Beware Of The Nevada Entity Formation Scam
By Richard Keyt - 
Email Editor
Date : January 29, 2009
Dear Valued Reader,
We are all still barraged by clients and prospective clients with questions on using Nevada entities as asset protection vehicles [Rob’s comment: almost always a bad idea!]. In the course of following up on one question Rick shared his views on Nevada entities with me as well as some testimony from the IRS demonstrating that they are targeting Nevada entities. I asked him to pass the information on. Rick is a good lawyer I have known for quite some time. We are almost brothers because he got a tax LL.M. from New York University School of Law. The only thing which impresses me more is that he actually flew a F-4 Phantom II at over twice the speed of sound. That makes me jealous. Anybody who can do that has got to have a good handle on Nevada entities. Enjoy the article.
Rob Lambert
As a business attorney who has formed over 1,800 Arizona limited liability companies, a common question people ask of me is "Should I form my LLC or corporation in Nevada?" There is a lot of spin and misinformation about Nevada entities. Forming entities in Nevada has become a profitable business for some Nevada attorneys. Nevada entity formation is an especially profitable business for document preparers (non-lawyers who practice law without a license while the state bar associations wink).
I once had a man show me a set of multiple formation kits involving three Nevada corporations for which he paid a Nevada document preparer over $7,000.He told me that one corporation managed the operating corporation and that his name did not appear anywhere on anything. He was not a shareholder, officer or director. The asset protection plan was that the man would be named to the board of directors of one of the corporations one day a year. None of it made any sense to me. I explained that for any asset protection plan to work, it must have a business purpose. I asked the befuddled man how he would answer the following questions under oath on the witness stand at the trial where a creditor is trying to pierce the corporate veil and hold him liable for the debts of the company:
What was the business purpose of the multiple entity structure?
Why three corporations instead of one?
Why was he not a shareholder, officer or director of any of the corporations?
What was the purpose for him to be on the board of directors of one of the corporations for one day a year?
| Of course, the man could not answer any of the questions. Imagine how the man's total inability to answer these important and fundamental questions would impact the jury. The creditor's lawyer and witnesses will tell the jury that the real reason for the complex structure and for the ownership of the corporations to be hidden is to make it more difficult, expensive and time-consuming for the man's creditors to get his assets. |
When people tell me they want to form an entity in Nevada because they can hide the ownership of the company, I am reminded of a general asset protection rule I have heard an asset protection lawyer I know say many times: Simple and open is better than hidden and complex.
You can form a limited liability company in Nevada without disclosing the names of any of the owners. Hidden ownership is one of the main selling points of the Nevada snake oil salesmen.
The other big sales point is that Nevada does not have a state income tax. I try to talk people out of forming a corporation or an LLC in Nevada unless the company will actually be doing business in Nevada. For more on forming an entity in Nevada, see my article called "Beware the Nevada Limited Liability Company / Corporation Scam - The Elusive Hunt for Stealthy Entity WMDs (Weapons of Mass Deception)." Learn why the IRS has targeted Nevada entities. Read why the U.S. Chamber Institute for Legal Reform ranks Nevada 40th in a 2008 national sample of in-house general counsel or other senior corporate litigators asked to rate the states in terms of how reasonable and fair their tort liability systems are perceived by U.S. businesses.
For confirmation of my views about Nevada entities, my article contains enlightening quotes from nationally known asset protection attorneys Robert Lambert, Randall K. Edwards and Jay Adkinson. Randall K. Edwards is a business and asset protection lawyer who has practiced law in Nevada since 1983, but he calls 'em like he sees 'em. Mr. Edwards says, "I rarely recommend to any of my clients that they utilize Nevada entities, unless they have some connection to Nevada other than a perception that they will have better privacy or some tax advantage."
Until next week,
Richard Keyt
For more information on Richard, please click here.
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ABOUT THIS EDITOR:
University of the Pacific, McGeorge School of Law, Sacramento, California, 1979, J.D., Staff Member and Associate Managing Editor, Pacific Law Journal
01 JANUARY
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