Hacker 2/HACKER2.mdf/secrets/ch6.txt

Text File | 1995-01-03 | 12KB | 200 lines

               TAX SAVINGS IN NEVADA -- AND A STRONG WARNING

               Once you're operating your small business, you
          should seriously consider the advantages of
          incorporating in Nevada.  Nevada is one of several
          states that have no corporate income tax, but in
          addition there is no state personal income tax, and no
          franchise tax.  Many large corporations use Nevada for
          warehousing because there is no inventory tax.  That
          may seem beyond the reach of a small business but if
          you organize your business as a Nevada corporation you
          may then contract with a local warehousing and
          fulfillment service to process and ship orders from
          Nevada.
               Already such companies as Citibank and Porsche
          North America have moved their corporate headquarters
          to Nevada.  For as little as $2,500, you can enjoy the
          same advantages as these corporate giants.
               For many companies, the most important reason to
          incorporate in Nevada is that there is no state income
          tax.  If you live in a high-tax state this can be
          crucial.  In California, for example, corporations pay
          a minimum of $9,600 on every $100,000 of taxable
          income.
               If minimizing taxes is your concern, your strategy
          should be to form a Nevada corporation and arrange for
          the profits to accumulate there rather than in the high
          tax state in which you presently do business.
               This is easier than you may think.  Suppose you
          run a small company and have some major element of the
          business that can be handled from Nevada.  Or a service
          that can be contracted for through the Nevada
          corporation.  If you do this with a service, it is
          important that the entire service is not performed in
          the high-tax state, in which case the Nevada
          corporation is subject to the same taxes in that state
          as any local corporation.  But your sales
          representative travels a 10 state area, so you make the
          Nevada corporation your distributor for those 10
          states, and pay his salary out of the Nevada
          corporation.  His official base is now Nevada.  You pay
          your Nevada corporation a sufficient commission to keep
          most of the profits in Nevada instead of in the state
          where your business is physically headquartered.
               Or you could contract for sales management
          services from the Nevada corporation, paying it a fixed
          fee, and it pays your salesman.  Next, you tell your
          salesman that he is being transferred to a new
          employer.  He still gets the same salary, and he still
          does the same job at the same pay.  The only difference
          to him is that his paycheck comes from a different
          issuer.
               Your fee to the Nevada sales management company
          might be $75,000.  Suppose that you are paying the
          Nevada corporation an extra $47,000 in management fees
          over what your salesman was previously paid, so your
          net profit is zero.
               Oddly enough, that's good news.  Zero profit means
          zero corporate income tax in your high-tax
          jurisdiction.  Now you have $47,000 of profit at zero
          taxes in your Nevada corporation.
               Best of all, it's perfectly legal.  All you have
          to do is make certain that the accounting and
          management of the sales company are actually being done
          through the Nevada corporation, and that all sales are
          booked and invoiced accordingly.
               This general method of transferring income and
          profit from high-tax jurisdictions to low-tax
          jurisdictions is common.  It will work for just about
          any goods or services your business requires, other
          than those of a purely local nature.
               Note that a Nevada corporation will help reduce
          only your state taxes.  Federal taxes apply in all
          states.  However, you could create a third company in a
          tax-free jurisdiction outside the United States.  Then
          you could potentially escape federal taxes as well .
          (But before doing that, it is important to get good
          accounting advice, so that you don't have an argument
          with the IRS over "transfer pricing.")
               Many promoters of Nevada corporations try to sell
          you on the use of a Nevada corporation for lawsuit
          protection.  Unfortunately, most of the information
          being given out is not only inaccurate, it is
          positively dangerous.  It is generally based on hiding
          your ownership of the Nevada corporation.  Keeping your
          ownership private and confidential is fine, and may
          reduce the risk of a lawsuit because you don't appear
          to be a financially attractive target.  But actually
          hiding your assets in litigation is fraud, and lying
          about your assets in a court proceeding is perjury.  A
          quiet public appearance is one thing, but don't let the
          people trying to sell you a Nevada corporate package
          inadvertently lure you into unknowingly committing a
          crime.  It is you, not the corporate agents, who will
          be facing a prison sentence, and saying you got your
          legal advice from a corporate promoter's brochure is
          not a good defense.
               Nevada corporate promotion literature usually
