The Nevada legislature made some significant changes to
Nevada’s Corporation Code in its most recent session.
You need to know these new rules.
The biggest changes, which are effective July 1, 2007, will
be discussed in this article. As is often the case, the
rules and regulations used to carry out the new laws
will be implemented over time, and we will keep you
informed of them as they arise. (If you or your friends
would like a free subscription to the Corporate Direct
Report please
click here.)
For now, there are three important changes and several
miscellaneous new rules you need to know about
immediately.
1. Bearer Shares Outlawed
Bearer shares are stock certificates which, instead of
listing the owner by name, list the owner only as “The
Bearer.” The supposed advantage of this was to maintain
privacy of ownership. The Bearer was whoever held the
certificate, so shares could be transferred from one
person to the next without notice to anyone or
recordation anywhere.
I have never really liked the whole notion of bearer shares.
If someone comes to me with the bearer certificate, how
do I know if the certificate wasn’t stolen or forged?
The idea of simply handing a certificate from one person
to the next may sound nice and easy (and a bit crafty)
but such a transfer can create all sorts of tax
problems. If you hand a certificate representing a
million dollar business over to your friend you’ve made
a significant gift, for which gift taxes are due. And
when by prearrangement he hands the certificate back to
you there’s another taxable event. Worse yet, what if
your ‘friend’ wouldn’t give you the certificate back?
The big reason bearer shares were outlawed has to do with
fraud. Less than ethical corporate promoters would sell
their less than ethical corporate clients on the idea
that by simply handing the bearer certificate over to a
friend they could deny a judgment creditor (one with a
court awarded judgment) access to the business or other
asset. Of course, such a transfer is a fraudulent
conveyance, meaning that a court could overturn the
transfer if anyone ever found out about it. The problem
was that it could be very difficult to find out about
it. As a result, bearer shares enabled a certain class
of people to commit fraud. The Nevada Legislature was
right in outlawing bearer shares.
2. New Ownership Disclosure Procedures
The use of Nevada corporations and other entities to commit
fraud is also the reason for this next big change. It is
unfortunate that privacy of entity ownership is now
somewhat compromised, but when people continually abuse
the system something will usually give.
Apparently the federal and law enforcement authorities
pushing for these changes played the terrorist card—that
insanely bad people were using the privacy of Nevada
entities to ultimately greatly harm us. While it is my
opinion that this red hot card gets played a little too
often these days, there can be no denying that domestic
bad guys, your average American scam artist, used Nevada
privacy for nefarious purposes.
But the new law for corporations, LLC’s, LP’s, business
trusts and the like is not as bad as you may expect.
Here is the rule for corporations:
1. In addition to any records required to be kept at the
registered office pursuant to NRS 78.105, a corporation
that is not a publicly traded corporation shall maintain
at its registered office or principal place of business
in this State:
a. A current list of its owners of record; or
b. A statement indicating where such a list is
maintained.
2. The corporation shall:
a. Provide the Secretary of State with the name and
contact information of the custodian of the list
described in subsection 1. The information required
pursuant to this paragraph shall be kept confidential by
the Secretary of State.
b. Provide written notice to the Secretary of State
within 10 days after any change in the information
contained in the list described in subsection 1.
3. Upon the request of any law enforcement agency in the
course of a criminal investigation, the Secretary of
State may require a corporation to:
a. Submit to the Secretary of State, within 3 business
days, a copy of the list required to be maintained
pursuant to subsection 1; or
b. Answer any interrogatory submitted by the Secretary
of State that will assist in the criminal investigation.
4. If a corporation fails to comply with any requirement
pursuant to subsection 3, the Secretary of State may
take any action necessary, including, without
limitation, the suspension or revocation of the
corporate charter
5. The Secretary of State shall not reinstate or revive
a charter that was revoked or suspended pursuant to
subsection 4 unless:
a. The corporation complies with the requirements of
subsection 3; or
b. The law enforcement agency conducting the
investigation advises the Secretary of State to
reinstate or revive the corporate charter.
6. The Secretary of State may adopt regulations to
administer the provisions of this section.
It is important to note that Nevada is not asking for the
owners of the entity up front. The requirement is that
the registered agent either keeps a list of the owners
or the name of a contact person who has a list of the
owners. The Secretary of State will request the
ownership list only when a law enforcement agency needs
it for a criminal investigation. Not for a civil case
mind you, but only for a criminal case.
What this means is that if your business and asset protection
plans are on the up and up, your privacy will be
protected. Or, to put it another way, if you are engaged
in fraud and other crimes, our firm will be happy to
comply with these new rules. You may even want to take
your bad business somewhere else to begin with. But for
the good guys, you will still maintain your privacy.
Two points are worthy of further note. First, for limited
partnerships the only owners the new legislation aims
for are the general partners. While the generals do
indeed control a limited partnership, frequently they
only own 2% or less of the entity, and are usually just
a management corporation or LLC. The limited partners
will own 98% of the limited partnership and, except for
management, are the economic beneficiaries of the
entity.
