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For many years, there has been an attempt by some in the state of Wyoming to promote Wyoming as a viable competitor to Nevada as a favorable incorporation jurisdiction for closely-held companies.  In fact, Corporate Service Center opened a subsidiary in Cheyenne, Wyoming in 1993, and became the first incorporation company to promote and specialize in Wyoming company formation.

We learned from our many experiences in Wyoming that Wyoming simply does not – and, in our opinion, will not in the future – offer incorporation benefits that meet or exceed those that Nevada already provides.  The current Wyoming Secretary of State does not favor promoting Wyoming as an incorporation center, and the Wyoming Bar Association is opposed to an in-state incorporation industry.  As a result of our experiences in Wyoming, Corporate Service Center of Wyoming was closed after 11 years of operation, and many of the Wyoming clients were re-domesticated into Nevada.

Nevertheless, one Wyoming incorporation firm (www.wyomingcompany.com) actively promotes a comparison of Wyoming and Nevada, listing the following advantages in favor of Wyoming incorporation (quoting from their website):

1. No state income taxes

2. No information collected to be shared with the IRS

3.  Privacy allowed

4. Shareholders are not listed with the State

5. Best asset protection laws

6. Nominee officers are legal

7. Citizenship not required

8. State tax not being considered

9. Wyoming draws little attention

10.  No Nevada “stigma”

11. Lower startup costs

The purpose of this paper is to analyze these claims and compare the actual strengths and benefits of Nevada versus Wyoming incorporation.

1. No state income taxes.  Neither Wyoming nor Nevada collect income-based taxes.  Personal income tax is unconstitutional in Nevada, but not in Wyoming.  Neither state imposes a corporate or business income tax.  This is an empty argument when comparing Nevada to Wyoming.

2. No information collected to be shared with the IRS. This is an carefully-worded claim.  Note that the claim is not that Wyoming doesn’t share information with the IRS, it is that they don’t collect information that can be shared with the IRS.  In fact, another Wyoming promoter states clearly on their website (www.wyomingcorporations.us) that Wyoming DOES have an information sharing agreement with the IRS.  (For the record, Nevada does not share state data with the IRS, but it does receive federal data on state entities, making the information sharing a one-way street.)  This factor provides Wyoming with no advantage over other states that do not collect financial data, such as Nevada.

On this issue I would like to make a few points:

a. States that do impose state corporate taxes collect financial data on companies that is subsequently shared in an exchange-agreement with the IRS.  States that do not impose corporate taxes – where no state tax return is filed – naturally don’t collect financial data that can be shared.  So, this factor provides Wyoming no benefit over Nevada.

b. Nevada’s position on not sharing state financial data is based in the politics of having so many voters working in the gaming industry, where tips provide a portion of the worker’s overall compensation.  Sharing data with the IRS includes much more data than just tax records.  The state official that changes this policy to allow state data, such as state employment records, vehicle registration information, etc., will have no future in Nevada politics.  Thus, Nevada has a greater incentive than other states to maintain the status quo on this issue.

c. In practice, most information that is available to the IRS is provided by banks and other financial institutions, who collect a significant amount of data in compliance with the “know your client” provisions of the U.S. Bank Secrecy Act.  Thus, the status of individual state information sharing with federal agencies is becoming increasingly irrelevant.

d. Promoting “no IRS information sharing” as a benefit to incorporating in any state is a bad business practice that negatively impacts the reputation of that state.  The Nevada Registered Agents Association approved placed this issue on its list of Discouraged Practices when they adopted their Industry Best Practices in September of 2008. Wyoming promoters engaged in this practice are creating an increasing negative stigma to Wyoming incorporation from the perspective of federal law enforcement and the IRS.  Companies that promote this advantage are under the microscope of the IRS.

