Understanding Privacy of Business Ownership

Understanding Privacy of Business Ownership

You may want privacy of your ownership interest in your business. This could be for a number of different reasons, including avoiding baseless lawsuits. Perhaps someone you know that owns a business got sued last month and you believe you can avoid the same fate if people can’t find what you own. There are a number of Internet incorporation sets touting certain privacy benefits, such as asset protection, by organizing your business under the laws of a certain state. Nevada and Wyoming (and already New Mexico and a few others) are usually the states being sold as “privacy and asset protection havens.” These states do not require the disclosure of the identities of the shareholders of a corporation, or members of a manager-managed LLC in the required corporate filings (public records). Usually, these “privacy” states only require that the directors (sometimes only 1) and officers of the corporation, or the managers of the LLC, be disclosed on the Articles of Incorporation (or Articles of Organization) and all annual reports.

But, there are a ton of myths out there regarding privacy and asset protection. Many new entrepreneurs get lured into believing what often amounts to false hype. I will try to dispel a few of these myths. The bottom line is that privacy does not protect your assets by itself, it is only advantageous. The single greatest assistance of a state’s privacy protections is that it can help prevent frivolous litigation. Preventing the average Joe from finding out what companies you may own by searching public records is a good thing. This can save a lot of baseless claims. If it takes longer for someone to figure out who the owners are, that is clearly advantageous. The plaintiff will have to use more money and most lawsuits are a simple game of pure economics. So, privacy can sometimes make it very expensive for a possible plaintiff to find your assets.

Guaranteed asset protection simply by privacy of ownership is basically a myth. Specifically, whether your business should always organize under Nevada or Wyoming laws, or use nominees or already bearer shares are all shared questions. The short answer is that Nevada, Wyoming (and a few other states) do offer privacy protections, but that is no guarantee you’ll protect your assets or avoid any kind of liability for your conduct.

Myth #1: You can continue Complete Privacy by Organizing in Nevada or Wyoming (or in other places)

The stated advantages to organizing under Nevada or Wyoming law for privacy purposes include:

  • Privacy for stockholders by not requiring that their names become part of the public corporate records. Nevada or Wyoming do not require shareholders or the members of an LLC to be disclosed in the corporate filings, only the directors, officers and managers of the LLC need to be disclosed-I discuss this later in this article;
  • Permits use of nominee stockholders, directors and officers of corporations and nominee members and managers of LLC’s;
  • Nevada and Wyoming do not proportion its data with the Internal Revenue Service and is one of a handful of states that do not have a sharing arrangement in place with the IRS (33 states have an “Information Sharing Agreement” in place with the IRS). But, just because Nevada does not proportion information with the I.R.S. does not average your information will be kept private. You will need to provide the I.R.S. with the name and social security number of the person responsible for all tax issues involving the company in order to acquire an EIN. Also, the company will be required to prepare a tax return (informational returns for S-Corp’s and most LLC’s), on which the names and social security numbers of the owners will be provided. consequently, the I.R.S. will end up with this information in spite of.

But, you can lose this privacy in a variety of ways. Business owners may be required to disclose their identity in the following instances: 1) Registering to do business in your home state; 2) Issuing stock; 3) Obtaining any required business licenses (which the State of Nevada requires for most activities and charges an additional fee to acquire); 4) Opening a bank account; 5) Being an employee or independent contractor to the corporation or LLC; or 6) Entering into other contracts or agreements where you sign individually, such as entering into any loans. Nevada now also requires a tax payer ID number of the company and personal guarantee by you on the state’s business license.consequently, it may not make sense for the average business to organize in Nevada or Wyoming solely to take advantage of privacy for these reasons.

Also, keep in mind, you may have to personally guarantee any debt on behalf of your business and will likely go into into contracts on behalf of your business. This method providing your name and identifying characteristics on certain documents. You will also need to provide a designated person along with their social security number to the IRS as the responsible party for tax matters when you acquire an FEIN for your business. These are all ways in which you could possibly disclose your identity. The average owner of an Internet business is going to function his/her own business and really has no way to avoid these things.

Of course, if you don’t take an active role in operating the business or sign any such contracts or guarantees, these concerns may not apply. Also, using nominees (discussed more below) or already shelf corporations will generally allow you to avoid disclosing your identity in public (corporate) records. Some shelf corporations can already be purchased with established bank accounts, credit histories and tax returns filed with the Internal Revenue Service.

