The recent Los Angeles condom ordinance has caused many industry insiders to speculate that large swaths of the adult entertainment industry might relocate to Las Vegas. Relocating a company’s entire operation is a large – and potentially expensive – undertaking. Accordingly, there have been few traffic jams involving moving vans full of porn companies’ worldly possessions. However, our firm has seen an uptick in the number of companies seeking to take the first step – incorporating in Nevada. This “moving on paper” to Nevada can be advantageous, even for companies that never intend to leave their home state, and even for companies that do not have any connection to California.
The rationale for basing a business in Nevada has been well-known for some time. Nevada’s corporate laws are very business friendly, particularly when compared with those of our neighbor to the west. In fact, Nevada is every bit as attractive as Delaware as a corporate haven for any industry – in fact, more so. When considering its proximity to California and its traditionally friendly relationship with all aspects of the sex industry, incorporation in the State of Nevada holds an unparalleled allure for adult entertainment providers.
Nevada provides a layer of anonymity and privacy that virtually no other state can offer. Nevada and Texas are the only states that do not have an information sharing agreement with the Internal Revenue Service.
Most are familiar with Nevada’s very favorable tax laws. There is no corporate or personal income tax in Nevada. The state has no franchise tax and does not tax corporate shares. Payroll taxes are among the lowest in the nation, and annual fees are nominal. However, the benefits of incorporation in Nevada do not end there.
For example, Nevada provides a layer of anonymity and privacy that virtually no other state can offer. Nevada and Texas are the only states that do not have an information sharing agreement with the Internal Revenue Service. The other 48 states and Washington, D.C., all share tax information with the federal government. Nevada does not, and its corporate laws and tolerance for the adult industry are unquestionably far more favorable than those found in Texas.
Corporate shareholders are not a matter of public record in Nevada. Corporations only need to disclose an appointed director, certain officers, and a registered agent for acceptance of service to the public. The only requirement for a shareholder is that he be at least eighteen years of age (and, in the case of close corporations, a natural person; C-corporations and limited liability companies may have shareholders that are other companies). Shareholders do not need to live in or hold meetings in Nevada. In fact, they do not even need to live in the United States.
Nevada additionally offers attractive options for shareholders, directors, and officers regarding potential liability in the event of a lawsuit. Joint and several liability has been abolished in Nevada. Thus, each defendant in a lawsuit is only responsible for damages in proportion to that defendant’s degree of fault. Nevada’s corporate laws expressly limit a shareholder’s liability in a lawsuit to the amount that he invested in the corporation.
With regard to directors and officers, they can be indemnified from any liability to a corporation’s shareholders. Citibank found this rule to be so attractive that it caused the company to relocate its operations entirely to Nevada. (Concerned about the appearance of operating in Las Vegas, the bank successfully lobbied to have an entire business-heavy portion of the Las Vegas Valley renamed “The Lakes.”) While a corporation’s directors and officers are obviously required to act in good faith, liability will not be imposed upon them outside of intentional misconduct, fraud, or a knowing violation of the law. Not even Delaware offers equivalent protection to a corporation’s directors and officers.
Nevada’s state courts are traditionally far friendlier with regard to protecting the corporate veil than courts in California and expressly permit corporations to form solely for the purpose of limiting shareholder, director, and officer liability. In fact, Nevada is a “thin capital” state and allows corporations to be formed for capitalization of as little as $100. In California, such low capitalization would likely cause a court to pierce the corporate veil, rendering the corporation’s directors and officers personally responsible for corporate malfeasance or liability. In Nevada, such a result is far less likely.
With extremely rare exceptions, Nevada’s courts virtually never pierce the corporate veil of Nevada corporations. In a span of thirty years, courts in the state have pierced the corporate veil on only two occasions, and both instances were because of fraud by the owners of the corporations.
For instance, in Roland vs. Lepire, a 1983 case often described as the first modern case where a Nevada court has opted to pierce the corporate veil, corporate protection was only disregarded by the court after it had determined that the corporation: (1) was not only inadequately capitalized but actually had a negative net worth; (2) had never held director and officer meetings; (3) had never kept a corporate minue book; (4) had never paid dividends to shareholders; and (5) had never paid salaries to its directors or officers. In other words, the Nevada court only pierced the corporate veil after it had determined that the corporation had disregarded virtually every single corporate formality. As long as corporate formalities are maintained, it is relatively safe to assume that no court in the state will disregard the corporation as a separate and independent legal entity.
Nevada also boasts protections against reverse corporate veil piercing that are unique within the entire country. While traditional corporate veil piercing reaches through the corporate form to reach personal assets, reverse piercing seeks to reach through the corporation to reach company assets in satisfaction of personal liabilities. While other states allow holders of personal judgments to reach company assets – ranging from cameras to servers to trademarks and copyrights, and even the management rights of the company itself – Nevada severely limits these remedies and ensures a reverse-piercing of the corporate veil cannot affect company management rights or assets. Nevada has codified these protections within its business statutes, and even extended such protections to single-member limited liability companies.
Nevada has additionally adopted business courts that are specifically designed to minimize the time, cost, and risks associated with corporate litigation. The state’s business courts engage in early and enhanced case management, actively participate in settlement, and give priority to business cases to ensure minimum business disruption. Perhaps most importantly, the business courts ensure that business disputes have a level of predictability in the state that can serve to reduce costs and expenditure of attorneys’ fees.
Of course, Nevada’s laws are generally favorable to businesses in many other ways that make it arguably the most attractive state in which to incorporate. Adult entertainment businesses would be well served to examine their current corporate structure and consider making the “move” (even if only on paper) to businessfriendly Nevada.
Marc J. Randazza and Ronald D. Green are with the Randazza Legal Group © Randazza Legal Group, 2012