3. Privacy allowed.  When speaking of privacy in the context of incorporation advantages, we are generally speaking of maintaining the privacy of owners.  Most individuals who are concerned with maintaining their ownership privacy place the highest priority on protecting personal information from public access and civil lawsuits.  Some place the highest priority on maintaining privacy from the government and law enforcement.  No state collects the ownership information of all business entities.  In fact, the Government Accountability Office issued a report (“Company Formations: Minimal Ownership is Collected and Available”) in 2006 that outlined what they perceive as weaknesses in state incorporation procedures and record keeping because ownership privacy is essentially provided in every state.   (Data collected by the Nevada Department of Taxation, which can include some ownership information, is confidential by statute.  This date is not available to the public, is not sold, and cannot be obtained by law enforcement.)  Again, for practical purposes, this type of information is collected by banks or other financial institutions when corporate bank accounts are opened.  Thus, this factor is of no advantage when comparing Wyoming with any state.

4. Shareholders not listed with the State.  See above. Wyoming has no advantage over other states.

5. Best asset protection laws. It is interesting that #5 on the list of Wyoming advantages is the #1 priority for almost everyone making the decision about where to incorporate.  Does Wyoming really offer the “best asset protection laws”?  Let’s discuss the three specific elements of protection that an incorporated entity can provide in light of the standard of what is “best”:

INDEMNIFICATION.  The protection of indemnification applies to those persons who act, fail to act,  make decisions or fail to make decisions on behalf of the corporation.  The degree to which the individual is indemnified is the degree to which they are “held harmless”, or not personally responsible for those actions, decisions, or failures.  Each state defines the strength of the indemnification of these persons by application of “Duty of Care” standards that are applied to the person(s) taking corporate actions or making corporate decisions.

In the area indemnification, Nevada and Wyoming have almost identical laws.  The level of indemnification available to corporate officers, and directors is at the highest level.  But there is one important distinction:  In Nevada this indemnification is automatic, while the protection is optional in Wyoming.  Where indemnification is optional by statute, it is not guaranteed.  Thus, Nevada has better indemnification provisions than Wyoming.

CORPORATE VEIL. The corporate veil separates the assets and liabilities of the company from the assets and liabilities of its owners; thus protecting owners from business risk.  In order to pierce the corporate veil, and attach assets of individual owners to satisfy the debts and obligations of the business, a court must apply a legal doctrine known as “alter ego” theory, which establishes that the business and the individual cannot be separated.  Each state has a different standard for defining alter ego doctrine.  In most cases, it is defined in the precedent of case law, such as in California where presently 28 separate factors can be used to pierce the corporate veil.  In a few cases, it is defined in statute. Nevada defines the alter ego doctrine by statute; Wyoming uses a combination of statutory reference and case law.

Under Nevada statute (NRS 78.747) alter ego can only be applied when all three of the following factors are present:  a) The corporation is influenced and governed by the individual; b) There is such a unity of interest and ownership that the corporation and the individual are inseparable from one another, and; c)  To keep the corporation separate from the individual would be to promote fraud or manifest injustice.  This is the “best” corporate veil protection available, because it relies on the standard of “fraud or manifest injustice”, which requires evidence of ill intent to proceed with veil piercing.

Wyoming code (17-16-622) states that “unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation EXCEPT THAT HE MAY BECOME PERSONALLY LIABLE BY REASON OF HIS OWN ACTS OR CONDUCT.”  This definition leaves open to the interpretation of the court as to what constitutes the type of acts or conduct that may create personal liability.  Traditionally, the doctrine of legal separation of the entity from the individual revolves around the basic tenant that “if the individual doesn’t treat the corporation like a separate entity, neither will the court.”  This general principle can be applied broadly by the court, to include numerous “acts” by the individual that fall far short of Nevada’s “fraud or manifest injustice” standard, including such things as commingling funds, failure to maintain corporate formalities, undercapitalization, failure to maintain arm’s length transactions, etc.  Thus, Nevada has a clear and distinct advantage over Wyoming regarding the strength of the corporate veil.  This advantage applies to LLCs as well, for this and other reasons.

