Toby Mathis: All right, welcome. We’re going to start “How to Properly Use a Nevada Corporation.” Well, I’m just going to give you a quick overview of who your presenter is. My name is Toby Mathis. I oversee the Las Vegas office for Anderson Law Group. We have offices, main offices, in Tacoma and it Las Vegas. I’ve been practicing law for 17 years, recently authored the “Matthew Bender Practice Guide for Choice of Law Provisions in Washington State,” filed over 30,000 entities. I’m the largest nominee in the state of Nevada, and we’ll talk about what that is it a little bit.
As for our Las Vegas location, we’ve been a Business of the Year. We been voted a Best Places to Work. The State Department uses us when they bring in foreign delegations to learn about doing business in the United States, amongst a few other things. Just to give you an idea of who I am and what we do, we work with small businesses. So we use Nevada a lot for reasons that hopefully you’ll get in the next hour.
First thing we probably want to cover… Let’s see if I can make my clicker work. Oh, it’s out. Is, Oops, “why do Corporations Exist?” Well, this is kind of interesting. A lot of you guys may not be aware that the Dutch East India Company was actually the first corporation. It’s kind of a multinational corporation. It’s actually in 1602. It was a chartered company, established in Holland, and it was literally the first company to issue stock. So we always look at it, in the legal industry, as the first corporation, the first multinational corporation, but it also had massive powers, including quasi-governmental powers, the ability to wage war, imprison and execute, negotiate treaties, coin money and establish colonies. So it was a super corporation, so to speak. So it was pretty darn powerful. Go back there.
So we use that as our predecessor. These things have been around for a long time. The United States, obviously, wasn’t quite around yet, but we borrow a lot of the principles, and the principle is that, for example, in this case, you have these ships go out, and if you were wealthy, why would you want to . . . So, if you were wealthy and you wanted to make a nice return on your money, why would you put all of your assets at risk, if you are investing in an endeavor like a ship, where someone might die? You might have wrongful death claims, etc. They could come and take everything you own. So the idea of the first corporations was to isolate that risk and to make sure that you could lose everything, just your investment.
So when we look at corporations, what we’re really going to do is isolate liabilities, and we’re going to talk about inside liabilities and outside liabilities, but this isolation and this sort of protection encourages economic rest. So corporations are really built for one purpose, and that’s to go out and conduct business.
Now this is the next point, is a point of confusion for a lot of folks, which is they hear about these not-for-profit corporations. They’re still out there for business. They just don’t need to make a profit, and so they get some tax benefits, and a lot of people are familiar with 501(c)(3)s where you can make charitable contributions, but that’s not the only type of not-for-profit. If you go down to any local Rotary Club or Kiwanis, or whatnot, you may not be able to make a charitable donation directly to the local club. They may have a foundation that’s part of them, but those are non-for-profit, just business organizations, and again, they just get a tax break; they don’t have to pay tax on their profits.
But on the same token, they’re restricted in some of their activities, but make no bones about it, the corporations are therefore one purpose and one purpose only, and that’s business, and as a result we get a lot of benefits for them, which we’ll be getting into.
What exactly is a Corporation? You see our little artificial man over there. He saying, “Hey, corps are people too,” looks a little depressed because folks really don’t understand that, well, they’re artificial people. The courts look at them as an actual person with certain rights. It might be the right to sue, be sued, enter into contracts, and do whatever activities that that particular state gives them, and perhaps even the federal government.
It’s derived by the Latin word “corpus.” For those of you who went to Catholic school, maybe you had to endure some Latin. I sure did. Took three or four semesters of it. It just means “a body of people.” So corporation is a fancy way of saying “a whole bunch of people acting as one.”
The cool thing about corporations is that their perpetual. They do not die with the owners. The best example I can give you on that is if you’re a shareholder in Microsoft and you pass away, Microsoft doesn’t cease to exist. If you are a sole proprietor, on the other hand, and you’re doing business just as yourself and you pass away, your business goes away too. It’s gone. So that little perpetual existence is important, especially when we’re talking about family planning. Corporations lend themselves fantastically to putting in management organizations to oversee family assets because you can have multiple generations running the same business and getting benefit out of it, and successions. You can have multiple generations going one after the other, learning to run the business, so kind of oversees the family’s assets, and you will see some slides as to how that works.
They provide asset protection, both inside and outside, which I will go over here into slides. But what it does is it protects you, when you invest in a Corporation, from having to worry about them coming and taking your personal assets, too. So while this is completely applicable to a corporation, I’m going to use an example that we use a lot in real estate, which is, let’s say you’re a doctor and you go out and you buy a rental property. I say, “What’s the worst thing that can happen?” and they say, “Well, I suppose you could have a claim on the rental property and they could take the property,” and I say, “No, they don’t need to stop at the property. They can garnish your wages for a long time.”
You can renew judgments for 10 years. So they could file around until you’re retired, and then if you have an IRA, they can even take your distributions out of your IRA. So what this does is a way of isolating liabilities, so that if you’re engaged in an activity, that you don’t have to worry about them following you around and taking your other assets. I mean, we’re talking about some folks that I’ve seen, personally, where they expose all of their assets in their names to business activities that end up costing them a tremendous amount of money because they did poor planning.
