What about Nevada?

Date : 30-Aug-2007

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. I also have a passing familiarity with Nevada law.

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. Last week, USA Today ran an article by Kevin McCoy under the headline “Corporate Owners Hide Assets, Identities,” in which the antics of several Nevada corporate hustlers were uncovered, chief among them Bill Reed, his second in command Rick Neiswonger and their company, Asset Protection Group (APG). Regular readers of this newsletter are familiar with the APG's 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 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 shut down APG, Reed and Neiswonger, and appointed a receiver to take over the company, which has subsequently stopped doing business altogether.

McCoy's article didn't stop at just exposing Reed and APG. 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. 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.

Despite all of this, it appears that the “Nevada hustle” continues. APG's meltdown hasn't stopped 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 attached to Nevada corporate entities.

So, what's the truth? Does Nevada really provide the best domestic Asset Protection? Should everyone establish a Nevada corporation, as advised by the Nevada corporate promoters?

One answer can be found in the U.S. Chamber of Commerce's State Liability Systems Ranking Report for 2006, 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 37th in the survey – in the “worst” category. (Delaware ranked first, where it's been for some time).

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 resorting to that state's “default” statutes.

Second, when courts are trying to determine whether to pierce a business's 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 do 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. I have every confidence that Nevada will be able to weather this storm, put some controls in place, and come out of this 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.

ABOUT THIS EDITOR:

John Dietz is a strategic advisor at Trustmakers.com with a passion for client solutions that can encompass your business, your real estate, and your personal assets. Mr. Dietz serves to educate you on the latest in asset protection planning.

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