Whether the new law intentionally just wanted information
only on the general partners or will be corrected to
include the limited partners’ identities remains to be
seen. But for now, people very concerned about privacy
may want to use Nevada limited partnerships.
The second point has to do with Wyoming. The corporate law of
Wyoming does not have such an ownership disclosure
procedure. Yet.
Apparently the federal authorities are working to get similar
legislation approved in other states, including Wyoming.
We will keep you informed of such developments. Until
then, once again, those very concerned about privacy may
want to use Wyoming entities.
3. Stronger Asset Protection for Nevada
Corporation Shares
One of the strongest asset protection laws on the books is
the charging order. This law holds that a judgment
creditor of a member of an LLC or a partner of a limited
partnership can’t acquire those interests directly and
use that control to force a sale of the assets. Instead,
they only obtain the rights of an assignee of the
membership or partnership interest, meaning they are
only entitled to distributions from the entity. They
can’t vote to sell the assets to satisfy their claim.
They can’t even vote to increase distributions. They are
stuck waiting for future distributions, which may or may
not come. The charging order is a very effective
deterrent to frivolous litigation, especially in Nevada
and Wyoming LLC’s and LP’s where the charging order is
the exclusive remedy.
Up until now, the charging order had never applied to shares
of corporate stock. So, for example, if John got in a
car wreck and his insurance did not cover him, the
victim could proceed against all of his assets. If John
owes 75% of a profitable corporation the victim could
get control of the shares and vote to sell the business
to satisfy the claim. This certainly is not fair to
Jane, the 25% owner of the business, who worked hard to
build it up only to see it sold out from under her.
With Nevada’s new law the charging order now applies to
shares of corporations. This is an excellent
development.
There are several important rules to point out. The charging
order protection only applies to corporations that have
more than one and fewer than 75 shareholders. If you own
100% of a profitable corporation you may well want to
consider issuing a nominal amount of shares to a
relative or friend in order to gain the better
protection. As well, the new law does not apply to
subsidiaries of publically traded companies or to
professional corporations.
The charging order protection for corporate shares does not
apply to any litigation filed before July 1, 2007, and
it does not supersede any private agreement between a
stockholder and a creditor. This new law puts Nevada at
the forefront of asset protection states. While Wyoming
will most probably follow suit, until they do Nevada is
the state in which to incorporate. Even though Nevada’s
initial and annual filing fees are somewhat higher than
Wyoming’s fees, the better protection is well worth the
extra cost.
4. Miscellaneous New Rules
The new law dealt extensively with the conduct of restricted
agents. A new category was created that of the
commercial registered agent, which shall be registered
with state. Registered agents that don’t comply with
rules to be established by the Secretary of State’s
office can be banned from the business. In keeping with
the new disclosure rules, registered agents must keep a
company’s stock ledger for three years following the
registration or termination of the agent or dissolution
of the company.
The new law allows for professional LLCs. Many doctors,
lawyers, CPAs and the like have wanted the flexibility
of operating their practices as an LLC but were
prohibited from doing so. The new law follows the trend
of many states of now allowing for professional LLCs.
The importance of the corporate election of directors was
underscored in the new law. Companies that fail to elect
directors within 18 months beware. The owners of 15% of
the corporate stock can go to court to force such an
election.
The reinstatement of entities was made more effective. A
corporation, LLC or LP that fails to pay its annual fees
to the state can lose its right to do business.
Reinstatement involves paying back fees to bring the
entity current with the state. The new law provides that
reinstatement reinstates the entity’s right to do
business as if the entity had been current all along.
As we have noticed before, the law is a dynamic and ever
changing area. Nevada’s new laws prove the point. Once
again, if you or a friend would like to continue
receiving these updates please click here.
We will keep you informed.
About
the Author:
Garrett Sutton, Esq. has over twenty years experience
assisting and advising entrepreneurs, families and
business in selecting the appropriate corporate
structures to limit their liability, protect their
assets and advance their personal and financial goals
through real estate investments and other means of
wealth creation.
A
best-selling author, speaker and a member of an elite
group of "Rich Dad's" advisors, hand selected by author
Robert Kiyosaki, Garrett speaks to investors and
entrepreneurs on a variety of topics including asset
protection, liability limitation, wealth creation, as
well as various business and real estate issues. As an
advisor for Robert Kiyosaki, Garrett has authored
Own Your Own
Corporation,
How to Buy & Sell a
Business, and co-authored Real
Estate Loopholes. These titles are included in the
"Rich Dad, Poor Dad" wealth-building book series.
Additionally, under the SuccessDNA Publishing label,
Garrett has authored and co-authored numerous books
including, How to Use Limited Liability Companies and
Limited Partnerships. Visit
www.CorporateDirect.com for more information.
View All Articles from Business Info
Guide
