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What About Nevada?
I’ve
been practicing law in Nevada for almost 25 years. In fact, my first job out of
law school, back in 1982, was an appointment as a judicial law clerk for one of
the justices of the Nevada Supreme Court. Since then, I’ve worked in various
capacities in Nevada, both for private law firms and in government – most
recently, as Chief Deputy City Attorney in Reno. I know a lot of the players in
politics, the legal community and the judiciary.
Nevada’s a great place. Its
history is full of colorful characters, from Mark Twain, who first sharpened his
pen at the Virginia City Territorial Enterprise newspaper, to Tony “the Ant”
Spilotro, a now-deceased mobster whose life was portrayed in the film “Casino,”
starring Joe Pesci and Robert De Niro. Nevadans have historically had a pretty
libertarian “live and let live” attitude about most things, and have had little
use for what they see as intrusive governmental meddling into their affairs, be
they personal, financial or moral. That attitude has been reflected for years
in Nevada’s corporate laws, which have historically been touted by everyone from
the Nevada Secretary of State to a rash of “corporate service providers” as the
last bastion of financial and corporate privacy. For years, folks from all over
the U.S., as well as internationally, have been establishing Nevada corporations
in order to take advantage of the anonymity afforded by Nevada’s laws.
It appears that the salad days of
Nevada’s corporate industry may be coming to an end. A while back, USA Today
ran an article by Kevin McCoy under the headline “Corporate Owners Hide Assets,
Identities,” (found at
http://www.usatoday.com/money/companies/regulation/2007-02-23-tax-havens-usat_x.htm)
in which the antics of several Nevada corporate hustlers were covered, chief
among them Bill Reed, his second in command, convicted felon Rick Neiswonger,
and their company, Asset Protection Group (APG). APG has a sad and sordid
history. Reed, a former lawyer from Colorado (who resigned his bar membership
with charges pending against him), recruited almost 2,000 “representatives” of
his APG company (each paying almost $10,000 each for the privilege) to sell an
“asset protection program” that relied on nominee officers and directors (Reed
would act as the company’s designated representative on all required corporate
filings), “friendly liens” (Reed would set up liens against one’s property, with
no consideration for those liens), anonymous bank accounts (Reed would act as
the signatory on the corporation’s accounts so that the corporation’s real
owners wouldn’t have to disclose their identity), and so-called “bearer shares”
(a convoluted concept in which a corporate share certificate made out to
“bearer” was touted by Reed and APG as being “just like cash” – it isn’t, by the
way). Last year, a federal court in Missouri, at the behest of the Federal
Trade Commission (FTC), shut down APG, Reed and Neiswonger, and appointed a
receiver to take over the company, which has subsequently stopped doing business
altogether.
To add even more spice into the
soup that APG has found itself in, the U.S. Justice Department, on behalf of the
IRS, has also filed suit against APG, adding claims relating to tax evasion.
It’s a full-scale mess.
McCoy’s article didn’t stop at
just exposing Reed and APG, however. It pointed out the fact that a
multi-agency U.S. Money Laundering Threat Assessment, issued in 2005, cited
Nevada as one of the states with laws most conducive to anonymous corporate
ownership used in money laundering schemes. In addition to this, an IRS report
issued last November cited Nevada as one of the jurisdictions most commonly used
by “non-filers, fraudulent taxpayers, abusive promoters and under-reporters” to
evade taxes. (See the report at
http://hsgac.senate.gov/_files/STMTBurgessIRS.pdf). Additionally,
some financial investigators have reported that ownership in a Nevada
corporation now automatically raises suspicions about the owner’s motives and
honesty – at least unless the owner has some connection to Nevada other than
simply wanting to remain anonymous under Nevada’s laws. Although it breaks my
heart to admit it, it looks like Nevada’s corporate reputation is starting to
suffer.
In an apparent attempt to salvage
Nevada’s corporate reputation from the wreckage that hustlers, thieves and
shysters have left behind, the Nevada legislature, in its 2007 session, took
some steps to change Nevada’s corporate laws – outlawing so-called “bearer
shares,” giving the same charging order protection to Nevada corporations as it
does to Nevada limited liability companies and limited partnerships, and making
it easier for law enforcement officials doing criminal investigations to find
out who actually owns a Nevada corporation.