An important concept, and this is going to be a little bit of an aside, but whenever you’re sued, the plaintiff is the master of the pleadings. So they can choose which causes of actions to assert, and if they see somebody with a bunch of assets in their name, even though it’s something that should be covered by insurance, they will oftentimes plead causative actions that would not be covered by insurance. The reason they do that is to put your personal assets at risk, and so that you have to kick in personal assets, as well the insurance company paying.
Insurance company on the same side will issue you a little letter that says, “Hey, we will defend, but we reserve our rights to collect that money if we find out that the real problems here, or portion of the problem, was outside of the policy,” and they can actually become another plaintive for you that comes after you.
Hold on for second. I see a question: “Can they take the distributions from a 401(k) and stuff?” It depends on whether it’s ERISA. If it’s qualified under ERISA, and for example a 401(k) has multiple participants, then they would, on a SEP-IRA, then it would because that’s one person. So it’s important about going after assets. I hope you guys are okay. I’ll answer your questions as we go along, if the relevant. What’s important to know is that it’s like the O.J. Simpson plan that was the NFL player union plan, they cannot take his distributions out of his retirement plan. If that was an IRA, they could.
So a lot of people they talk to their attorneys and they say, “No, IRAs are actually protected.” Well, they may not be able to go into the IRA, but they can certainly take the income out of it. The same thing is true when we talk about divorce planning. Sometimes they say, “Hey, I have a separate asset. I want to keep it separate,” and I say, “That’s fantastic. You might be able to isolate the separate asset, but the income that that asset kicks off if you get divorced, they can hand it to the ex-spouse.” So just go in with your eyes open as to what the reality is, and always deal with planners that actually do this for a living. You don’t want to go to the guide it’s doing divorces and doing other kinds of general practice, and all of a sudden he puts on his corporate hat, or she puts on her corporate hat and says she’s a big planner.
The next thing is tax planning. Because they’re built for business, corporations get preferential tax treatment in the IRS. There’s some absolutely fantastic benefits, including reimbursements for medical, dental, vision and not having to comply with the hobby loss rules for C corps. There’s some really cool benefits that are out there, and I hope you don’t mind me using the language “cool.” Some folks like hearing lawyers use legal jargon, unlike saying things like, “Hey, that’s really awesome,” or, “That’s really cool.” You get some great tax benefits because they are set up for that. So purpose.
Now, this next point, the state statutes, that’s a big one. You have to understand that 99.9% of corporations, other than big federal organizations, are set up under state statutes, and why is that important? It’s because we have all these states, 50 states. It’s like a menu. Each state is different. Each state has its own laws, and we can go around and we can pick and choose, under certain circumstances, we can decide where we want to actually incorporate, and I’m going to go over some of the provisions that are relevant, and then the truth behind how to use multijurisdictional planning because there’s a ton of bad information out there.
There’s horrible promoters that are not actually attorneys or any licensed professionals, and they’re just hawking. Sometimes they’re hawking Nevada; sometimes they’re hawking Delaware; sometimes they’re hawking Wyoming, and it’s not going to work for you because of your situation, but they don’t care; they’re just trying to sell something to you, and so they don’t take the nuances into consideration.
So here’s the big one, inside and outside liability, and this is going to apply to all corporations. Inside activities… Here, let me just get my pen. Right here, we’re talking. A little check mark there. The inside activities are what occurs inside the company. This is, and we’re going to go to the next slide, which is, this is your directors, your officers, how they interact with each other, how they interact with shareholders. Those things are one area, and then there’s outside liability. There’s the customer.
Here’s a customer, and in this particular case he saying, “Hey, I’d like to buy some widgets from your company,” and we look and say, “Where’s that going to be covered by? What a jurisdiction is going to cover that?” and so we have some options; we get to choose, perhaps, where we cover our inside activities, and maybe if we’re doing business in a state we’re going to have to deal with some out-of-state stuff, too, but in either case, those are the two types of liability, and let’s talk about inside.
It really comes down to the players that are involved in the Corporation. The first ones are the owners. They’re known as “shareholders.” They own and control the corporation. They’re typically not liable for the acts of the Corporation, unless they do some really bad stuff, and again, that’s going to depend on the court and the statutes that are written in that particular state where the matter is being heard.
The reason the corporation’s in charge is because they get to elect the directors. So the shareholders are pretty passive. For example, if you’re a shareholder of Microsoft, you may get a notice once a year of a shareholder meeting, but you really have no say, but if you’re a small, closely-held company, where your account for 50% of those shares, yeah, all of a sudden you may control those directors, and those directors are the ones that make the big decisions, and they may or may not receive compensation. They make the policies, but they must be 18 years of age or older. So in a lot of situations, you have families where they’ll, as their kids get older, they put them on the Board of Directors, and they may not pay them a wage. That does not mean they cannot give them fringe benefits.**