NEVADA CORPORATIONS

CORPORATE ADVANTAGES

Corporate laws in Nevada have many advantages over similar corporate laws of other states, and are now far more liberal. In the 1990's, a decade of change, Nevada's Legislature made changes which transformed Nevada into a more attractive place to incorporate than Delaware, the traditional stronghold of corporate charters. Nevada has become "the Delaware of the West". Policy underlying the liberality of Nevada's Corporations Act was deemed necessary by Nevada's lawmakers to encourage prospective incorporators (those who start up corporations) to incorporate in Nevada for business, and tremendous tax savings. Recent changes by the Nevada Legislature have lessened corporate requirements even more in an effort to make this State the most attractive state in the United States in which to incorporate.

WHAT IS A CORPORATION?

A "corporation" under the law is an artificial "person"; a legal entity created by authority of legislative enactments, called statutes. A corporation can be comprised of a single person and his or her successors, being the incumbents of a particular office. However, these entities ordinarily consist of associations of numerous individuals. The corporation exists under a special statutory denomination, regarded in law as having a personality and existence distinct from that of its members. A corporation, by the same statutory authority, is vested with continuous succession, irrespective of changes in membership. Its continuation can be either in "perpetuity", or for a limited term of years, and of acting as a unit or single individual in matters relating to the common purpose of the association, within the scope of the powers and authorities conferred upon such bodies by law. Dartmouth College v. Woodward, 17 U.S. 518, 636, 657, 4th L.Ed. 629; U.S. v. Trinidad Coal Co., 137 U.S. 160, 11 S.Ct. 57, 34 L.Ed. 640.

HOW IS A CORPORATION FORMED?

Corporations are formed by filing its "Articles of Incorporation", in the office of the Secretary of State. Articles are the formal written basis for the entity. Articles of Incorporation must contain certain specified information, as required by state law. The articles of incorporation are a public document. The fact that this document is public, means that any third person may obtain the information contained therein by requesting a copy from the Secretary of State. However, in Nevada no shareholder information - none of the shareholder names, addresses or the number of shares owned, may be obtained from the Nevada Secretary of State. Information on the corporation's officers, directors, and even a copy of the Articles of Incorporation may be divulged to inquiring parties. This is important today, where we are in the age of the Internet and World Wide Web, and persons searching the web might be able to ascertain ownership information (if records were kept by Nevada) from almost anywhere on Earth.

WHAT BUSINESSES MIGHT BENEFIT FROM OPERATING AS A CORPORATION?

Corporations are one of several different types of business forms, but this form must be considered as the entity of choice when the operation of the business might create a liability to third persons, as well as where incomes, profits and losses are at certain levels. Then, it becomes more effective, from a tax perspective, to operate as a corporation as opposed to another business form. As to third party liability, a corporation provides a "shield" or a "veil" which stands between the shareholders of the company (its owners) and the outside world, which insulates or protects the shareholders from individual liability or personal financial responsibility for, e.g. defective products sold by the company, or other liabilities. In a corporation, the liability exposure of a shareholder is limited to the amount of his or her investment in the company, only. Personal jurisdiction over a shareholder cannot be obtained by the injured or damaged third party.

CORPORATE TAXATION

A full discussion on corporate tax law and related issues is beyond the scope of these materials, and this seminar. The following is a brief perspective of some primary tax considerations. Please consult with your tax advisors or a certified public accountant.

However, a clear benefit here is that at present there is no Nevada State taxation on the shares held by the Shareholders of a Nevada Corporation, whether the shareholders are residents or non?residents. There is no Nevada Corporations Tax, as there is, for example, in California. There are two corporate Classifications under Federal Tax Law; Sub?chapter "C" and Sub?chapter "S" corporations. Sub-chapter "C" is the status a newly formed corporation will take, by default, without formally electing to be treated, for tax purposes as anything else. In other words, without any further election, a newly formed corporation will remain a Sub?chapter "C" company. In order to obtain the status of Sub?chapter "S", within a certain period following incorporation, an Election form must be filed with the Internal Revenue Service which results in the corporation being able to take advantage of the Sub?chapter "S" tax statutes. Essentially, Sub?chapter "S" election results in income passing through to the shareholders directly, such that the income is taxed but once, at the shareholder's taxable rate. To take advantage of Sub-chapter "S" it is important to remember that an affirmative act is required; filing the form with IRS.

Unlike the flow?through nature of a Sub?chapter "S" corporation, income to a "C" corporation is taxed twice. It is first taxed when received by the company. At this point, it is taxed at the corporate tax rate. However, income is taxed a second time, when distributions of that income, either by salaries or dividends are paid to the shareholders, which income will then be taxed a second time, at the individual shareholder's rate. Sub?chapter "S" corporation income is taxed once, at the individual shareholder's tax rate. It is also important to know, that unlike other states, Nevada corporations are not saddled with succession, income, stamp, franchise, license or transfer taxes of any kind.

WHAT ARE THE KEY FACTORS IN CONVERTING AN EXISTING BUSINESS TO A CORPORATE FORM?

