tax savings; (3) privacy; and (4) the establishment of a business court. Below, these claims regarding incorporation in Nevada are debunked.
(1) Asset Protection:
Some claim that Nevada state corporate law makes “piercing the corporate veil" more difficult. (“Piercing the corporate veil" is a doctrine courts use to hold shareholders of a corporation liable for corporate actions despite the general limited liability principles.) While it is true that Nevada courts have been more reluctant to hold shareholders liable for corporate actions than some other states, a business is most likely going to end up court in the state in which it operates, not the state in which it incorporates. Further, although the law is not entirely settled, the courts in the place where you do business could apply its own state law rather than Nevada, especially if the only connection to Nevada is incorporation.
Many people also believe that under Nevada law, you can just hand your shares certificates over to a family member or friend in order to avoid the claims of creditors. The belief was based on a very limited understanding of how “bearer" shares work; and in any event, bearer shares have been illegal in Nevada since 2007.
(2) Tax Savings:
People believe Nevada is a better incorporation jurisdiction because there are no corporate taxes or individual state taxes in Nevada. However, unless your business is based in Nevada as well as incorporated in Nevada, Nevada law would only allow you to avoid state corporate income taxes on revenue derived in Nevada. If your business operations are in Ohio, you have to pay taxes in Ohio regardless of the state of incorporation. Likewise, when you draw your income from the corporation, you have to pay personal income tax in the state where you live. In order to enjoy of the seemingly-favorable tax laws of Nevada, you must live in Nevada, and your business must be based in Nevada and derive most of its income in Nevada.
It is true that the Nevada Secretary of State does not directly hand Corporate/Officer information over to the IRS. That being said, just because the Secretary of State is not giving the information directly to the IRS does not mean the IRS is not able to get the information they want. Most of this information is required in tax returns; and in the event of an audit or dispute, the IRS can, for the most part, subpoena the information it needs to make its case. Furthermore, because of Nevada’s promotion of the fact that it does not have an information-sharing agreement with the IRS, incorporating in Nevada when you are an out-of-state company may, in fact, make it more likely that you will get audited.
(4) Business Court:
In 2001, as part of Nevada’s effort to challenge Delaware as the state of choice for incorporation, Nevada established a specialized business court. Nevada’s business court was patterned after, and functions similar to, business courts established in other states. However, Nevada’s business court does not currently publish written opinions. Because of this, it lacks well-established case law interpreting corporate law and fails to provide the predictability and consistency that makes Delaware so attractive.
In sum, Nevada falls short of its promises for out-of-state business entities. The best course of action is to incorporate in either your home state or Delaware. If costs are your primary motivator, incorporating in your home state will most often be the best option since you’ll save on the out-of-state statutory agent fees.