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.
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:
- 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.
- You may not be able to finance a new car.
- 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.
When you are a sole proprietorship, you have a bank account. You can use that money for your business or personally and your CPA, at the end of the year, will help you to determine which portion of that money was deductible for business expenses and which ones were personal expenses. Many times the CPA comes back and says you spent a lot of money on personal items that are not deductible business expenses. Therefore your net profit is higher than you thought so you owe more in taxes than you thought. In a corporation this is different. The corporation has a separate checking account and should be used for business purposes only! If you use the money for personal reasons, that is called commingling funds with your personal account. A judge may set aside the corporate veil because you ignored the fact that the corporation is a separate legal entity from yourself.
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!!!
Other benefits to incorporating:
A corporate structure communicates permanence, credibility and stature. Even if you are the only stockholder or employee, your incorporated business may be perceived as a much larger and more credible company. Seeing “, Inc.” or “Corp.” at the end of your business name can send a powerful message to your customers, suppliers, and other business associates about your commitment to the ongoing success of your venture.
Tax Advantages – Deductible Employee Benefits
Easier Access to Capital Funding
Capital can be more easily raised with a corporation through the sale of stock. With sole proprietorships and partnerships, investors are much harder to attract because of the personal liability. Investors are more likely to purchase shares in a corporation where there usually is a separation between personal and business assets. Also, some banks prefer to lend money to corporations. This is not as common at the small business level as it sounds, because it can be complicated and require the proper attorneys to make sure you are not violating any security laws. Unfortunately, many still get investors and never consult with a proper securities attorney.
An Enduring Structure
Easier Transfer of Ownership
With a corporation’s centralized management, all decisions are made by your board of directors. Your shareholders cannot unilaterally bind your company by their acts simply because of their investment. With partnerships, each individual general partner may make binding agreements on behalf of the business that may result in serious financial difficulty to you or the partnership as a whole.
Do I need an attorney to incorporate?
No, an attorney is not a legal requirement to incorporate. You can prepare and file the Articles of Incorporation yourself; however, you should understand the requirements of your intended state of formation. You can use our service to incorporate and not only save money on attorney fees but rest assured that all forms are filed properly.
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)?
- There is more complexity and expense with forming a corporation.
- There are more extensive record keeping requirements.
- The cost involved is more than just being a sole proprietorship.
In Which State Should You Form Your New Entity?
The basic recommendation is to form your corporation or LLC under the state laws in which the business will operate. If you have a partner and/or business activity in more than one state, you will have to decide in which state to domicile your corporation or LLC, and perhaps register as a foreign corporation or LLC doing business in the state where the activity occurs. You’ll make this decision based upon multi-state taxation rules, and registration requirements that vary from state to state.
Many times you hear that Delaware and Nevada are the best states in which to domicile (or form) your new business. Both states have advantages, but not all may apply to your situation. Nevada for example, gives you the following advantages:
- It’s a very difficult state in which to pierce the corporate veil,
- Indemnification of officers and directors, and
- No Joint and Several Liability.
Let’s examine one at a time. First, what does “piercing the corporate veil,” mean? It is the ability of legal prosecution to cross (pierce) the border (veil) between a business and the personal assets of its owners, shareholders, members, or managers. When you form a corporation, whether it’s in Nevada, California, Texas or wherever, you must follow certain corporate formalities. If your corporation does not keep accurate records of meetings through minutes, or if it co-mingles funds, prosecutors find it easier to pierce the corporate veil. While a lawsuit typically ends when there is enough insurance or assets to pay off the debt, a plaintiff may attempt to pierce the entity and go after the owners’ personal assets if the entity does not hold enough assets to cover the judgment.
In the real world, piercing does not happen that often because a majority of cases are settled out of court. However, when a prosecutor isable to introduce the real possibility of piercing the corporate veil, business owners are put in the uncomfortable position of having to settle for more than they otherwise would to shield their personal assets. On the other hand, when a prosecutor is facing tougher legal obstacles, such as those afforded by a Nevada jurisdiction, you can arrive at settlements more quickly, and for significantly lesser amounts.