As with a Limited Liability Company (LLC below), the most significant considerations in changing the business form are those related to the tax consequences. These relationships will vary depending on the present form of the business entity, for example, whether the business is presently a sole proprietorship, partnership, etc. The conversion of one business form to another should be dealt with by legal and tax professionals, as it is a decision that one should not make lightly, but which should be made after a wide variety of considerations have been addressed and analyzed.

Sub?chapter "S" tax law contains a limitation on the number of shareholders of the corporation. Sub?chapter "S" corporations are limited to no more than 35 shareholders, so the Sub-S form may be best suited for small family run or operated businesses, companies which are to be "closely held" corporations. Closely held companies have restrictions on the transferability of shares of stock. The Sub?chapter "C" corporation has no such restriction. If it is believed that the number of shareholders may exceed 35, then the "S" corporation is not an alternative, and the owner may be compelled to do business in a "C" corporation, or to recognize that a conversion from the "S" form to the "C" form will be inevitable when the number of shareholders reaches 35.

As with the Limited Liability Company (LLC, discussed below), the ability to convert an existing business to a corporation is a pivotal consideration. With a new business, "conversion" is not an issue as a corporate form can be selected from the outset of the business. However, when relationships have already been developed in the existing business, these considerations must be reviewed closely to determine whether they will be affected by a conversion from one business form to another. The costs of a corporation are also important considerations, as the cost of doing business in a corporate form are greater than the costs of a partnership or sole proprietorship, and corporations are more regulated than other business forms.

IS A CORPORATION LIABILITY SHIELD EFFECTIVE IN ALL CIRCUMSTANCES?

Most experts agree that the shield from liability provided by a corporation is the most effective available, and is about the same as that provided by the LLC. There are certain instances where that shield from liability will not be effective. In cases where the officers, directors or shareholders of a corporation have perpetrated a fraud, or an intentional misrepresentation, or where they have ratified, acquiesced or agreed with those acts, performed by an agent or employee of the corporation, then the injured third party may have grounds to "pierce to the corporate veil". More information on the "veil" is found below.

Although there are no minimum capitalization requirements for a corporation in Nevada, for example, there are certain considerations and factors which will be reviewed by the courts in order to determine whether the corporate veil should be pierced or not. Capitalization of the company is a factor. If it is established that the corporation is merely the "alter ego" of its officers, directors or shareholders, (i.e. thinly or lacking capitalization) then liability may extend to the principals of the corporation, exposing them to personal liability. Remember, in the eyes of the law, a corporation is viewed as a "person". If corporate formalities are not complied with, the corporation may be looked upon as the alter?ego of its principals, or as a sham. Competent attorneys can help corporate owners, officers and directors from having this occur. Discuss these issues with the LoBELLO LAW FIRM, business and corporate attorneys.

In addition to the above, where fraud or intentional acts are at issue, the personal guarantee of an officer, director or shareholder (with authority to do that), for a contract of the corporation, will expose that individual to liability in the event of a breach of the contract, which has been personally guaranteed. Unlike an LLC, which is a relatively new business form, there is a large body of law, which has developed for corporations. Accordingly, there is a tremendous amount of legal guidance on a wide variety of acts or circumstance, which arise in the corporate arena. Sound legal advice is prudent, before such problems arise.

Finally, if your business involves the sale or distribution of products for sale to the public, one major area of consideration is the risk of personal liability exposure to consumers injured by defective products. In this litigious society, people will initiate legal proceedings and ask questions latter. Unfortunately, Nevada's product liability laws follow those in the rest of the country in that all entities in the chain of manufacturing and distribution can be named as defendants, and are therefore potential targets for an injured party.

The protection afforded by doing business as a corporation is that exposure for tort liability would generally be limited to the extent of your investment (as a shareholder) in the corporation. In essence, the corporation acts as a shield between an individuals' personal assets, and the plaintiff in a product liability lawsuit. A competent attorney can provide information on how the structure of the corporation should be maintained in order to limit or eliminate, the risk of personal liability exposure.

However, there are risks in the corporate area as well. For example, it is never wise to begin a corporation on a "shoe?string" budget. If the corporation is capitalized too "thinly", with equity capital (your money) as compared to debt capital (borrowed money), a court could determine that your corporation is your alter?ego or that it is a thin corporation, and order that you be held personally responsible to creditors. Also, and many people who form both corporations and LLCs forget this aspect, it is very important to comply with all corporate formalities, as a failure to do so, and attending to the separateness aspect, could result in a "piercing of the corporate veil", by the courts. This means that if a corporation, for example, has never been adequately capitalized and properly operated to protect the interests of creditors, the courts can take away the veil of limited liability that normally protects the stockholders.

WHAT ARE THE CORPORATE REPORTING AND OTHER REQUIREMENTS?

