Incorporating

THE FIRST STEP

When you operate a business, the key question you need to ask is why should I incorporate? You will learn that it makes a lot of sense to incorporate your business to separate your risk and personal assets, just as it makes sense to separate your business and personal credit. If you need a recommendation to a top company to help incorporate your business, please call our offices at 1-888-313-6333.

Why Incorporate?

 

Anyone who operates a business, alone or with others, may incorporate. Under the right circumstances, the owner of any size business can benefit!

 

Reduces Personal Liability – This is by far the biggest reason to incorporate or form an LLC. It makes no sense to be a sole proprietorship unless you have no assets or you don’t have any future assets coming. Unfortunately, many CPAs advise their clients they don’t have to incorporate until they reach a certain profit level. Overall, we strongly disagree with this advice because getting sued is so very costly. If you are sued as a sole proprietorship you could lose your personal assets. Most people do not consider what happens to them by just being sued (regardless whether they win or lose the case.)

Here are just a few things you would be unable to or have a difficult time doing if your business were to be sued:

  1. You may not be able to get a loan for a new home, refinance or take a second mortgage on your current home (because most applications ask, not if you have a judgment against you, but if you are BEING SUED!). Even a frivolous lawsuit can prevent you from doing things financially. At best, you would have to pay a much higher interest rate because you are considered a higher risk now to the lending institution.
  2.  

  3. You may not be able to finance a new car.
  4.  

  5. You may not be able to lease office space.

Key point: Even though many professionals will say that you are protected by insurance, you can still be sued, and lose a lot of money, without ever having a claim against your insurance policy. This is just one major reason to form a corporation or LLC to operate your business. Creating a legal entity separates the business entity from you personally so that any legal action can only affect that entity and not you personally!

 

Key point: If you have a claim of $10,000 with your insurance company they will usually pay it. However, if you have a claim for $900,000, they will have an attorney from the insurance company visit you, basically to find out if there is a loophole in the insurance policy where they don’t have to cover you. And of course, even if they do, you will probably be cancelled or your rates will skyrocket!


Key point: Even if you incorporate you still have to do things properly! As mentioned earlier, a corporation is a separate legal entity from you. If the corporation is not treated as such and is sued, you need to know that a plaintiff may decide to go through the corporation and after you personally if there aren’t enough assets or insurance in the corporation. This is called “piercing the corporate veil.” There are three major areas that, if not handled properly, can cause the corporate veil to be pierced:

1. Lack of Corporate Formalities.

2. Commingling of Funds.

3. Lack of Proper Capitalization:

Key Point: You will learn that in Nevada it is very difficult to pierce the corporate/entity veil, even if you don’t do the three previous items properly. Nevada has NEVER had a case pierced for those reasons, only for outright fraud! If you are serious about incorporating, the bottom line is that there are some responsibilities required to obtain this level of protection. For a few dollars more you should incorporate in Nevada first, THEN register as a foreign corporation or LLC in your state of operations to protect the corporate/entity veil! If you incorporate in a weaker state and your veil is pierced you are right back to where you did not want to be. You will be held personally liable and now you CANNOT do all those financial transactions we spoke about, plus you might lose the lawsuit and lose your personal assets!!!

Summary: Incorporating helps separate your personal identity from that of your business. Sole proprietors and partners are subject to unlimited personal liability for business debt or lawsuits against their company. Creditors of the sole proprietorship or partnership can bring suit against the owners of the business and can move to seize the owners’ homes, cars, savings or other personal assets. Once incorporated, the shareholders of a corporation have only the money they put into the company to lose and usually no more.

Other benefits to incorporating:

Adds Credibility

Tax Advantages – Deductible Employee Benefits

Easier Access to Capital Funding

An Enduring Structure

Easier Transfer of Ownership

 

Anonymity

Centralized Management

Do I need an attorney to incorporate?

What are the disadvantages of incorporation (these are some reasons many stay a sole proprietorship even though that may be a very bad idea for them)?

  1. There is more complexity and expense with forming a corporation.
  2. There are more extensive record keeping requirements.
  3. The cost involved is more than just being a sole proprietorship.

In Which State Should You Form Your New Entity?

Nevada Corporation Code allows for the indemnification of all officers, directors, employees, stockholders, or agents of a corporation for all actions taken on behalf of the corporation that they had reasonable cause to believe were legal. This indemnification includes any and all civil, criminal and administrative action. (See NRS 78.751.) These two laws provide complete protection for the officers and directors of Nevada corporations, as long as they act prudently in their roles.

The other significant change in Nevada law is the abolishment of joint and several liability. Joint and several liability means that should a judgment be entered against several defendants, they will each assume equal liability for the full amount of the judgment, regardless of their relative fault in causing the damages. Nevada now requires the court to assign a percentage of fault to each defendant, from zero to one hundred, with the total equal to 100 percent. Every defendant found liable is required to pay a share of the total judgment no greater than his or her fault.

NV vs. DE

This is one of the biggest questions we are asked on a daily basis. The following chapter will lead you through some of the differences between the two states and point out some advantages and disadvantages. Please feel free to flip to page 13 for a quick chart on some of the specific differences.

What about Nevada vs. Delaware?

The main rights in Delaware law benefit shareholders of public corporations. This attracts large, public companies that trade on variousexchanges across the country to provide the best protection to their shareholders. Delaware’s corporate law, with regards to corporate takeovers, is the strongest in the U.S. However, for everyone else, the following chart illustrates several benefits of Nevada over Delaware:

Nevada vs. Delaware
It’s No Secret: Nevada Beats Delaware!

Nevada’s liberal incorporation laws offer more privacy and less disclosure than the once popular Delaware, making it the most advantageous state in which to incorporate.

Here are some of the specific differences:

Nevada
Delaware
State Corporate Tax No 8.7%*
Disclosure of principal business location outside Delaware No Yes
Report actual number and value of stock listed No Yes
Freely exchanges information with other states and the IRS No** Yes

**To verify this information, call the state corporate tax department of Delaware at (302) 577-3300

**Even though this type of information sharing has not been the practice of Nevada in the past, in today’s world, the IRS is realistically able to get its hands on any information they deem necessary to further the cause of “fair and reasonable taxation.”

Delaware’s state corporate tax amounts to 8.7%. Delaware also requires disclosure of the principal place of doing business outside the state, requires the corporation to report the actual number and value of its stock, and freely exchanges information with the IRS.

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CONCLUSION

On the above issues, as argued in the “Nevada vs. Delaware” report, Nevada law provides much more protection for directors and officers than does Delaware law. As stated by Roberts & Pivnick, supra:

Because Delaware’s laws are designed to protect the rights of minority shareholders in large corporations, it has found itself in a difficult position regarding closely held companies. This may have come at the expense of protecting the directors and officers of Delaware corporations…. Nevada is striving on an ongoing basis to challenge Delaware as the state of choice for incorporation. In this vein, Nevada has adopted statutes that are more director friendly and anti-takeover favorable than Delaware’s.