Another factor that helps prosecutors pierce the corporate veil is low capitalization. In some states, like California, we recommend that you capitalize your corporation with at least $1,000. If not, it’s easier to prove that you are simply the “alter ego” of the corporation (one and the same with the corporation), and pierce the corporate veil! How does Nevada feel about this? Nevada is referred to as a “thin capital state,” meaning you can form a corporation for as little as $100, or even comparable services. Also, Nevada maintains a certain attitude about piercing the corporate veil, which is why major corporations domicile in Nevada and register to do business in their home states.
First, Nevada has a three-prong test. Prosecution must prove all three parts to pierce the corporate veil:
- The corporation must be influenced and governed by the person asserted to be the alter ego;
- There must be such unity of interest and ownership that one is inseparable from the other; and
- The facts must be such that adherence to the corporate fiction of a separate entity would,
- Under the circumstances, sanction fraud or promote injustice.
The burden of proof for these three “general requirements” is on the plaintiff, who seeks to pierce the veil. A failure to prove any of the three will result in the veil not being pierced! Essentially, Nevada says that unless you can prove fraud, the corporate veil will not be pierced. That is awesome protection!
A landmark case proves this point: Rowland v. LePire, 99 Nev. 308, 662 P.2d 1332 (1983). As mentioned before, in order to protect the integrity of the corporate veil, it is important to keep accurate corporate records, and have adequate capitalization. In the case of Roland vs. Lepire, it was clear that there was inadequate capitalization. The corporation had a negative net worth at the time of the trial; no formal directors’ or shareholders’ meetings were ever held; dividends were not paid to shareholders; and the officers and directors did not receive salaries. There was no corporate minute book, nor was there any evidence that minutes were kept. At the same time, a general contractor’s license, a framing contractor’s license and a corporate checking account were secured in the corporation’s name. The court concluded that, ‘Although the evidence does show that the corporation was undercapitalized and that there was little existence separate and apart from [the two key shareholders]…evidence was insufficient to support a finding that appellants were the alter ego of the…corporation.’ The Nevada Supreme Court has made clear that unless the plaintiff is able to meet the burden of proving that “the financial setup of the corporation is only a sham and caused an injustice,” the veil is unlikely to be pierced.
Nevada appears as an IRON FORTRESS to creditors. The corporate veil has only been pierced once in Nevada in the last 24 years, and that was in a case where the corporation actually did business in Nevada and committed fraud against a Nevada resident.
In 1987, the Nevada Legislature passed a revolutionary law permitting corporations to place provisions in their Articles of Incorporation eliminating the personal liability of officers and directors to the stockholders of Nevada Corporations. This is one of the main reasons large companies like Citibank domicile in Nevada. Delaware and a few other states soon adopted lesser versions of this law, but Nevada’s law remains among the most thorough and comprehensive in the country. Contained in the Nevada Revised Statues (78.037), the law in part reads as follows:
“The Articles of Incorporation may also contain:
A provision eliminating or limiting the personal liability of a director or officer to the corporation or its shareholders for damages for breach of fiduciary duty as a director or officer, but such provision must not remove or limit the liability of a director or officer for: Acts or omissions which involve intentional misconduct, fraud or a knowing violation of law.”
This Statue was updated on June 15, 2001 to read:
The Articles of Incorporation may also contain any provision, not contrary to the laws of this state:
- For the management of the business and for the conduct of the affairs of the corporation;
- Creating, defining, limiting or regulating the powers of the corporation or the rights, powers or duties of the directors, the officers or the stockholders, or any class of the stockholders, or the holders of bonds or other obligations of the corporation; or
- Governing the distribution or division of the profits of the corporation.
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:
|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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- Acts or omissions not in good faith.
- Acts by officers are not exempt from monetary damages under Delaware law.
- Breach of a director’s duty of loyalty.
- Transactions involving undisclosed personal benefit to the officer or director.