All of these efforts may be “too little, too late,” however. Despite the
legislature’s efforts, it appears that the “Nevada hustle” continues unabated.
Neither new Nevada corporate laws nor APG’s meltdown have stopped some members
of the Nevada “corporate industry” from chugging along, continuing to peddle
Nevada as the “end all, be-all” for domestic (U.S.-based) asset protection, and
touting Nevada’s corporate laws as the strongest in the nation when it comes to
privacy and bulletproof asset protection. These promoters either ignore or
downplay any negative stigma attaching to Nevada corporate entities, as well as
the recent legislative changes to Nevada corporations law.
So, what’s the truth? Does Nevada
really provide the best domestic asset protection? Should everyone establish a
Nevada corporation, as advised by some Nevada corporate promoters?
One answer can be found in the
U.S. Chamber of Commerce’s State Liability Systems Ranking Report for 2007, in
which a survey was taken not only of each state’s statutes, but also of the
competence of its judges, the likelihood of summary judgment being granted in
favor of a corporation, the state’s history with regard to upholding corporate
veil protection, findings on class action suits, awards of punitive damages and
a number of other factors. Nevada ranked 28th in the survey.
(Delaware ranked first, where it’s been for some time). See
http://www.instituteforlegalreform.com/lawsuitclimate2007/best_to_worst_poster.pdf
Looking at this, one might
come to the conclusion that Delaware – not Nevada – is the perfect place to
incorporate your business. But this misses an important point. At least nine
times out of 10, the best place to incorporate one’s business is generally in
the state in which your business is headquartered. Thus, if your corporate
headquarters are in Delaware, you are probably best off incorporating (or
establishing a limited liability company – LLC) in Delaware. If your business
is headquartered in Nevada, you are probably best off establishing your business
in Nevada. If in Missouri, Missouri … and so on. Why is this?
First of all, the statutes of each
state can usually be superceded or at least advantageously augmented by a
well-written operating agreement (in the case of a LLC) or, to a lesser degree,
carefully drawn corporate by-laws (in the case of a corporation). Thus,
regardless of how a state’s business entity code is written, the defining
documents for a business entity can usually establish what the owners want to
accomplish – and provide excellent asset protection – without resort to that
state’s “default” statutes.
Second, when courts are trying to
determine whether to pierce a business’ corporate veil, they will generally
apply the law of their jurisdiction – not the laws of the jurisdiction where the
entity was established – to figure out whether the owner will be held personally
liable for a business entity’s actions. Thus, if you happen to get sued in
California, for example, don’t count on Nevada’s laws to protect your Nevada
corporation from attack in California. Your California judge will most likely
be looking to California law and California public policy to decide whether your
Nevada corporation will be protected. Establishing your corporation in Nevada
generally isn’t going to help you much if you happen to live in – and get sued
in – another state.
Third, it’s an administrative and
financial hassle to establish and maintain a corporation in another
jurisdiction. If, for example, you live in Utah but your corporation is
established in Nevada, you’ll have to qualify your Nevada corporation to
business in Utah. You’ll have to pay fees in both Nevada and Utah, and there
will be some other filings you’ll have to make as well (I don’t have space to
get into the tax ramifications of this arrangement except to say that you may
end up spending far more in tax planning and filing fees than you could ever
hope to save by this “multiple filing” scenario).
Don’t get me wrong. I’m not down
on Nevada. I love the place. I love practicing law there. It’s a great place
to establish your business … if you live in Nevada, work in Nevada, have your
headquarters in Nevada, have a business operation in Nevada or own property in
Nevada. As time goes on, I have every confidence that Nevada will be able to
weather this storm, enforce its new corporate laws, continue to put some
badly-needed controls in place, and come out stronger and better. Meanwhile, if
you’re looking for that magical kingdom where all of your dreams will come true
and you’ll live happily ever after without fear or problems, you won’t find it
in Nevada. You might try Disneyland.
Randall K. Edwards practices law in
Nevada, Utah, California and Arizona, with his primary office located in Salt
Lake City. |