Myth #2: Privacy Alone Protects Your Assets

The privacy afforded to those organizing in Nevada, Wyoming or any other state with similar privacy features simply will not protect your interest in a corporation or LLC from your creditors. For example, pursuant to Nevada Civil Code NRS 21.080, all real and personal character of a judgment debtor (not otherwise exempt by law) is liable to execution, including “shares and interests in any corporation or company.” If a creditor obtains a judgment against you, your interest in a Nevada or Wyoming corporation/LLC is unprotected to attachment in order to satisfy the debt. You can either ignore the court order to testify regarding your assets (or refuse to answer questions after appearing) and confront imprisonment for contempt of court, or commit perjury by lying about the extent of your assets. clearly not alluring choices and why the concept of privacy does not protect your assets by itself. Do not be fooled by websites that tell you otherwise.

Myth #3: Using Nominees Is a Bullet Proof Strategy

Many online sets tout the use of nominees as a bullet proof method of privacy and asset protection. Nevada and Wyoming law, for example, allows for the use of nominee directors and officers and managers of an LLC, and nominee shareholders and members. The theory is that you can use a third party to conceal your identity as an owner and corporate officer or manager. Then, you can continue control over the entity by using a proxy or some other instrument to control the corporation or LLC over the nominee. You should generally avoid using nominees or at the minimum understand there are holes in this “bullet proof strategy.”

While you will gain some inner of privacy from having a nominee officer, shareholder, director, etc. this privacy will be lost once the nominee is served a subpoena and asked to provide the contact information for the owners of the company. The nominee will then be legally required to provide this information and your privacy is gone. Nevada civil procedure law makes it clear that the failure to obey a subpoena shall be punished for contempt. The law leaves no room for discretion unless the records to be disclosed are privileged. I think you would be hard pressed to find a nominee who is going to want to use some time in jail for the small fee you pay for the sets.

But, some sets out there do offer the use of an attorney to act as an intermediary between you and the incorporation service. That attorney can then invoke attorney-client privilege, adding a inner of privacy anytime there is an inquiry about your identity. Dealing directly with the incorporation service creates no such privilege. However, in some instances the attorney may be ordered by the court to divulge your identity in situations of fraud or criminal conduct. This practice does present some measure of privacy.

Myth #4: Using Bearer Shares Provides Asset Protection

There are many asset protection and incorporation websites touting the use of bearer shares in the state of Nevada and in other places. Bearer shares are now illegal under the laws of the State of Nevada as of 2007. in spite of, the bearer proportion strategy does not prevent creditors from recovering your stock if a judgment is obtained against you. There are far too many holes with the use of bearer shares as a way to continue privacy and protect your assets. This “strategy” creates all kinds of fraudulent move issues in the first place, in addition as possible income and/or gift tax ramifications. There is really no need to go into any more detail other than to say you should you avoid sets/websites touting the use of bearer shares as an asset protection means. Also, for most small businesses, the most negative aspect of bearer shares is the inability to make an S-election due to the limitations on the number and kind of shareholders. Not to mention bearer shares are not permitted by most states.

truly Understanding Privacy

If you feel strongly about privacy, at the minimum on the surface, then you should understand what this really method. Privacy truly lies specifically with any initial corporate filings annual reporting requirements of the state. If you are truly concerned, you can use a state like Nevada or Wyoming that allows no disclosure of members in a manager-managed LLC or shareholders on the initial or annual corporate filings. Nevada’s privacy protection protects members and shareholders from disclosure on corporate filings, but this privacy does not apply to certain officers, directors, and in the case of LLCs, managers. Nevada requires an incorporator or organizer to appoint by name at the minimum one initial director in a corporation’s articles or in the case of an LLC, at the minimum one member or manager in the articles of organization. In both situations, the articles are a public record, and anyone can request copies by paying a small fee.

Nevada, as other states, requires that every corporation and LLC file an “Annual List of Officers and Directors” each year. This requires disclosure of the complete names of at the minimum some of the officers and the directors of a corporation, and the managers of an LLC. This information is then posted on the Nevada Secretary of State’s Web site, which is a searchable public database and easy for anyone to figure out who is operating the corporation or LLC. Most states will allow you to designate a manager of your LLC and designate directors of a corporation and only list the information of those persons on the organizational documents.

But, depending on state law, the shareholders or members of an LLC are required to be listed on the annual reports go forward. This is where you may run into an issue with privacy if you are concerned. in spite of of state laws, it is very difficult for a small current business to continue the privacy of all owners. Also, it can be an administrative and financial burden to establish and continue a corporation or LLC in another jurisdiction. The fees you pay to the state and these nominee kind sets will add up in a hurry. But, privacy is nevertheless a consideration in avoiding frivolous lawsuits, as I mentioned. Just understand the limitations and myths.

leave your comment