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Incorporating in Nevada

Incorporating in Nevada

August 30, 2006
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" A tiny but significant portion of that filing stream is made up of newly formed adult Internet companies. "

Five years ago, Las Vegas resident John Vanhara was your average Czech expatriate looking to make money on the Internet. Then came the bursting of the dotcom bubble, 9/11 and the subsequent dramatic reshuffling of business plans.

"When the Nasdaq went down, I was just thinking, what else can I do?" Vanhara says.

At the time, Vanhara had only two major assets to his name: EastBiz.com, the URL of his old barter site company, and the hard-won knowledge of how to set up a corporation in one of the country's most business-friendly states. Putting two and two together, Vanhara quickly shifted business models, offering to help other cash-strapped companies relocate to the low-cost environs of the Silver State.

"The first year was really slow, maybe two or three orders per month," he says. "In 2003, I got to three per week. That's when I opened my office."

Three years later, EastBiz.com averages just shy of 200 filings a month. Billed out at $89 apiece — not including the state's $75 filing fee but covering everything from initial paperwork to the yearly reminder to send in a fresh corporate officers list — the rate of filing adds up to roughly $800 a day. Vanhara has since expanded his incorporation service to include all 50 states but insists that Nevada filings are still the bread and butter of his fast-growing business. "If you have a very small business and you don't want any hassle, Nevada is your choice for that," he says.

It's a poorly kept secret that not all states are created equal when it comes to the benefits and drawbacks of incorporation. For more than a century, Delaware, the second-smallest state in terms of land area and the fourth-smallest in terms of population, has wooed America's corporations by offering the nation's most business-friendly court system and a business code built to accommodate out-of-state shareholders. In recent decades, such states as Florida and Texas have joined in the act, passing laws to protect corporate insiders' key personal assets in the event of Enron-style bankruptcy filings.

Few states have been as aggressive or as successful in this corporation courtship game as Nevada, however. According to the office of Dean Heller, Nevada's secretary of state and the man responsible for overseeing the corporate sector, the Silver State minted a record 82,000 new corporations last year, a 15 percent jump over 2004 filings.

A tiny but significant portion of that filing stream is made up of newly formed adult Internet companies. Granted, the number of adult companies willing to broadcast and brag about their Nevada corporate status is low, but Vanhara says he's noticed a growing number of adult-oriented Internet companies showing up on his client roster.

"We never ask what kind of business our clients do, but we do get their mail," Vanhara says. "People who do adult, their credit card companies send all these threatening letters saying, 'We didn't know you were doing that.' We receive those letters."

Another Service: 2257
Sensing additional revenue opportunity, Vanhara and Eastbiz.com have begun to offer 2257 compliance age record-keeping as additional service to Internet filers.

One adult industry executive willing to speak on the record about the pros and cons of Nevada incorporation is Lars Mapstead, aka Legendary Lars, president of Streamray Inc. and its more recent offshoot Cams.com. Both companies show up in the Nevada secretary of state's online database, as does Lars's older company Cyberzine Inc., best known for its lengthy legal battle with AOL.

In each case, the company filings list a generically named registration company as a local agent and Lars as the sole corporate officer, a reflection of corporate filing forms' discretion when it comes to asking about business mission or shareholder interests.

"They are a little more protective than if you were, say, a California corporation," Lars says.

That protectiveness, notes Mark Warda, a Florida attorney who specializes in real estate trusts and author of "How to Form a Nevada Corporation From Any State," has made the state a natural destination for privacy-prone businesses and individuals.

"Many of the local companies that handle registration for out-of-state businesses also will offer to be your president for 364 days a year," Warda says, "You pay them a fee, usually $100 or so, and then fire them when you need to file your annual report with the state. The next day, you hire them back again."

Lars says he never went the ultra-secrecy route partly because, in the case of Streamray and Cams.com at least, the companies are partially managed out of the Las Vegas offices of a company Lars acquired several years ago. Rather than relocate the entire operation to California, he has chosen to leave it on the books in Nevada and take advantage of Nevada's lower filing and management costs.

"It's probably about 30-40 percent cheaper in terms of technical salaries," Lars says. "Also, Nevada is a fire-at-will state. You can basically tell somebody to walk without having to build up a ton of documentation like you have to do in California."

The latter management bonus, Lars points out, is an artifact of the hospitality industry's outsized economic power. Without the ability to fire at will, Nevada's large casinos and hotels would never be able to survive steep drops in tourism, such as the one that hit the city in the immediate wake of Sept. 11, 2001.

The state's discretion when it comes to demanding the name of corporate insiders and shareholders, meanwhile, is an artifact of both the real estate and mining speculation that drew the earliest pioneers into Nevada's rugged badlands. Indeed, most of the companies and individuals taking advantage of Nevada incorporation, Warda says, are property owners looking to distance assets from the prying eyes of divorce attorneys, journalists, business competitors and, in some cases, tenants and clients.

Multiple LLCs
"A lot of my clients who incorporate there will have multiple LLCs," Warda says. "One LLC owns the property. Another LLC manages the property, making it that much harder for the tenant to sue the actual property owner. It seems sneaky, but a lot of that stuff I personally feel is legitimate because with our lawsuit-happy legal system, it balances things out."

When it comes to shielding such assets from the government, however, Lars sends his fellow entrepreneurs a warning. He cites the case of Gilbert P. Hyatt, a software engineer who, after patenting a novel computer chip in 1990, relocated from Southern California to Nevada to keep the California Franchise Tax Board away from his $40 million in patent licensing fees. The Franchise Tax Board ultimately sent agents to Las Vegas to stake out Hyatt's home and dig up documentation confirming California residency at the time of the first payments.

The moral of the story: What happens in Vegas doesn't always stay in Vegas if the state where you do the bulk of your business has a good incentive to audit your income stream. For that very reason, Lars, rather than attempting to qualify as a Nevada resident, chooses to file his taxes in California.

"I looked at it and decided that in the industry we're in, it's just better to pay every penny," he says with a chuckle. "You can sleep a lot better at night when you do that."


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