California tries to Circumvent Nevada Corporate Law

August 9, 2007 at 1:53 pm | Posted in Corporate Strategies | Leave a comment
Tags: corporate structuring, financial privacy, nevada corporations, Tags: Corporate Strategies

The Majority Rule among the states is that the law of the state where a corporation is formed will be applied when addressing the question of whether a corporation’s veil should be pierced and the shareholders’ or corporate officers’ personal assets seized. This principal is frequently referred to as The Internal Affairs Doctrine. Stated simply, the internal affairs of a corporation are controlled by home state law, and the issue of whether shareholders or officers will be responsible for corporate liabilities is held to be an internal affair of the corporation. Because of this rule, Nevada is the preferred state for incorporation since its laws offer the greatest protection for shareholders and officers. Under the Internal Affairs Doctrine, Nevada law applies to a Nevada corporation operating in California.

However, California has tried to make inroads on the Internal Affairs Doctrine by holding that the laws of the state of incorporation may not apply if an out-of-state corporation does not have sufficient contacts with its home state. Recent California court opinions have used the term pseudo foreign corporation to describe corporations which in their view do not have sufficient contacts with their home state; the word pseudo means fake. If a court determines that a Nevada corporation does not have sufficient contact with the state of Nevada, it can avoid applying Nevada Law. In making this determination, the courts look at the following factors:

1. Does the Nevada corporation have a Nevada address? If so, does it receive any mail at this address? Does it receive faxes at this address?
2. Does the Nevada corporation have a Nevada phone number? If so, does it receive any calls at this number?
3. Does the Nevada corporation ever meet with clients or hold internal meetings in Nevada? Are its Shareholder Meetings in Nevada?
4. Does the corporation perform any of its administrative functions, such as tax preparation, bookkeeping, or corporate/legal consulting in Nevada?

Additionally, the State of California has enacted a pseudo foreign corporation statute which provides that California law will apply to the “internal affairs” of foreign corporations doing business in California if more than 50% of the corporate stock is held by a California resident. See generally, California Corporations Code section 2115 However, utilization of a properly configured estate plan allows you to avoid the force and effect of this statute. With a proper estate plan you can have a Nevada domiciled trust hold the stock to your Nevada corporation. Interestingly, the very existence of this statute establishes that Nevada law is generally applied to Nevada corporations operating in California; if Nevada Law did not apply, there would be no need for this statute.

The bottom line is this; the more a Nevada corporation is tied to Nevada, the stronger its ability to defeat a pseudo foreign corporation attack To meet this objective, your Nevada Corporation should have a Nevada address, phone number, bank account and some degree of physical presence. Our Virtual Office program provides these services. Secondly, Nevada Corporations operating in California should be configured so that 51% of the stock is held by an out of California proxy. A personal estate plan will allow you to achieve this result.

CALL NEVADA STATE CORPORATE NETWORK TODAY AND DISCUSS HOW WE CAN HELP YOU ACHIEVE THESE OBJECTIVES:

1-800-910-9919 or visit our web site for more information. Nevada State Corporate Network, Inc. – Graig Zapper – President