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Nevada Corporations |
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LEGAL NOTICE: |
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Personal Protection Against Corporation LiabilitiesIn this increasingly litigious society, it is becoming increasingly important to limit your exposure and protect yourself from liability to the greatest extent possible. When you study the issue of liability as it relates to corporate officers, directors and agents, you will arrive at the inescapable conclusion that Nevada is simply the best state for protection of corporate actors. As a general rule, all corporate members of Nevada corporations are protected from liability except in cases of outright fraud or violations of the law. As with most general rules, there are exceptions and this takes us back to the question, "When is a corporation not a corporation?" The answer: When it's an alter-ego; when one person owns and controls it and there is a unity of interest to the extent that upholding the corporate fiction would sanction fraud or promote injustice. Here is the relevant statute: NRS 78.747 Liability of stockholder, director or officer for debt or liability of corporation. 1. Except as otherwise provided by specific statute, no stockholder, director or officer of a corporation is individually liable for a debt or liability of the corporation, unless the stockholder, director or officer acts as the alter ego of the corporation. Piercing the Corporate VeilNevada is first in many ways, not least of which is the protection it provides against "piercing the corporate veil" to hold corporate actors responsible for the liabilities of the corporation they serve. Some people think this is the Number One reason to incorporate in Nevada. It is certainly a very good reason, although we may beg to differ with regard to it being the decisive factor on its own. In combination with the privacy of control and ownership Nevada offers, this feature allows for the development of many powerful strategies because it is very difficult for someone outside of the corporation to determine just how many owners and operators are actually involved. Most strategies, however, are not developed around one-man corporate structures, making this point irrelevant to most situations. But it's worth examining in greater detail for one-person structures. If a corporation exists only to serve your (singular) purposes AND you are the sole owner (it always comes down to ownership), then it is you and you are it and you can be held responsible for its liabilities. If you have perused the section on Privacy, however, you are aware that ownership of a Nevada corporation can be very difficult for anyone on the outside to ascertain. If you have begun to follow the advice of John D. Rockefeller ("Control everything; own nothing."), then you can see how the alter-ego label simply cannot be properly applied to your situation because you would NEVER be the sole owner of a Nevada corporation and there cannot therefor be a "unity of interest". Ideally, disclosure of the PRIVATE ownership of the corporation could be handled with the owners' consent in camera, off the public record. A classic Nevada case illustrates just how seriously Nevada courts protect against piercing of the corporate veil (attaching liability to corporate actors) and why the corporate veil has only been pierced on very rare occasions in this state. The case is Rowland v. Lepire, 662 P.2d 1332 (Nev. 1983). In this case the plaintiff wanted to hold the respondent liable for damages caused by the respondent's corporation. There was no question that it was his corporation. On the face of things it was clearly a case of "alter-ego": personal funds were commingled with the corporation's funds and fundamental corporate formalities were not maintained. The bottom line? The court ruled that it would not sanction fraud or promote injustice to uphold the fiction of the corporation's separateness and even in this case of utter mismanagement the corporate veil was not pierced. Mr. Lepire was saved by Nevada's powerful liability protection. Just cause is not a pre-requisite to lawsuits any more. On the other hand, the PRIVACY afforded by a Nevada corporation can make it virtually impossible for creditors and litigants to get at hard-earned assets. One of the main reasons that a business owner will decide to incorporate is to limit the potential liability that his or her business has on personal assets. Incorporating can separate those activities of the corporation from the assets of the individual. While this basic principle is valid in any state, it is strongest in practice in the State of Nevada. Most every state in the United States has adopted corporate statutes that limit the liability of any of a corporation's representatives, officers, directors and stockholders. Nevada has gone one step further, very specifically spelling out in its statutes that all corporate representatives are free from personal liability with regard to corporate activities except in cases of fraud or willful criminal activity. This means that the corporation can be sued, file bankruptcy and be involved in other unfortunate activities and not jeopardize the personal assets of its agents or representatives. If you are sued, it's also nice to know that as an officer of a Nevada corporation, you may be indemnified by the Board. NRS 78.7502 spells out discretionary and mandatory indemnification of those who act on behalf of a Nevada corporation: NRS 78.7502 Discretionary and mandatory indemnification of officers, directors, employees and agents: General provisions. 1. A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. 2. A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. 3. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections 1 and 2, or in defense of any claim, issue or matter therein, the corporation shall indemnify him against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense. The Supreme Court of Nevada has consistently taken a very strong stand against piercing of the corporate veil-the separation of the liabilities of the corporation from those of the individual(s) operating the corporation-even when a corporation fails to properly take care of basic corporate formalities. (It is, however, strongly recommended that every corporation properly handle the basic paperwork that substantiates its separate existence.) This is possibly best evidenced in the case of Rowland v. Lepire, in which the defendant freely commingled personal and business funds and failed to maintain corporate records. The bottom line? Notwithstanding the facts of the case and without much reference to them, the judge ruled against piercing of the corporate veil to get at the defendant personally, leaving the plaintiff with recourse only against the incorporated entity. If a corporation is sued, the initiator of the suit must typically bring action against the corporation at the place where it is domiciled. (All contractual business done with parties who are outside of the State of Nevada should contain a "choice of law" provision specifying that disputes will be resolved according to the laws of the State of Nevada.) This is where it becomes important to have your corporation set up in a state such as Nevada that has taken a stand to eliminate the personal liability of a corporation's participants.
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