- Acts or omissions that occurred prior to the date that the statute, which provides for indemnification of directors, was passed and approved.
One requirement Delaware has is that an officer must reasonably believe that he or she is performing his or her duties in a manner that is in the best interests of the corporation. This requirement is not present in Nevada.
Nevada vs. Delaware
The Latest Research!
You are benefiting from countless hours of research rather than placing beliefs in errant claims. The following court cases are being used to illustrate this.
This research reviews the accuracy of claims made in “Nevada vs. Delaware,” reported on many websites in our industry. The issues will be discussed in the order presented in the report. Specifically, there are five areas wherein it is asserted that a specific act would be protected under Nevada law, but that a corporate director or officer would be exposed to liability in Delaware. Research reveals that the report is quite accurate.
1. ACTS OR OMISSIONS NOT IN GOOD FAITH
Before it was amended, effective June 15, 2001, Nevada Revised Statutes (NRS) 78.037(1) allowed a Nevada corporation’s articles of incorporation to contain:
- A provision eliminating or limiting the personal liability of a director or office holder to the corporation or its stockholders for damages for breach of fiduciary duty as a director or officer.
However, such protection was prohibited for “acts or omissions, which involve intentional misconduct, fraud or a knowing violation of law.”
Before this change was made it was discussed in David Mace Roberts & Rob Pivnick, “Tale of the Corporate Tape: Delaware, Nevada and Texas,” :
- Without doubt on this subject, Nevada is more director and officer friendly than either Delaware or Texas . . .The NRS seems to imply that a limitation of liability statement may exculpate directors for a breach of the duty of loyalty, acts not in good faith, and receiving improper benefits. If true, directors may act contrary to the interests of the corporation by receiving improper benefits or otherwise act in bad faith, without vicarious liability, if the articles of incorporation eliminate director liability for such acts.
Effective June 15, 2001, a subsection (7) was added to the statute:
- A director or officer is not individually liable to the corporation or its stockholders for any damages as a result of any act or failure to act in his capacity as a director or officer unless it is proven that:
(a) His act or failure to act constituted a breach of his fiduciary duties as a director or officer;
(b) His breach of those duties involved intentional misconduct, fraud or a knowing violation of law.
This subsection, in effect, gives all directors and officers of Nevada corporations the protection that the former NRS 78.037(1) merely allowed corporations to include in their articles. In other words, all Nevada corporations now have a limitation of liability statement for directors and officers imposed by law. And, this protection includes acts not in good faith, since NRS 78.138(7) tracks the language of the former NRS 78.037(1). With these amendments, in Nevada, there no longer exists corporations that have limitation of liability statements, and corporations that do not.
In Delaware, such is not the case.
When a Delaware corporation’s articles of incorporation do not contain a limitation of liability statement, the protection provided for directors from personal liability comes under the business judgment rule. “As a substantive rule of law, the business judgment rule provides that there is no liability for an injury or loss to the corporation arising from corporate action when the directors, in authorizing such action, proceeded in good faith and with appropriate care.”
This being the case, an act of a Delaware corporate director not in good faith, which rises to the level of “gross negligence,” can lead to personal liability if the corporation has no limitation of liability statement in its articles. When such a statement does exist, acts not in good faith are still not protected.
The Delaware General Corporation Law (GCL) is codified and this section, which covers only directors, allows a provision in the articles of incorporation:
- Eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director’s duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective.
The legislative commentary states that “makes clear that no such provision shall eliminate or limit the liability of a director for . . . failing to act in good faith.”
Delaware statute quoted above treats intentional acts of misconduct and knowing violations of law as different from acts or omissions not in good faith.
It is noteworthy to mention that section (ii) of the Delaware statute quoted above treats intentional acts of misconduct and knowing violations of law as different from acts or omissions not in good faith. This bolsters the interpretation above, as under that statute a Nevada director is only liable for breaches of fiduciary duty that involves intentional misconduct, fraud, or knowing violations of law. Thus, such acts are not acts “not in good faith.”