          stresses that Nevada does not require public disclosure
          of corporate shareholders.  They conveniently forget to
          tell you that neither does any other state in the U.S.!
          And in all states the officers and directors are a
          matter of public record.  Any corporation provides
          privacy to the extent that to determine the
          shareholders, a court action involving either the
          corporation or the individual is necessary.  But if a
          court in your home state has jurisdiction over you
          because of a lawsuit, all of your holdings do have to
          be disclosed.  (There are ways to protect those assets
          with trusts, but thinking your concealed ownership of a
          corporation in Nevada -- or in any other state -- is
          asset protection is foolhardy and reckless.)
               Another claim of a few of the Nevada promoters is
          that Nevada allows bearer shares.  It doesn't, and
          federal tax law prohibits the issuance of bearer shares
          by corporations in the United States.
               Nevada state law requires that all Nevada
          corporations retain the services of a resident agent in
          the state who must have on file the name and address of
          the person who holds the stock ledger.  But the
          resident agent is not required to keep the ledger
          himself.  But, again contrary to what the promoters
          tell you, this is identical to the corporation law of
          the other 49 states and the District of Columbia.
          Corporation laws in all states are relatively uniform -
          - it is the tax laws that create the interesting
          differences.
               Nevada promoters will tell you that there are no
          minimum capital requirements, but that is true of about
          40 of the states, and the rest have a very nominal
          amount such as $500 or $1,000.  They'll also tell you
          that one person can hold all corporate offices and be
          the sole director -- but almost every state now has
          that feature.
               One Nevada promoter's brochure we have seen even
          claims that you can legally make up any name you wish
          as director of the corporation, citing the "common law
          rule that a person may use any name providing it is not
          for a fraudulent purpose." Fortunately most of the
          corporate brochures don't go that far, for this is
          again very dangerous advice.  That is an often quoted
          but completely misconstrued concept of common law.
          Using a different name in your role as director of a
          corporation will -- in any jurisdiction -- not only be
          construed as a fraudulent act, but will convert your
          otherwise legitimate corporate business activities to
          fraud.  Many states do have a common law principle that
          you may use any name -- IF you consistently and
          publicly adopt that name for all purposes.  Most states
          require that public adoption to be by court order, and
          a few states make it a criminal offense to use a name
          not on your birth certificate unless it has been
          changed by court order.  So don't fall for this one
          just because "somebody" told you that you could legally
          do it.  The very fact that you are using the name only
          to hide your directorship in the Nevada corporation is
          overwhelming evidence of fraud in any state.  You could
          jeopardize your entire business -- and even if you are
          not prosecuted, the resulting stench should it come out
          could destroy the reputation of your business.  Would
          you want to do business with somebody who ran the
          business under a false name?  You'd certainly question
          his integrity and honest intentions.
               The tax savings afforded by a Nevada corporation
          make it a tool worth considering -- even if you have
          never incorporated before.  Needless to say, this
          attractive combination of benefits has spawned a whole
          new service industry to assist you.  Many of the widely
          advertised corporate formation services are very good.
          But remember, they are only corporate formation agents,
          not lawyers or accountants.  Any Nevada lawyer or
          accountant can not only form your corporation for you,
          but can give you other advice that is worth the fee.
          And their prices are competitive -- sometimes even
          cheaper than the corporate formation agents with large
          national advertising bills.  A good source is to check
          the Martindale-Hubbell Lawyer's Directory, available at
          almost every public library in the United States.  It
          will give you full background information on the
          attorney and his specializations.
               One last word of advice.  The most common pitfall
          in using a Nevada corporation in the ways we have
          described is the temptation to cut corners.  It is not
          enough merely to pretend to do business in Nevada.
               You run the risk of losing all your benefits if
          the books aren't in order, or if the board doesn't meet
          regularly to approve whatever the company is doing, or
          if the minutes of those board meetings are not up-to-
          date, or any other legal technicality has not been
          properly attended to and officially documented.  But as
          a carefully and prudently run business, you can be
          assured that all the advantages we have discussed are
          yours to keep.