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Prepared By: Melissa C. Marsh, Los Angeles Business And Corporate Attorney
Written: March 2009

Although there are situations were a Nevada corporation will best suit one of my clients, they are very rare. This article will dispel many of the myths and scams promulgated, but will also set forth some of the valid reasons to incorporate in Nevada.

Is a Nevada Corporation Right For You?

We have all heard the radio and television advertisements propounding the benefits of incorporating in Nevada and Delaware. They claim to have liberal incorporation laws and favorable tax policies. It is true that Nevada does have many pro-business benefits stemming from asset protection, strong privacy laws, and various tax advantages. But beware! While it is true that California law does not require a company to incorporate in its "home" state (where the business is actually located), there are dangerous pitfalls to incorporating outside of California if you live in California. This is primarily because California has long established case law that enables it to apply its laws to any corporation that is doing business in California.

Advantages to Incorporating In Nevada.

If you will be actually operating your business in Nevada, a Nevada corporation offers many advantages. What does this mean? If you will have an office in Nevada from which your services are provided, or a warehouse in Nevada from which your goods are shipped, you may be able to take advantage of Nevada's favorable laws. First, a Nevada corporation does not pay a state tax or an annual franchise tax. In California, any corporation doing business in the state of California is required to pay the minimum $800 franchise tax. Second, in Nevada it is extremely difficult for anyone to "pierce the corporate veil" and attach the personal assets of the shareholders of a Nevada corporation. Third, the Supreme Court of Nevada has a long history of consistently protecting the privacy of Nevada Corporate shareholders and directors, even when a Nevada corporation fails to adhere to basic corporate formalities. Unlike most other states, including California, Nevada does not require the shareholders of a Nevada corporation to disclose their personal information which enables them to remain virtually anonymous. That is so long as that Nevada corporation does not decide to engage in business in another state like California.

Why a Nevada Corporation Loses Many of its Advantages When it Does Business in California.

Under California’s “pseudo-foreign” corporation laws, once a foreign corporation (any corporation formed in another state) opens its doors to California, the corporation is required to register with California as a foreign corporation. A foreign corporation must qualify to do business in California when it engages in repeated and successive business transactions in California. The sanctions for failing to qualify, when required, include civil penalties and a bar against the use of the California court system. There is also a risk that the contracts and agreements entered into by a non-qualified foreign Nevada corporation doing business in the state of California may be rescinded, or cancelled by court order. To register as a foreign corporation, the Nevada corporation is required to pay California's franchise tax ($800 minimum), to apply and pay for a business license, and to disclose a list of its officers and directors. In effect, privacy is out the window and the foreign born Nevada corporation still must pay California's annual franchise tax. In addition to California's annual franchise tax, a Nevada corporation engaged in business in California must also pay Nevada's $225 annual filing and business registration fee (even if the Nevada corporation does not conduct any business in the state of Nevada). And finally, the Nevada corporation will have to prepare and file two state tax returns: one for California and one for Nevada. In essence, a Nevada corporation engaging in business in California will need to prepare all the corporate paperwork twice for two different states—Nevada and California. And, if the corporation ever ceases to do business, the corporation will have to file two sets of final income tax returns and two sets of paperwork (separately for both Nevada and California) to shut down the business in both states.

Consequently, many of the advertisements suggesting incorporation in Nevada and/or Delaware are scams and schemes that won't save you money or protect your privacy – to the contrary these schemes oftentimes lead to increased taxes and accounting fees. While it is true that California is one of the most restrictive states in which to do business, the rules governing foreign corporations are even more burdensome.

Conclusion.

For most small businesses, it is generally best to incorporate in the state where that business is based. Even though some factors favor incorporating in the "friendly" states of Nevada and Delaware (for public companies), it is often much more expensive and a greater hassle to incorporate a smaller business out of state. For all of the above reasons, proceed with extreme caution and consult with an attorney about the pros and cons of incorporating out of state before making your final decision.

If you have additional questions, or would like to discuss the possibility of incorporating your business in California, Nevada or Delaware with a Los Angeles, California business law attorney with 15+ years experience, please call Melissa Marsh at 818-849-5206, or schedule a telephone consultation for as little as $129 by completing our Telephone Consultation Request Form and Melissa Marsh will call you back at the time you select.

Related Articles:

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• S Corp or C Corp?
• S corp or LLC?
• Is a California LLC, or Living Trust, Better For Asset Protection?

Related Services:

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Ms. Marsh provides various low cost In House Counsel Plans designed specifically for the small business owner, and if you just have a few simple questions she provides a Telephone Consultation for as little as $129.

© 2009 Melissa C. Marsh. All Rights Reserved.