In Delaware, under no circumstance is a director protected for acts not in good faith. However, in Nevada, such acts are protected, either by a limitation of liability statement found in the articles of incorporation before June 15, 2001 or since then. Therefore, on the issue of corporate director acts not in good faith, Nevada law provides protection not found in Delaware law.
2. ACTS BY OFFICERS EXEMPT FROM MONETARY DAMAGES
A limitation of liability statement in the articles of incorporation could include officers as well as directors. This made Nevada one of only six states to have such laws covering officers as well as directors. (The other five states are Louisiana, Maryland, New Hampshire, New Jersey, and Virginia.)
With the recent changes to Nevada’s corporate laws, a limitation of liability statement is no longer needed for officers or directors. To repeat, this section, applicable since June 15, 2001, is a statutorily imposed limitation of liability statement for officers and directors. Only acts of intentional misconduct, fraud, or a knowing violation of law will lead to an officer’s (or director’s) liability.
With the recent changes to Nevada’s corporate laws, you no longer need a limitation of liability statement for officers or directors.
Protection for officers in Delaware corporations is nearly non-existent. GCL allows limitation of liability statements in the articles of Delaware corporations, applies on its face to directors only.
Protection for officers in Delaware corporations is nearly non-existent.
When a director is not protected by a limitation of liability statement in the articles, he can still find solace in the business judgment rule. Not so for officers of Delaware corporations. “Some states extend the business judgment rule to officers as well as directors, limiting officers’ liability to gross negligence.” “Most jurisdictions, though, have not addressed the application of the business judgment rule to officers. The reason for this is unclear. In any event, it is prudent for officers to assume that they will have exposure for ordinary negligence.”
As you can see, Nevada corporate law provides substantial protection from monetary damages for corporate officers. Conversely, Delaware provides little to no protection for officers. On this issue, Nevada law is superior.
Delaware provides little to no protection for officers. On this issue, Nevada law is superior.
3. BREACH OF A DIRECTOR’S DUTY OF LOYALTY
Under the former NRS 78.037(1), a limitation of liability statement in a Nevada corporation’s articles of incorporation protected directors from personal liability except in cases of intentional misconduct, fraud, or a knowing violation of law. As we mentioned, this protection has now been codified at NRS 78.138(7), giving all Nevada directors a limitation of liability statement as a matter of law.
In reviewing the “intentional conduct, fraud, or a knowing violation of law” language of the former NRS 78.037(1), stated that this “seems to imply that a limitation of liability statement may exculpate directors for a breach of the duty of loyalty.” Their conclusion is sound, given the language of the statute. Since NRS 78.138(7) mirrors the language of the former NRS 78.037(1), their conclusion is equally applicable to the new statute. Thus, Nevada laws appear to protect Nevada corporate directors from breaches of the duty of loyalty. Delaware law does not follow suit.
Nevada laws appear to protect Nevada corporate directors from breaches of loyalty duty. Delaware law does not follow suit.
In Delaware corporations where the articles include a limitation of liability statement, the limits of GCL § 102(b)(7) come into play. This section reads, in pertinent part, that a limitation of liability provision shall not eliminate or limit the liability of a director: (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders.
The courts in Delaware have construed this section literally, holding that a limitation of liability statement in a Delaware corporation’s articles pursuant to § 102(b)(7) shields directors from breaches of the duty of care (i.e., for acts of “gross negligence”), but not for breaches of the duty of loyalty. “A breach of loyalty claim requires some form of self-dealing or misuse of corporate office for personal gain.”
Where a corporation’s articles do not include a limitation of liability statement, and thus §102(b)(7) is inapplicable, the only protection available for Delaware directors is the business judgment rule. However, this rule does not protect directors who breach their duty of loyalty.
- The fiduciary duties of directors include a duty of care and a duty of loyalty. This latter duty has been described as follows:
- The duty of loyalty is a broad and encompassing duty that, in appropriate circumstances, is capable of impressing a special obligation upon a director in any of his relationships with the corporation. This duty of loyalty embodies both an affirmative duty to protect the interests of the corporation and an obligation to refrain from conduct that would injure the corporation and its stockholders or deprive them of profit or advantage. In other words, directors must eschew any conflict between duty and self-interest.
