Incorporating Nevada: Business benefit, or shell game?

LLCs vs. Corporations: What’s the difference?

To the average person, the designation “LLC,” “Corp.” or “Inc.” after a company’s name likely means nothing.

For the company’s owner, though, it can have significant financial implications.

The vast majority of the more than 50,000 new business entities that are incorporated each year in Nevada are limited liability companies and corporations. LLCs accounted for 62 percent of new filings last year, while corporations comprised 30 percent, according to Las Vegas research firm Applied Analysis.

What’s the difference between the two? Here are some tips from the Nevada Co., a registered agent.

LLCs

• Like a corporation, an LLC is considered separate from its owner, who typically wouldn’t be held personally liable for the company’s debts and obligations.

• An LLC does not pay taxes directly. Its income passes through to its owner, who is taxed individually.

• Unlike a corporation, an LLC can distribute profits regardless of ownership stakes.

• An LLC does not have stock and therefore can’t issue stock options or raise money from the public.

Corporations

• There are no limit to the number or type of shareholders.

• Corporations include three tiers of power. Shareholders own the company and elect directors, who in turn elect officers, who in turn manage the company’s day-to-day operations. One person can hold all three positions.

• Profits are not automatically distributed to shareholders and can be socked away as retained earnings.

• Shareholder profits can be taxed twice, once at the corporate level and, if a dividend is declared, again at the individual level.

InCorp

Mike Bertrand sings and prepares to lead a parade of costumed employees at InCorp in Henderson on Tuesday, July 16, 2013. Launch slideshow »

What's in a name?

Business owners often pick ho-hum names for the companies they incorporate – ABS Capital Corp., for instance, or Mortgage Alliance LLC.

But, with more than 50,000 new entities being formed every year in Nevada, some are bound to have more colorful names than others.

There’s Ass Industries LLC, 2 Old Farts Entertainment LLC, $hi Dolla$ Cartel LLC and the Office of President for Kingdom of God Helpers and His Successors, a Corporation Sole.

Ass Industries sells snowboard wax. 2 Old Farts says it offers web design, bookkeeping and virtual assistant services. $hi Dolla$ belongs to Honey Belshe, a female rapper from Texas whose stage name is “Hi Dolla Honey.”

It’s unclear what the Kingdom of God Helpers’ offers.

Its business filing lists James and Karie Best, of Abilene, Texas, in the officer category, but James Best, a former State Farm Insurance agent, said he had “absolutely nothing” to do with choosing that name for the company.

Here are some other companies that have incorporated in Nevada. Because of the state’s lax incorporation laws, it is unclear what field some are in and what services they offer.

• Artsy Fartsy Art Gallery LLC

• Shooting Puppies LLC

• Greek Gangsta Princess Enterprises LLC

• God Loves Everything About Me Inc.

• Aryan Brotherhood of Texas Inc.

• All American Strippers Las Vegas Style LLC

• Porn Game Show Inc.

• $hamele$ Mu$ic LLC

• Chapel of the Mid-Night Sun Inc. The Light in the Darkness Proclaiming: Glory to Thee, Almighty God in Highest, In (Cont’d)

• Office of the Presiding Overseer of the Grand Lodge of Luxor, and His Successors, a Corporation Sole (GLL International)

Welcome to Nevada, a great place for business.

A state overflowing with shell corporations. A place where corporate taxes practically are unheard of. A land where executives aren’t bothered by certain kinds of lawsuits. A safe haven from nosy outsiders and stockholders who want to know more about your company.

All this and more can be had in the Silver State — and you don’t even have to be a resident.

Over the past decade, Nevada has become one of the most popular places in America to incorporate a business. Executives from around the country and world, without ever setting foot in the state, set up companies here because of the tax breaks, legal benefits and secrecy offered.

Nevada, in return, reaps a large amount of money — and controversy — from the setup.

Plenty of legitimate businesses incorporate in the state. Many file in Nevada because they can pay minimal taxes and are more protected from shareholder lawsuits than in other states. Money saved, in theory, can be reinvested in operations and used to grow their businesses.

But Nevada also is home to a large number of out-of-state companies that fudge their accounting and use seemingly fraudulent business tactics, hurting the state’s reputation as a place for legitimate enterprise.

And while increased fees and the recession have caused new business filings to taper off, Carson City still collects large pots of money from the incorporation industry.

Commercial recordings have pumped more than $100 million a year into the state’s coffers since 2010, thanks in large part to the doubling of Nevada’s annual business-license fee. It rose from $100 to $200 in 2009.

Last year, Nevada earned $133 million in revenue from corporate filings, up 3 percent from the year before, according to Las Vegas research firm Applied Analysis. New entity filings were down 5 percent, slipping to 55,565.

Statewide, more than 287,000 entities are in good standing with regulators, according to Applied Analysis, which analyzes data for the Nevada Secretary of State. That’s one company for every 10 Nevadans.

Despite the slowdown in filings, Nevada’s commercial recording business remains strong. Applied Analysis principal Jeremy Aguero said filings generate about the same revenue as the state’s live entertainment tax.

About 50,000 new entities were incorporated annually in Nevada from 2000 to 2003, and new filings peaked at about 85,000 in 2006 during the height of the economic boom. Since 2009, after the recession hit, they have hovered in the 55,000 to 60,000 range.

