Once you're operating your small business, you
should seriously consider the advantages of
incorporating in Nevada. Nevada is one of several
states that have no corporate income tax, but in
addition there is no state personal income tax, and no
franchise tax. Many large corporations use Nevada for
warehousing because there is no inventory tax. That
may seem beyond the reach of a small business but if
you organize your business as a Nevada corporation you
may then contract with a local warehousing and
fulfillment service to process and ship orders from
Nevada.
Already such companies as Citibank and Porsche
North America have moved their corporate headquarters
to Nevada. For as little as $2,500, you can enjoy the
same advantages as these corporate giants.
For many companies, the most important reason to
incorporate in Nevada is that there is no state income
tax. If you live in a high-tax state this can be
crucial. In California, for example, corporations pay
a minimum of $9,600 on every $100,000 of taxable
income.
If minimizing taxes is your concern, your strategy
should be to form a Nevada corporation and arrange for
the profits to accumulate there rather than in the high
tax state in which you presently do business.
This is easier than you may think. Suppose you
run a small company and have some major element of the
business that can be handled from Nevada. Or a service
that can be contracted for through the Nevada
corporation. If you do this with a service, it is
important that the entire service is not performed in
the high-tax state, in which case the Nevada
corporation is subject to the same taxes in that state
as any local corporation. But your sales
representative travels a 10 state area, so you make the
Nevada corporation your distributor for those 10
states, and pay his salary out of the Nevada
corporation. His official base is now Nevada. You pay
your Nevada corporation a sufficient commission to keep
most of the profits in Nevada instead of in the state
where your business is physically headquartered.
Or you could contract for sales management
services from the Nevada corporation, paying it a fixed
fee, and it pays your salesman. Next, you tell your
salesman that he is being transferred to a new
employer. He still gets the same salary, and he still
does the same job at the same pay. The only difference
to him is that his paycheck comes from a different
issuer.
Your fee to the Nevada sales management company
might be $75,000. Suppose that you are paying the
Nevada corporation an extra $47,000 in management fees
over what your salesman was previously paid, so your
net profit is zero.
Oddly enough, that's good news. Zero profit means
zero corporate income tax in your high-tax
jurisdiction. Now you have $47,000 of profit at zero
taxes in your Nevada corporation.
Best of all, it's perfectly legal. All you have
to do is make certain that the accounting and
management of the sales company are actually being done
through the Nevada corporation, and that all sales are
booked and invoiced accordingly.
This general method of transferring income and
profit from high-tax jurisdictions to low-tax
jurisdictions is common. It will work for just about
any goods or services your business requires, other
than those of a purely local nature.
Note that a Nevada corporation will help reduce
only your state taxes. Federal taxes apply in all
states. However, you could create a third company in a
tax-free jurisdiction outside the United States. Then
you could potentially escape federal taxes as well .
(But before doing that, it is important to get good
accounting advice, so that you don't have an argument
with the IRS over "transfer pricing.")
Many promoters of Nevada corporations try to sell
you on the use of a Nevada corporation for lawsuit
protection. Unfortunately, most of the information
being given out is not only inaccurate, it is
positively dangerous. It is generally based on hiding
your ownership of the Nevada corporation. Keeping your
ownership private and confidential is fine, and may
reduce the risk of a lawsuit because you don't appear
to be a financially attractive target. But actually
hiding your assets in litigation is fraud, and lying
about your assets in a court proceeding is perjury. A
quiet public appearance is one thing, but don't let the
people trying to sell you a Nevada corporate package
inadvertently lure you into unknowingly committing a
crime. It is you, not the corporate agents, who will
be facing a prison sentence, and saying you got your
legal advice from a corporate promoter's brochure is
not a good defense.
Nevada corporate promotion literature usually
stresses that Nevada does not require public disclosure
of corporate shareholders. They conveniently forget to
tell you that neither does any other state in the U.S.!
And in all states the officers and directors are a
matter of public record. Any corporation provides
privacy to the extent that to determine the
shareholders, a court action involving either the
corporation or the individual is necessary. But if a
court in your home state has jurisdiction over you
because of a lawsuit, all of your holdings do have to
be disclosed. (There are ways to protect those assets
with trusts, but thinking your concealed ownership of a
corporation in Nevada -- or in any other state -- is
asset protection is foolhardy and reckless.)
Another claim of a few of the Nevada promoters is
that Nevada allows bearer shares. It doesn't, and
federal tax law prohibits the issuance of bearer shares
by corporations in the United States.
Nevada state law requires that all Nevada
corporations retain the services of a resident agent in
the state who must have on file the name and address of
the person who holds the stock ledger. But the
resident agent is not required to keep the ledger
himself. But, again contrary to what the promoters
tell you, this is identical to the corporation law of
the other 49 states and the District of Columbia.
Corporation laws in all states are relatively uniform -
- it is the tax laws that create the interesting
differences.
Nevada promoters will tell you that there are no
minimum capital requirements, but that is true of about
40 of the states, and the rest have a very nominal
amount such as $500 or $1,000. They'll also tell you
that one person can hold all corporate offices and be
the sole director -- but almost every state now has
that feature.
One Nevada promoter's brochure we have seen even
claims that you can legally make up any name you wish
as director of the corporation, citing the "common law
rule that a person may use any name providing it is not
for a fraudulent purpose." Fortunately most of the
corporate brochures don't go that far, for this is
again very dangerous advice. That is an often quoted
but completely misconstrued concept of common law.
Using a different name in your role as director of a
corporation will -- in any jurisdiction -- not only be
construed as a fraudulent act, but will convert your
otherwise legitimate corporate business activities to
fraud. Many states do have a common law principle that
you may use any name -- IF you consistently and
publicly adopt that name for all purposes. Most states
require that public adoption to be by court order, and
a few states make it a criminal offense to use a name
not on your birth certificate unless it has been
changed by court order. So don't fall for this one
just because "somebody" told you that you could legally
do it. The very fact that you are using the name only
to hide your directorship in the Nevada corporation is
overwhelming evidence of fraud in any state. You could
jeopardize your entire business -- and even if you are
not prosecuted, the resulting stench should it come out
could destroy the reputation of your business. Would
you want to do business with somebody who ran the
business under a false name? You'd certainly question
his integrity and honest intentions.
The tax savings afforded by a Nevada corporation
make it a tool worth considering -- even if you have
never incorporated before. Needless to say, this
attractive combination of benefits has spawned a whole
new service industry to assist you. Many of the widely
advertised corporate formation services are very good.
But remember, they are only corporate formation agents,
not lawyers or accountants. Any Nevada lawyer or
accountant can not only form your corporation for you,
but can give you other advice that is worth the fee.
And their prices are competitive -- sometimes even
cheaper than the corporate formation agents with large
national advertising bills. A good source is to check
the Martindale-Hubbell Lawyer's Directory, available at
almost every public library in the United States. It
will give you full background information on the
attorney and his specializations.
One last word of advice. The most common pitfall
in using a Nevada corporation in the ways we have
described is the temptation to cut corners. It is not
enough merely to pretend to do business in Nevada.
You run the risk of losing all your benefits if
the books aren't in order, or if the board doesn't meet
regularly to approve whatever the company is doing, or
if the minutes of those board meetings are not up-to-
date, or any other legal technicality has not been
properly attended to and officially documented. But as
a carefully and prudently run business, you can be
assured that all the advantages we have discussed are
yours to keep.
