Excerpt from Chapter 1: Should You Incorporate in Nevada? Before you take the big step of organizing a Nevada corporation or limited liability company (LLC), you should understand the advantages and disadvantages of corporations and LLCs in comparison to the advantages and disadvantages of incorporating in the state of Nevada. For simplicity, when we say incorporate in this book, we will be referring to forming either a corporation or an LLC. ADVANTAGES OF CORPORATIONS AND LLCS For nearly any type of business, the corporation or LLC is preferred over the sole proprietorship or partnership. Except for the smallest home-based business, it is foolish to operate without the protections these entities offer. This section will review the advantages of using a corporation or LLC as your business entity. The main reason for forming a corporation or limited liability company (LLC) is to limit the liability of the owners. In a sole proprietorship or partnership, the owners are personally liable for the debts and liabilities of the business, and creditors can often go after their assets to collect business debts. If a corporation or LLC is formed and operated properly, the owners can be protected from all such liability.
Example: If several people are in a partnership and one of them makes many large extravagant purchases in the name of the partnership, the other partners can be held liable for the full amount of all those purchases. The creditors can take the bank accounts, cars, real estate, and other property of any partner to pay the debts of the partnership. If only one partner has money, he or she may have to pay all the debts accumulated by all the other partners. When doing business in the corporate form, the corporation may go bankrupt and the shareholders may lose their initial investments, but the creditors cannot touch the personal assets of the owners. Example: If a person runs a taxi business and one of the drivers causes a terrible accident, the owner of the taxi company can be held liable for the full amount of the damages. If the taxi driver was on drugs and killed several people and the damages amount to millions of dollars more than the insurance coverage, the owner may lose everything he or she owns. With a corporation, only the corporation would be liable. The owner could not be touched, even if there was not enough money or insurance to cover the damages.
One real-life example of this was a business owner who owned hundreds of taxis. He put one or two taxis into each of hundreds of different corporations that he owned. Each corporation only had minimum insurance coverage, and when one taxi was involved in an accident, the owner only lost the assets of that corporation. NOTE: The corporation will not protect an owner from the consequences of his or her own act or from the debt if a corporate officer or shareholder does something negligent him- or herself, signs a debt personally, or guarantees a corporate debt. Also, if a corporation does not follow the proper corporate formalities, it may be ignored by a court and the owners or officers may be held personally liable. The formalities include having separate bank accounts, holding meetings, and keeping minutes. When a court ignores a corporate structure and holds the owners or officers liable, it is called piercing the corporate veil. Continuous Existence A corporation or LLC may have a perpetual existence.
When a sole proprietor or partner dies, the assets of his or her business may go to his or her heirs, but the business does not exist any longer. If the surviving spouse or other heirs of a business owner want to continue the business in their own names, they will be considered a new business even if they are using the assets of the old business. With a partnership, the death of one partner could cause a dissolution of the business. Example: If a person dies owning a sole proprietorship, his or her spouse may want to continue the business. That person may inherit all the assets but will have to start a new business. This means getting new licenses and tax numbers, registering the name, and establishing credit from scratch. With a corporation or LLC, the business could continue with all the same licenses, bank accounts, etc. Example: If one partner dies and no prior agreements allow for the continuation of the business, the partnership may be forced to close.
The heirs of the deceased partner may be able to force the sale of their share of the assets of the partnership, even if the surviving partner needs them to continue the business. If he or she does not have the money to buy out the heirs, the business may have to be dissolved. With a corporation or properly drawn LLC agreement, the surviving member could be allowed to buy out the interest of the deceased one. Ease of Transferability A corporation and all its assets and accounts may be transferred by the simple assignment of a stock certificate. An LLC may be transferred with an assignment of a membership interest. With a sole proprietorship, each of the individual assets must be transferred, and the accounts, licenses, and permits must be individually transferred. Example: If a sole proprietorship is sold, the new owner will have to get a new occupational license, set up his or her own bank account, and apply for a new taxpayer identification number. The title to any vehicles and real estate will have to be put in his or her name and all open accounts will have to be changed to his or her name.
He or she will probably have to submit new credit applications. With a corporation, all of these items remain in the same corporate name. As the new shareholder, he or she would elect him- or herself director, and as director, he or she would elect him- or herself president, treasurer, and any other offices he or she wanted to hold. NOTE: In some cases, the new owners will have to submit personal applications for such things as credit lines or liquor licenses. Transfer of Ownership By distributing stock or different types of membership interests, the owner of a corporation or LLC can share the profits of a business without giving up control. This is done by keeping a majority of ownership or by issuing different classes of ownership-some with and some without voting rights. Example: If a person wants to give his or her children some of the profits of his or her business, he or she can give them stock and pay dividends to them without giving them any control over the management. This would not be practical with a partnership or sole proprietorship.