Many of the companies are brick-and-mortar businesses with offices, staff and day-to-day operations. Others are shell corporations that exist solely to hold real estate or other assets for owners. Many are not based in Nevada.

About 250 publicly traded companies were incorporated in Nevada as of 2011, but only 10 to 20 percent of them physically are headquartered here, said David Smith, a University of Virginia commerce professor.

•••

State officials make it clear why they want companies to incorporate in Nevada.

On state websites, officials highlight a laundry list of taxes business owners can avoid by incorporating here — corporate income taxes, personal income taxes, franchise taxes, estate taxes, inheritance taxes and more.

“No Nevada gift taxes means you won’t be penalized for your generosity in life,” a Secretary of State website advertises.

The state also promises a “corporate veil” that’s hard to pierce, fewer rights for dissenting shareholders and a business court system with predictable legal decisions.

Nevada offers more privacy for corporate records than Delaware or California, two other states that are popular for incorporations, and under Nevada law, only shareholders who own at least 15 percent of a company or people authorized in writing by shareholders can inspect and make photocopies of financial records. Delaware typically lets any stockholder inspect and copy data.

Like many other states, Nevada business owners do not have to publicly disclose that they own a company. They don’t even have to list their address.

Perhaps most important, though, Nevada offers heightened protection against litigation for corporate officers and directors.

Nevada business executives generally are protected from lawsuits that claim they wrongly extracted personal benefits from a corporate transaction or acted unreasonably on the job. They typically are liable, however, for intentional misconduct and fraud or other violations of the law, said University of Virginia law professor Michal Barzuza, who has studied Nevada extensively.

“We do have greater protection than probably any jurisdiction,” Secretary of State Ross Miller said.

The safeguards, while appealing to executives, draw criticism.

“Nevada has all but hung up a ‘no law for sale’ sign,” Barzuza has written.

•••

State lawmakers approved corporate protections in 2001 with the goal of attracting new businesses to Nevada to boost revenue from incorporation filings. They planned to spend $30 million of the projected revenue on salary hikes for public school teachers.

But there were vocal critics. Sen. Terry Care said lawmakers were being asked to protect “corporate crooks.” Sen. Bob Coffin said that because of the changes, reputable companies would avoid Nevada and “scoundrels” would move here. Sen. Dina Titus said Nevada should hang up a sign reading, “Sleazeballs and rip-off artists welcome here.”

“Nevada has sold its soul, tarnished its already shaken reputation today, in exchange for a $30 million Band-Aid,” Titus said at the time.

Nevertheless, she and other opponents ultimately voted for the bill.

Many companies that incorporate in Nevada are far from unsavory. But others lean in that direction.

In September 2011, Reuters published a special report highlighting three men who built thriving businesses helping people set up shell companies in Nevada. Each also served time in federal prison for committing financial felonies.

Aaron S. Young spent 14 months in prison for using Nevada shell companies to help clients avoid taxes, Reuters reported. Wayne Andre McMiniment served three years for wire fraud in a theft and tax-evasion scheme. Richard C. Neiswonger spent 14 months in prison for wire fraud and money laundering.

Nevada often attracts publicly traded companies from states with relatively weak executive protection laws, as well as companies that have a significant likelihood of being forced to restate their reported financial results, Barzuza and Smith said. The companies are led by executives who are willing to take bigger risks, work aggressively to make themselves look good and sometimes play “fast and loose,” Smith said.

They like Nevada because they’re protected in court against potential liability if their actions create problems. For instance, they are more likely to report revenue as optimistically as possible and to underreport costs in an effort to boost their earnings, Smith said.

“I think there is a concern that some shady companies are taking advantage of this law,” Barzuza said.

•••

On the fourth floor of a Henderson office building, one floor above VEGAS INC, it looks like a year-round party at the headquarters of InCorp Services. Streamers hang from the ceiling, balloons hover near cubicles, and walls are decorated with brightly colored murals.

You wouldn’t know it walking in, but InCorp is one of the biggest players in Nevada’s incorporation business.

“It’s not the sexiest of industries, so we try to make the company fun,” said Gayle Clauges, formerly known as the director of client services, now called the “empress of first impressions.”

Founded in 1998, InCorp employs about 75 workers and has more than 125,000 clients worldwide. In Nevada, more than 31,300 entities list InCorp as their registered agent, state records show.

The company says it is the fourth-largest national registered agent in the country.

Its employees remind clients of due dates for required filings and accept documents on their behalf. InCorp also provides customers with a layer of secrecy and anonymity, as clients can list InCorp’s address as their own on publicly available documents.

“No business owner wants to be served with lawsuit papers in front of customers or employees, and you probably don’t want to deal with tax and other legal communications in your (everyday) operations,” the company’s website states. “As your Nevada registered agent, we can handle all of that for you.”

The company, which is privately held, does not disclose its financial performance, but Clauges said InCorp regularly hits monthly revenue records.

While InCorp touts its services online, it doesn’t mention the perks of incorporating in Nevada.

That’s not the case with other registered agents, many of whom are con artists who inflate Nevada’s secrecy laws, Miller said.

One registered agent, Corporate Service Center, offers a $100,000 guarantee that the “corporate veil” guarding its Nevada clients will never be lifted.

“You can live anywhere and still incorporate in tax free, lawsuit proof, private Nevada!” the company’s website reads.

Founder and President Cort Christie did not return a call for comment.

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