TAX SAVINGS IN NEVADA -- AND A STRONG WARNING Once you're operating your small business, you should seriously consider the advantages of incorporating in Nevada. Nevada is one of several states that have no corporate income tax, but in addition there is no state personal income tax, and no franchise tax. Many large corporations use Nevada for warehousing because there is no inventory tax. That may seem beyond the reach of a small business but if you organize your business as a Nevada corporation you may then contract with a local warehousing and fulfillment service to process and ship orders from Nevada. Already such companies as Citibank and Porsche North America have moved their corporate headquarters to Nevada. For as little as $2,500, you can enjoy the same advantages as these corporate giants. For many companies, the most important reason to incorporate in Nevada is that there is no state income tax. If you live in a high-tax state this can be crucial. In California, for example, corporations pay a minimum of $9,600 on every $100,000 of taxable income. If minimizing taxes is your concern, your strategy should be to form a Nevada corporation and arrange for the profits to accumulate there rather than in the high tax state in which you presently do business. This is easier than you may think. Suppose you run a small company and have some major element of the business that can be handled from Nevada. Or a service that can be contracted for through the Nevada corporation. If you do this with a service, it is important that the entire service is not performed in the high-tax state, in which case the Nevada corporation is subject to the same taxes in that state as any local corporation. But your sales representative travels a 10 state area, so you make the Nevada corporation your distributor for those 10 states, and pay his salary out of the Nevada corporation. His official base is now Nevada. You pay your Nevada corporation a sufficient commission to keep most of the profits in Nevada instead of in the state where your business is physically headquartered. Or you could contract for sales management services from the Nevada corporation, paying it a fixed fee, and it pays your salesman. Next, you tell your salesman that he is being transferred to a new employer. He still gets the same salary, and he still does the same job at the same pay. The only difference to him is that his paycheck comes from a different issuer. Your fee to the Nevada sales management company might be $75,000. Suppose that you are paying the Nevada corporation an extra $47,000 in management fees over what your salesman was previously paid, so your net profit is zero. Oddly enough, that's good news. Zero profit means zero corporate income tax in your high-tax jurisdiction. Now you have $47,000 of profit at zero taxes in your Nevada corporation. Best of all, it's perfectly legal. All you have to do is make certain that the accounting and management of the sales company are actually being done through the Nevada corporation, and that all sales are booked and invoiced accordingly. This general method of transferring income and profit from high-tax jurisdictions to low-tax jurisdictions is common. It will work for just about any goods or services your business requires, other than those of a purely local nature. Note that a Nevada corporation will help reduce only your state taxes. Federal taxes apply in all states. However, you could create a third company in a tax-free jurisdiction outside the United States. Then you could potentially escape federal taxes as well . (But before doing that, it is important to get good accounting advice, so that you don't have an argument with the IRS over "transfer pricing.") Many promoters of Nevada corporations try to sell you on the use of a Nevada corporation for lawsuit protection. Unfortunately, most of the information being given out is not only inaccurate, it is positively dangerous. It is generally based on hiding your ownership of the Nevada corporation. Keeping your ownership private and confidential is fine, and may reduce the risk of a lawsuit because you don't appear to be a financially attractive target. But actually hiding your assets in litigation is fraud, and lying about your assets in a court proceeding is perjury. A quiet public appearance is one thing, but don't let the people trying to sell you a Nevada corporate package inadvertently lure you into unknowingly committing a crime. It is you, not the corporate agents, who will be facing a prison sentence, and saying you got your legal advice from a corporate promoter's brochure is not a good defense. Nevada corporate promotion literature usually stresses that Nevada does not require public disclosure of corporate shareholders. They conveniently forget to tell you that neither does any other state in the U.S.! And in all states the officers and directors are a matter of public record. Any corporation provides privacy to the extent that to determine the shareholders, a court action involving either the corporation or the individual is necessary. But if a court in your home state has jurisdiction over you because of a lawsuit, all of your holdings do have to be disclosed. (There are ways to protect those assets with trusts, but thinking your concealed ownership of a corporation in Nevada -- or in any other state -- is asset protection is foolhardy and reckless.) Another claim of a few of the Nevada promoters is that Nevada allows bearer shares. It doesn't, and federal tax law prohibits the issuance of bearer shares by corporations in the United States. Nevada state law requires that all Nevada corporations retain the services of a resident agent in the state who must have on file the name and address of the person who holds the stock ledger. But the resident agent is not required to keep the ledger himself. But, again contrary to what the promoters tell you, this is identical to the corporation law of the other 49 states and the District of Columbia. Corporation laws in all states are relatively uniform - - it is the tax laws that create the interesting differences. Nevada promoters will tell you that there are no minimum capital requirements, but that is true of about 40 of the states, and the rest have a very nominal amount such as $500 or $1,000. They'll also tell you that one person can hold all corporate offices and be the sole director -- but almost every state now has that feature. One Nevada promoter's brochure we have seen even claims that you can legally make up any name you wish as director of the corporation, citing the "common law rule that a person may use any name providing it is not for a fraudulent purpose." Fortunately most of the corporate brochures don't go that far, for this is again very dangerous advice. That is an often quoted but completely misconstrued concept of common law. Using a different name in your role as director of a corporation will -- in any jurisdiction -- not only be construed as a fraudulent act, but will convert your otherwise legitimate corporate business activities to fraud. Many states do have a common law principle that you may use any name -- IF you consistently and publicly adopt that name for all purposes. Most states require that public adoption to be by court order, and a few states make it a criminal offense to use a name not on your birth certificate unless it has been changed by court order. So don't fall for this one just because "somebody" told you that you could legally do it. The very fact that you are using the name only to hide your directorship in the Nevada corporation is overwhelming evidence of fraud in any state. You could jeopardize your entire business -- and even if you are not prosecuted, the resulting stench should it come out could destroy the reputation of your business. Would you want to do business with somebody who ran the business under a false name? You'd certainly question his integrity and honest intentions. The tax savings afforded by a Nevada corporation make it a tool worth considering -- even if you have never incorporated before. Needless to say, this attractive combination of benefits has spawned a whole new service industry to assist you. Many of the widely advertised corporate formation services are very good. But remember, they are only corporate formation agents, not lawyers or accountants. Any Nevada lawyer or accountant can not only form your corporation for you, but can give you other advice that is worth the fee. And their prices are competitive -- sometimes even cheaper than the corporate formation agents with large national advertising bills. A good source is to check the Martindale-Hubbell Lawyer's Directory, available at almost every public library in the United States. It will give you full background information on the attorney and his specializations. One last word of advice. The most common pitfall in using a Nevada corporation in the ways we have described is the temptation to cut corners. It is not enough merely to pretend to do business in Nevada. You run the risk of losing all your benefits if the books aren't in order, or if the board doesn't meet regularly to approve whatever the company is doing, or if the minutes of those board meetings are not up-to- date, or any other legal technicality has not been properly attended to and officially documented. But as a carefully and prudently run business, you can be assured that all the advantages we have discussed are yours to keep.