What A Tangled Web We Weave, When First We Practice To Deceive!

Date: March 16, 2006

Sir Walter Scott's oft-quoted observation above is just as true today as it was 200 years ago when he made it. If he were alive today, he might have been talking about Nevada corporations.

The bottom line, which I have nearly beaten to death, is that Nevada corporations stink as Asset Protection vehicles (except if you really need an entity in Nevada to actually do business!).

Despite my efforts, I still literally get hundreds of emails each month asking for my opinion on the use of Nevada corporations.

The catalyst for this bash at Nevada corporations is an email from a big shot promoter of them. In his email he stated:

“A Nevada corporation can be an excellent tool for privacy and Asset Protection. The key to making this work is to maintain control of the corporation without having ownership. This is done by issuing 13 shares (this gets you past the IRS "closely held corporation" restriction) of stock to different friends and family members. … Everyone who holds stock must sign a proxy letter that gives all voting rights to the Board of Directors and prohibits them from selling the stock without first offering it back to the corporation. Then, you setup your spouse as the only Director and yourself as the only Executive. You now have full control and zero ownership.”

This approach, like all approaches built on deceit, backfires when attacked.

Why does this stink? Simple: It is easily torn apart, and it forces you to lie.

This stinks because you must lie: In a debtor’s exam, the creditor’s attorney asks you who owns the stock. You pull out the stock book and show that the stock is owned by 13 of your closest friends and family. What you have done is turned them into co-defendants and co-conspirators with you in the follow-up fraudulent conveyance action. If you admit to being the real party in interest (aka the “big boss” or “equitable owner”), then your elaborate ruse is pierced, and the corporate stock is available to your creditor. If the judge thinks you are a real scumbag and actually have power over the corporation and its stock, he may order you to cause the corporation’s stock to be transferred to your creditor. If you refuse, you will probably find yourself living in a six-by-eight foot cell for refusing to honor the judge’s order.

It stinks because it is terrible from a tax perspective: Assuming you are “only” an employee of the corporation run by 13 of your closest friends and family, the only way you can extract money from the corporation is as salary. This is often the least tax efficient way to extract money from a corporation.

It stinks because it removes your financial upside: If you sell the corporation, the money must be paid to your 13 closest friends and family, the alleged “owners” of the corporation. Why would you spend your life building a business and not profit from its success? This is a huge price to pay for ineffective Asset Protection.

It stinks because it puts you in business with 13 friends and family members.

It stinks because it is complicated and simply doesn’t work. For the life of me, I can’t understand why people fall for this hooey.

Good Asset Protection is built on solid technology and NEVER forces you to lie.

WHEW, that felt good.

Now, go have a healthy and protected week.

ABOUT THIS EDITOR:

Rob Lambert, Founder and former law professor is considered to be foremost expert on tax compliant asset protection structures. A contributing editor to Lexus Nexus debtor creditors series of law books Rob's passion is implement client wealth plans that stand the test of time and hold up under duress.

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