Under Nevada corporate law, there are no annual reports required, as they are in certain other states. Corporations are kept in good standing merely by having your attorneys prepare and annually file a list of officers and directors with their mailing addresses and by making sure that there is a resident agent who has been appointed for the service of process in this state. The LoBELLO LAW FIRM provides this service to corporate clients and acts as the Corporation's Resident Agent for service of process on the Corporation, as required by law. As stated above, in Nevada third parties cannot gain information on who the shareholders of a Nevada Corporation are. In other states, this information is easily available with a simple inquiry to the Secretary of State. With The LoBELLO LAW FIRM as resident agent for service of complaint, the lawsuit is served first on your attorneys.

The filing fees of new or amended articles of incorporation are nominal and vary in accordance with the total and value of the authorized capital stock. If necessary, there are ways in which the filing fees can be kept at a minimum, but such a decision must be based on a sound analysis, and is based on the number and value of the shares. Shorting the corporation on the number and value of the authorized shares can cost more to correct later, than what was initially saved.

In Nevada corporations, neither the stockholders, officers nor directors are required to be residents of this state. They need not come to Nevada to form the company and annual and other meetings may be held within or without the State of Nevada. No initial capital is required; corporate voting may be cumulative; stockholders are generally not liable for corporate debt; and a corporate directors' judgment is conclusive as to value of property exchanged for stock in absence of actual fraud.

Stock and Bond Issue, par value and no par value common and preferred stock are permitted in Nevada. There are different classes of stock, with different rights accruing to each type that can be issued in Nevada Corporations. Classes of a company's stock may also be issued in series with varying rights, so that provision may be made for present and future financial investment and business contingencies. Corporations may merge or consolidate with other corporations or even other business forms. Bonds and other evidences of indebtedness may be issued by a Nevada Corporation. Under Nevada Corporate powers, a Corporation may also carry on different kinds of business under one charter provided that the activity is permitted under that charter (Articles).

In Nevada there is no delay for incorporation. The legal organization of a corporation may be completed in one day through, an "expedited" process, requiring a nominal fee.

IS ANYTHING ELSE REQUIRED?

When a corporation is chartered, by filing the Articles with the Nevada Secretary of State, the entity has been formed, and that is it. The document which actually governs the operating and decision making processes, and powers and duties of officers and directors, as well as more mundane aspects such as the place of business and the bank or other financial institution to be used by the corporation are all contained in the By?laws. Bylaws, once prepared may always be amended by the directors. However, it is generally the Bylaws, which govern most of the aspects of corporate activities.

The Bylaws, much like the Operating Agreement of an LLC, or the Partnership Agreement in a Partnership, is the document containing the important details regarding day-to-day operations of the company. Bylaw should be drafted by one who is familiar with what the incorporators intend to actually do with the corporation, whether to invest in real estate, operate a hot dog stand, or offer securities for sale to the public, as each will require certain specific, and very different language in the Bylaws. When a problem or a power struggle in the corporation arises, the Bylaws are what will be looked at to determine the outcome, or at least as to how the problem should be addressed, and the more detailed the Bylaws are the easier the day?to?day operations will be.

If doing business in a corporate form is unfamiliar to the incorporators, another document, the Consent In Lieu of the First Meeting of the Board of Directors, may prove useful. This document provides that all of the preliminary business of the corporation has been done. This preliminary business is usually done by way of a formal "First" Meeting of the Board of Directors. However, if a person does not know or is not sure exactly what business needs to be attended to or discussed and resolved, conducting a formal "First" Board Meeting may be difficult. This is where the Consent in Lieu is useful; as it forms a record that all the preliminary business and decisions have been made and preliminary business is done. And, it is done without the formal meeting.

ONE MORE WORD ON FEDERAL INCOME TAXATION SAVINGS

The LoBello Law Firm can show you how in small corporations, stockholders can elect to be taxed as individuals rather than as a corporation. This is accomplished through the election of Sub?chapter "S" corporate tax status; and election made under the Internal Revenue Code. The tax savings are often considerable. Later the stockholders can elect to change back to the corporate rate if conditions change so that greater savings can be maintained.

CORPORATE SECURITY

A Corporation is not liable for the debts of a stockholder, and the stockholders are not liable for the debts of the Corporation. The advantages of this are obvious, and can sometimes be taken advantage of. If a corporation incurs a debt, makes a purchase, or enters a contract, and then defaults on the payment of the debt or the refusal to pay the obligation, typically shareholders, officers and directors cannot be held responsible for the debt. The corporation can fold up its tent, dissolve and wind up affairs, leaving the creditor seeking to enforce the debt. If there has been a fraud or any malicious intent underlying such a transaction, the corporation will not be allowed to stand in front of and protect those who have perpetrated the fraud.

CORPORATE CONTINUITY

As a final note, one of the best advantages of a corporation is that it typically has perpetual existence. Unlike an LLC, for example, which has a life span of generally up to 30 years (although it can be continued), the corporation is unaffected by death, insanity, insolvency, or criminality of its shareholders, officers and directors, and continues to conduct its business affairs from one generation to another. Only a concerted and planned dissolution of the corporation will affect the continuity of its existence.

e-mail: mlobello@lobellolaw.com

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