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Many California-based businesses have eagerly embraced the rhetoric regarding the tax and liability protections afforded by Nevada corporations and limited liability companies. Unfortunately, most of the misleading information have been fueled by the on-line marketing initiatives of local incorporation service organizations ("ISOs"), rather than through the legal and financial community. In fact, ISOs are not required to use the assistance of attorneys or tax professionals, and therefore have no ethical responsibility to the public to provide competent professional advice. While the "do-it-yourself" mentality may be advantageous in building a deck or installing a garbage disposal, such can cause serious consequences with respect to organizing a business entity. The public can be assured that the ISOs' revenues are based upon "cookie-cutter" transactions, leaving a wake of legal and tax exposure that may oftentimes prove more expensive for the unsuspecting customer.

Here are some common misleading representations touted by ISOs regarding incorporating or forming a limited liability company in Nevada:

1. Nevada has no state corporate income or franchise taxes;
2. Nevada has no tax on corporate shares;
3. Nevada has no succession or share disposition tax;
4. Nevada corporate stockholders are no required to be citizens;
5. Nevada stockholders and directors are not required to live or hold meetings in Nevada;
6. Nevada entities have no minimum initial capital requirement;
7. Nevada only requires the name and addresses of the officers, directors and agent for process in their public filings;
8. Nevada case law makes it difficult to pierce the corporate veil;
9. Nevada does not give reciprocity to the IRS; and
10. The identity of Nevada stockholders remains anonymous to the public (other than officers and directors).

1. Although Nevada does not institute a corporate income or franchise tax, the business will have to pay California income taxes for all revenues generated in California. More importantly, domestic California corporations only pay a franchise tax, which could be significantly less money than the California corporate income tax;
2. Although Nevada does not assess a succession or disposition of stock transfer tax, if the stockholder is a California resident (or domiciled here), they will be required to pay taxes on the gains attributed to such transfer;
3. California laws are similar for both foreign and domestic entities with respect to disclosure of the names and addresses of officers, directors and agents for service of process. The identities of shareholders and members are not required for public disclosure in California.
4. While the threshold burden of proof for piercing the corporate veil is higher in Nevada, as a practical matter, if a director/officer/shareholder/manager is found to be using the entity as an alter-ego to defraud third parties, most courts would likely pierce the veil. Common sense and prudence can afford adequate legal protection in California, and most negligence and gross negligence claims against such persons can be mitigated through indemnification and/or insurance.
5. Although Nevada may not have reciprocity with the IRS, any revenue generated within California would normally be shared with the IRS.

Therefore, we strongly recommend that if you are a business owner considering the formation of a legal entity, to contact us in conjunction with your tax advisor in order to assess the specific legal and financial implications of your business, to make wise decisions. After all, we understand that your business is your livelihood, and we care about its success.