Incorporating Nevada : Piercing The Corporate Veil

2007-03-08 10:33:40

( Business )



A certain state is known to pierce the corporate veil quite liberally. Aggressive in applying its corporation statutes with regard to foreign corporations and likewise, its laws apply the doctrine of piercing aggressively.

The application of this law presumes that third party liability is not an “internal matter” of the corporation. Usually the internal affairs of the corporation are decided by the laws where the company is incorporated.

However, a certain ruling opens the debate as to whether a state can regulate a foreign corporation’s internal affairs. But it is not clear whether third party liability is regarded as an internal affair. Federal courts often rule that the state where incorporation is made applies when deciding whether the corporate veil should be pierced or not.

Given this situation, the previously mentioned state feels entitled to pierce the veil of foreign corporations who do business there.

However, not precluded in the test applied when deciding to pierce are:
(when applying the alter ego doctrine) –
1) The interests and ownership of the corporation and the individual/organisation who control it are so unified that they no longer exist separately.
2) Not disregarding the corporate entity results in the sanctioning of a fraud or promotes injustice.

The doctrine is applied when an innocent party attacks the corporation for injuring its interests. The real issue in this case is whether justice and equity can be done and seen and unfairness and fraud defeated if the distinct entity of the corporation is disregarded.

When you incorporate in Nevada, the same test is used in deciding about piercing the corporate veil. However in the first-mentioned state inadequate capitalization can cause a decision to pierce, excluding all other factors (even unjust results and improper purpose). Incorporating Nevada however, it becomes less likely that foreign companies will be pierced and undercapitalization has become an increasingly irrelevant factor. So a foreign company is less likely to face piercing in a Nevada court after incorporating Nevada.

However, a foreign company can carry out business in the first-mentioned state but avoid its laws by forum selection and choice-of-law clauses, which it achieves by incorporating outside of this state.

It can, for example, incorporate in Nevada and, by incorporating in Nevada, it can choose Nevada’s forum selection and choice-of-law contractual positions.

The reason for incorporating is so that your personal assets are protected from creditors.

So the advantages of incorporating Nevada rather than the other state are considerable.

Why?
1) Because “piercing” under Nevada’s law is much less likely and especially so on issues of undercapitalization.
2) If someone is domiciled in Nevada and is subject to piercing, the law there protects their assets substantially, which can be used later in bankruptcy.

So, really, the protection of your assets is far greater when incorporating Nevada – which after all why people incorporate in the first place.


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