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Nevada, like the state of Delaware (see Delaware corporation), is well known as a corporate haven. Many major corporations are incorporated in Nevada, particularly corporations whose headquarters are located in California and other Western states.
Organizers of a business generally have a choice on where to incorporate the business. In the United States, corporations are generally organized pursuant to state law, rather than federal law. Moreover, a business need not establish or maintain a physical presence in a state in order to incorporate under the state's general corporation law. If the corporation transacts business in a state other than the state of incorporation, it is considered by the other state to be a foreign corporation. See NRS Chapter 80. For example, a business may be headquartered in San Jose, California but incorporated in Nevada. The corporation is a Nevada corporation and the State of California will consider it to be a foreign corporation. See California Corporations Code Section 171.
In the United States, states generally, but not invariably, follow the internal affairs doctrine. "The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs ... because otherwise a corporation could be faced with conflicting demands." Under the internal affairs doctrine, courts will generally apply the law of the state of incorporation to the "internal affairs" of the corporation.
States can derive revenues through the incorporation of businesses. These revenues include direct payments to the state in the form of filing and other fees. The state can also receive revenues indirectly through businesses (law firms, resident agents, accounts and other service providers) to corporations. The Nevada legislature has tried to make Nevada an attractive alternative to Delaware as a state for incorporation. In many instances, it has tried to "out Delaware" Delaware.
Nevada's laws offer flexibility to a board of directors in managing the affairs of a corporation, and permit management to put in place strong protection from hostile takeovers. It also provides extremely strong protection against piercing the corporate veil, where a corporation's owners can be held responsible for the actions of a corporation. For instance, from 1987 to 2007, there was only one case that successfully pierced the corporate veil of a Nevada corporation, and in this case the veil was pierced due to fraud on the part of the corporation's owners.
Because the provisions on "piercing the corporate veil" are corporate governance matters, if a corporation chartered in California, for example, (which has much more creditor friendly provisions permitting this) is sued anywhere, California law applies, but if a corporation chartered in Nevada, which operates only in California, is sued in a California court, the California court would use Nevada law in determining what the requirements permitting this (Note that foreign corporations, including those, for example, incorporated in Nevada, may be subject to California Corporation Code 2115). On the issue of "piercing the corporate veil," Nevada law applies (which is much more supportive of the corporation's interest), even if the corporation only operates in California and has never had any other contact with Nevada and is simply chartered there as a "flag of convenience."
Nevada (unlike other states) permits the corporation's articles of incorporation to vest authority to adopt, amend or repeal bylaws exclusively in the directors, so that shareholders would not be able to change the corporation's bylaws.
Disputes over the internal affairs of Nevada corporations are usually filed in the Nevada District Courts, from which judgments can be appealed to the Supreme Court of Nevada, the state supreme court. Because of the large number of corporations chartered in Nevada, the courts in that state are more focused on the application of corporate law than the courts of most other states. Nevada's courts are developing a strong body of case law that serves to give corporations and their counsel guidance on matters of corporate governance, although Delaware and some other states have a larger body of such case law.
Nevada's tax structure is also a large benefit to incorporation in Nevada. Nevada has no franchise tax. It also has no corporate income tax or personal income tax. While Nevada likes to promote that there are "no corporation taxes" in the state, there is an annual $200 "Business License Fee" which is paid to the Secretary of State's Office at the time of formation or renewal of the corporation. Nevada additionally applies a 1.17% tax on gross wages to most businesses with a payroll over $62,500. Nevada and Texas are the only two states that do not have information sharing agreements with the Internal Revenue Service.
Advantages of Nevada incorporation
- No state corporate income tax, franchise tax, personal income tax, or taxes on corporate shares
- No IRS information-sharing agreement (although other states' incorporation laws often supersede Nevada law in certain cases)
- Low annual fees and minimal reporting/disclosure requirements
- Stockholders, directors, and officers are not public record, not required to reside or hold meetings in Nevada, and are not required to be US citizens
- Directors not required to hold stock
- Officers/directors are protected from personal liability for lawful acts of the corporation
- Corporations may purchase, hold, sell, or transfer shares of its own stock
- Corporations may issue stock for capital, services, personal property, or real estate, including leases and options
- Directors may determine the value of any transactions; their decision is final once determined
- Edgar v. MITE Corp. 457 U.S. 624, 645 [73 L.Ed.2d 269, 285, 102 S.Ct. 2629](1988).
- Nevada Department of Taxation: Federal Income Tax; Nevada Tax Notes, 174, April 2011.
- Nevada Corporation Statutes
- Nevada Government Main Website
- Nevada Secretary of State
- Bishop & Zucker on Nevada Corporations and Limited Liability Companies (2011) (Treatise)
- Keith Paul Bishop, Silver Standard – There are many benefits to incorporating in Nevada but tax avoidance is not one of them, Los Angeles Lawyer, November 2008