Promoters of Wyoming incorporation have started to make brazen claims that Wyoming offers better asset protection benefits than Nevada. This is a fair comparison for analysis, since the claim can be measured against the standards set by Nevada in three specific areas of corporate asset protection. However, there are many benefits of Nevada LLC.
Corporate protection consists of three separate factors. The relative asset protection strengths or weaknesses of state corporate law result from how state statutes or case law addresses each of these factors.:
Factor #1: 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. From Wyoming’s perspective, this similarity appears to be intentional, given the fact that Wyoming’s statute mimics language passed years earlier by Nevada. So, the level of indemnification available to corporate officers, and directors in both states is at the highest level. However, there is one important distinction: In Nevada this indemnification is automatic – it is the default language of the statute, while the protection is “opt-in” in Wyoming. Where indemnification is optional by statute, it is not guaranteed. Thus, Nevada has better indemnification provisions than Wyoming.
Factor #2: The 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.
Factor #3: Reverse Piercing/Judicial Foreclosure. 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. There are clear and distinct Nevada corporation benefits, and advantages in each of the specific legal factors that provide corporate asset protection.