Corporations are a heavily marketed entity in the world of asset protection. Nevada corporations in particular are promoted because of their ability to be owned with complete privacy by using nominees. It is true that corporations can be useful as an asset protection tool, and they were a good way to go in the 80’s and early 90’s. If they were the best thing to use today, then PF Shield would use them also. But they are not the best thing out there, at least for asset protection purposes, and these are the reasons why.
- Although there is no corporate tax in Nevada, in some instances your Nevada corporation may be liable for a tax in your home state that an LLC would not be liable for.
- In some instances (especially where liens or lease agreements are considered), putting money into a corporation may make that corporation liable for a tax, even though you have not generated a profit for yourself. This is not the case with an LLC that benefits from pass-through taxation.
- Corporations can have the corporate veil pierced (i.e. be stripped of their liability protection features) if they are under-capitalized (meaning they didn’t have enough assets put into them.) This is not the case with an LLC.
- Corporations are generally required to hold annual board meetings, keep corporate minutes, etc. Failure to do so may make the corporation more vulnerable to an alter-ego ruling, which also may pierce the corporate veil.
- Corporations are vulnerable to lawsuits against a stockholder who is sued for something unrelated to the corporation’s business activities. If John has 51% stock in a corporation, for example, and he gets in a car accident, and is sued, and a $2 million judgment is awarded against him, then a judge can order him to surrender his stock in order to satisfy the judgment. Since the lawsuit’s plaintiff now has 51% ownership of the company, the plaintiff can liquidate the company’s assets in order to get his $2 million. An LLC does not have this same weakness. As far as LLCs are concerned, in most instances a judge is limited to “charging orders”, which means he can only allow a creditor to receive distributions from an LLC. The creditor is generally not entitled to the assets of the LLC, or to a membership interest in the LLC itself. See the Anonymous LLCs/COPEs section of this website for more information regarding charging orders.
- A New Mexico LLC can have the same level of private ownership that a Nevada corporation has. You can use a nominee member to own the LLC, or you can use 2nd anonymous LLC as the member of the LLC. An anonymous LLC may be even more private than a Nevada corporation, since it can be set up so as to never be required to file any return with the IRS. This is not the case with a Nevada corporation, or any corporation, for that matter.
Although corporations are not the entity of choice for an asset protection scenario, there are reasons for choosing a corporation over an LLC. For example, someone may wish to form a large company where ownership of stock could quickly and easily change hands. Perhaps this individual also wants a company that would be able to rapidly gather venture capital through the sale of this stock. A “C” Corporation is ideal for meeting this person’s needs. If this person is smart, however, he/she would likely make the “C” Corporation a holding company for several subsidiary LLCs, in order to encapsulate liability and provide the extra liability protection that the C corporation lacks.
Highly detailed comprehensive comparisons of
Oklahoma LLCs versus Nevada Corporations or New Mexico LLCs versus Nevada Corporations