In Delaware, a breach of the duty of loyalty is not protected by the business judgment rule.
Thus, on this issue once again, Nevada law provides more protection for directors than do the law of Delaware.
4. TRANSACTIONS INVOLVING UNDISCLOSED PERSONAL BENEFIT TO A DIRECTOR
This issue is closely related to the issue of the duty of loyalty. In Delaware, interested director transactions are allowed and are valid if 1) there is good faith approval by a majority of disinterested directors upon full disclosure; 2) there is approval by shareholders after full disclosure (interested shareholder votes do not count); or 3) the transaction is fair and either approved or ratified by the directors or shareholders. Nevada law is similar. These statutes involve disclosed transactions. When an undisclosed transaction occurs, the two states differ.
In Nevada, the former NRS 78.037(1) allowed limitation of liability statements in corporate articles, except for acts or omissions involving intentional misconduct, fraud, or a knowing violation of law. As interpreted by Roberts & Pivnick, supra, this seemed “to imply that a limitation of liability statement might exculpate directors for . . . receiving improper benefits.”
Once again, since the new NRS 78.138(7) codifies the limitation of liability statement as a matter of law for Nevada corporate directors, the same conclusion still pertains. That is, Nevada corporate directors are apparently protected in situations involving transactions where they receive undisclosed personal benefits. This is not the case in Delaware.
Nevada corporate directors are apparently protected in situations involving transactions where they receive undisclosed personal benefits.
This is not the case in Delaware.
Undisclosed personal benefits to a Delaware director are an issue of the duty of loyalty. (See the previous section, especially the quotes from Graham v. Taylor Capital and Ward, et al.) As such, Delaware law does not protect them, either in situations involving GCL § 102(b)(7) or under the business judgment rule.
Even beyond this, in cases involving director interest in a corporate transaction, the business judgment rule is inapplicable, and the director has the burden of proving the transaction is “fair.” If he cannot do so, he is liable. The director’s only hope is to disclose the transaction, and come within the terms of GCL § 144(a), supra. If he does so, the business judgment rule applies, unless the transaction rises to the level of disloyalty to the corporation.
On the issue of undisclosed personal benefits to corporate directors, Nevada law appears to provide protection, whereas Delaware law clearly provides none.
5. ACTS OR OMMISSIONS OCCURRING PRIOR TO STATUTORY INDEMNIFICATION
Both Nevada and Delaware allow for the indemnification of corporate directors for acts performed in good faith and with a reasonable belief that the act was in the best interest of the corporation. However, as stated by Roberts & Pivnick, supra, at 52, “the battle of director friendly indemnification laws goes to Nevada, with . . .Delaware struggling to get out of the starting gate . . . Nevada allows corporations to provide broad indemnification to their directors and officers . . . Delaware’s indemnification provisions are comparatively narrow.” The reason for this conclusion is NRS 78.752, which allows a corporation to make “other financial arrangements” on behalf of its directors, beyond the maintenance of insurance. “As such, greater protection for directors is possible.”
The battle of director friendly indemnification laws goes to Nevada, with Delaware struggling to get out of the starting gate!
However, there is nothing in the indemnification statute in Delaware, which states that indemnification is not available for an act or omission that occurred before the statute was created. Perhaps there is some confusion on this issue because of GCL § 102(b)(7), which allows Delaware corporations to have an article provision limiting or eliminating director liability in certain situations. This section states, in part:
- No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective.
In other words, in Delaware, a § 102(b)(7) provision that is created after an act or omission occurs provides no help to a director, whose only defense would then be the business judgment rule. In such a situation, liability follows if “gross negligence” is found. (When such a provision pre-dates the act or omission, the director is exempt from breaches of the duty of care, i.e., from acts of “gross negligence.”) However, this has nothing to do with “indemnification,” which is a completely separate issue.
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.