REVERSE PIERCING.  While piercing the corporate veil can allow a creditor to “pierce” through the business to attach the assets of the owner, the concept of reverse-piercing is, as the term implies, the reverse:  it would allow for piercing through the ownership to allow access to the asset of the business in order to satisfy a debt or obligation of a shareholder.  In Wyoming, there is no protection in the law from potential reverse piercing. Nevada is the only state to provide protection from reverse piercing through its application of a charging order on the stock of closely-held corporations with between 2 and 75 shareholders. Nevada has a unique, clear and distinct advantage regarding protection from reverse piercing.

As you can see, the claim that Wyoming has the “best” asset protection laws is hollow. Nevada has clear advantages in each of the specific legal factors that provide corporate asset protection.

6. Nominee officers are legal.  There is no state in which a nominee officer is illegal.  To make a nominee officer illegal would require that the law has the capability of defining the term to only include corporate officers that have inherent limitations on their powers.  This cannot be done without having significant adverse impact on many legitimate companies.  This is a specious argument that provides no advantage for Wyoming over any state.  However, states and service providers that market nominee officers will be under the microscope of the IRS and federal law enforcement.

7. Citizenship not required.  There is no state that requires proof of citizenship for stockholders, officers or directors of corporations.  This is a specious argument that provides no advantage for Wyoming over any state.

8. State tax not being considered.  Good news! Wyoming is not considering a state corporate tax!  Neither is Nevada. Nevada’s state budget challenges in the current economic downturn will be addressed in the 2009 Nevada Legislature.  Currently, there has been no serious discussion of adding a corporate or business tax in Nevada.  There will be, however, a shift in the reliance that state government and local counties and cities have on property taxes and sales taxes.  These changes will not impact Nevada’s status as having no state corporate tax.  This argument has no advantage for Wyoming over Nevada.

9. Wyoming draws little attention.  This is a true statement, and is the primary reason that Corporate Service Center decided to close Wyoming operations down after 11 years in Cheyenne.  It draws little attention because it has no substantive benefits that Nevada does not provide to a greater degree.  There is no compelling reason to incorporate in Wyoming over Nevada.  Advantage: Nevada.

10. No Nevada Stigma.  Since 9/11 and the passage of the Patriot Act, the federal government has taken a much greater interest in the marketing and incorporation practices in the United States.  In November, 2006 the U.S. Senate Permanent Subcommittee on Investigations held a hearing on Failures to Identify Company Owners Impedes Law Enforcement. In this hearing, even though the previously-referenced GAO report found that no state collected ownership information, the Subcommittee singled out two states as poster-children for potential abuse: Delaware and Nevada.  Of the two states observers noted that Delaware “took the worst beating”. Delaware is known as the incorporation center of the United States, serving as the preferred jurisdiction for almost all of the Fortune 500 corporations.  Its reputation as a corporate haven is well-earned, as the state is highly regarded for its business law, business courts, and for their consistent application over many decades. Nevada is known as the “Delaware of the West”, having designed its laws to attract and provide protections to owners, officers and directors of closely-held small businesses.  The sheer number of individuals who have chosen Delaware and Nevada as their choice of jurisdiction for incorporation are a testament to the real benefits that these jurisdictions provide.  If Nevada’s “stigma” is that it is mentioned in the same breath as Delaware, then the Wyoming provider is right: Nevada has it, and Wyoming doesn’t.

11. Lower startup costs.  The State of Wyoming charges less to file articles of incorporation than Nevada does.  Yet entrepreneurs and small businesses seem willing to come to Nevada anyway!  There must be some truth to the adage:  You Get What You Pay For!    People incorporate to protect themselves.  As this paper outlines, Nevada protects business stockholders, officers and directors better than Wyoming does.   REAL protection is worth something to smart businesses.

To contact Denise regarding formation of Nevada Entites, please register HERE.