It is clear that state law has significant influence when dealing with corporate law. As a result, it often happens that clients will ask questions about whether they should create a “Nevada corporation” or form their entity in a different state. However, the reason why many people consider Nevada a good choice is not necessarily the right one. In order to analyze in which state it is better for an entity to incorporate, you need to consider the types of liabilities that are likely to arise in business, and what use it would be for your particular transaction to take advantage of a particular channel. In my experience, there are several general incentives that drive people who believe they should search for the most appropriate circumstances of establishment.
The first reason is that it is widely considered preferable to include liability in a state like Nevada, with the idea that Nevada has fewer responsibilities than a more liberal state, such as California. While this may be true, it is a false reason to believe that you will be able to reap the benefits of better Nevada legislation just by entering there. In reality, if you do business in the state of California, but register it as a company in Nevada, it is unlikely that your case will occur in Nevada. For example, if you own a Nevada corporation, but its principal office is in San Diego, you will never go to court anywhere except in San Diego, which complies with California law, not Nevada law. This means that most external liabilities will occur in the state in which you actually conduct your business, not in the state in which you are incorporated.
Therefore, in order to avoid general liability, not much profit is derived from registering companies abroad. Plus, doing this requires you to pay a double annual fee, given that you still need to register your Nevada corporation in the state where you actually do your business.
The second reason people want to incorporate in a state like Nevada is because there are certain states that don’t require investors to be known. This held attraction is that in creating a Nevada corporation, you have the potential to avoid your potential creditors discovering that you own stock in a prosperous Nevada corporation. However, the problem with this is that to prevent it from being disclosed that you are associated with a Nevada corporation, you must prevent yourself from being recognized as an investor and as an officer or director, and while Nevada does not mandate registration on the investor side, it does require registration of officers and directors. .
Flying under the radar, so to speak, at a Nevada company will require you to hire an officer and director who will work for you and be listed on the annual list of officers and directors. When this practice occurs, officers and directors are referred to as nominal officers and nominal directors. However, the use of nominal officers and directors is not the most advisable business approach to take. This practice can cost several thousand dollars annually and add great complexity to your business dealings. In addition, it is possible that in doing this you may not be covered under normal obligations. While this process makes it harder for creditors to disclose your assets, it doesn’t prevent them from suing you and eventually finding you and your entity. In short, trying to cover up your business dealings is a complicated process that ultimately doesn’t have to be justified in any way.
A third reason Nevada is made a better jurisdiction is that this state does not have corporate taxes, or individual state taxes. But like the “benefits” discussed earlier in Nevada, there are also doubts about these perceived benefits. In order for your business to take advantage of the favorable Nevada tax laws, you must have an office in Nevada that is your company’s principal or sole office. However, when your income is withdrawn from your company, the personal taxes you pay are also the country in which you live. Therefore, the only truly viable way to evade state taxes is to actually live in Nevada and conduct your business outside of a Nevada office, which, again, is often more of a hassle than it’s worth.
The final most common reason people believe it is better to incorporate in a state like Nevada is because they think they will have access to more favorable shareholder laws. Unlike the three reasons above, this fourth reason actually has benefits. In Nevada, regulations have the ability to be modified only by the vote of a majority of investors, allowing corporate restructuring and important corporate decisions without the approval of minority investors. In terms of management rights, Nevada business laws are usually more favorable as there are no mandatory provisions that allow cumulative voting as is the case with California business laws. Additionally, in Nevada, companies are allowed to exchange stock for future service, whereas in many other states this is not the case.
If your company is going to have investors, then it may be worth the effort to seek incorporation in Nevada. Keep in mind the first three reasons why people believe Nevada is the better jurisdiction, and consider the costs associated with doubling your application. After doing these things, if you are confident that you will have investors and can afford the additional complication fees, then incorporating in Nevada can be well worth the effort. However, the state doesn’t have to be Nevada. There are other states that also offer similar incorporation advantages. If you intend to have investors, you will most likely be assisted by a lawyer. In this case, you can seek his advice as to which jurisdiction is best for your business. However, for small businesses, it’s generally most effective to incorporate in your own state and keep yourself from getting involved with the hassles of chasing the Nevada mythos.