The Elusive Hunt for Stealthy Entity WMDs (Weapons of Mass Deception)

By Richard Keyt, Arizona business, contracts and entity formation attorney

I am an Arizona business lawyer who has formed corporations and partnerships since 1980.  I formed my first LLC the day the Arizona’s LLC law became effective in 1992. Since 2001 I have formed 9,000+ Arizona limited liability companies. Every day I talk to several people who have questions about forming an entity. One of the most common questions people ask me when they are considering forming a corporation or a limited liability company is “should I form my company in Nevada instead of Arizona?” For the reasons stated below, I rarely recommend that people form an entity in Nevada.

Alleged Reasons to Form an LLC or Corporation in Nevada

Most of people who ask me about forming a Nevada corporation or limited liability company live in Arizona, will operate their business or own real estate in Arizona and will derive all income solely from within Arizona. When I ask them why they want to form a company in Nevada they usually say:

  • To save state income taxes, and/or
  • To hide the fact I own the company (the mythical hunt for stealth).

My typical response is to say “whoever told you that is either: (i) misinformed (giving the “Nevada law expert” the benefit of the doubt), (ii) an idiot, (iii) intentionally trying to deceive you to sell their Nevada ultimate asset protection entity product, or (iv) all of the above.

A few people also say they want to form their entity in Nevada because:

  • Nevada has the best entity laws of any state, and/or
  • Nevada has the series LLC.

Reality vs. Spin

Let us look at each of the alleged reasons to form an entity in Nevada.

Reason 1 – Save Taxes: Forming an entity in Nevada will only allow you to avoid income taxes only if all of the revenue of the entity is derived in Nevada or states that do not have an income tax. The law of the United States is that if an LLC or a corporation formed in state #1 has a presence in state #2 that has a state income tax and if the LLC or corporation derives income from within state #2, then state #2 can tax all income derived within its borders. Thus, a Nevada LLC or corporation that operates a retail store in Arizona must report and pay Arizona state income tax on the income derived from the Arizona business.

Reason 2 – Hide Ownership: The California Court of Appeals in the well known case of Associated Vendors, Inc. v. Oakland Meat Co., Inc. (1962) 210 Cal. App. 2d 825, 26 Cal. Rptr. 806, listed facts that should be analyzed in determining if an alter ego situation exists and the corporate veil should be pierced and hold the shareholders liable for the debts of the corporation. One of the 19 negative facts the court listed is the “concealment and misrepresentation of the identity of the responsible ownership, management and financial interest, or concealment of personal business activities.” If you hide your ownership of your entity and you end up in court, you will have some “splaining” to do to the judge or jury as to the business purpose in hiding the ownership of the company.

Reason 3 – Nevada Laws Best: Says who? The person who is trying to sell you a Nevada entity? Asset protection attorney Jay Adkinson says “Nevada’s laws are not substantially better than the laws of any other state.” Randall K. Edwards, an asset protection lawyer and litigator who has been licensed to practice law in Nevada since 1983, agrees with Jay Adkinson that Nevada entity law is not better than entity laws of other states. Randall said, “I rarely recommend to any of my clients that they utilize Nevada entities, unless they have some connection to Nevada.” That statement is from an attorney licensed in Nevada who forms Nevada entities. See also the 2008 State Liability Systems Ranking Study prepared by the U.S. Chamber Institute for Legal Reform, which ranks Nevada 40th in a national sample of in-house general counsel or other senior corporate litigators asked to rate the states in terms of how reasonable and fair their tort liability systems are perceived by U.S. businesses.

Reason 4 – Series LLC: Presumably the series LLC works to segregate and limit liability among each series LLC if all of the LLC’s assets and activities occur in the state of formation, the plaintiff is in the state of formation and the lawsuit is filed in the state of formation. If, however, the plaintiff is a tenant injured on property located in California that is owned by a Nevada series LLC and the lawsuit is in a California court, there is a good chance the California court will apply California law and disregard the series feature of the Nevada LLC. There are no appellate court cases that have ruled that the series LLC limits liability when the plaintiff and the court are outside the state in which the LLC was formed. Jay Adkinson said, “the non-Series state is very unlikely to apply the Series-legislation as to creditors, claimants, and other third-parties who did not agree to be bound by the Series legislation.” You may want to be a pioneer and create new appellate law in your state, but I do not want my clients to hope the series LLC will work when for a relatively small cost they can form an additional LLC to hold assets.

Nevada Entities are on the National Radar Scope

A February 23, 2007, story in USA Today entitled “Corporate Owners Hide Assets, Identities” says:

“A multi-agency U.S. Money Laundering Threat Assessment issued in 2005 cited Nevada, Wyoming and Delaware as the states with laws most conducive to anonymous corporate ownership.”

“USA TODAY’s findings buttressed the money laundering report’s warning that a “race to the bottom” among states vying to set minimal corporate information requirements has enabled companies to hide the identities of their owners, thereby making it harder for law enforcement agencies to track suspected tax evasion, money laundering and other crimes.”

“Concern about camouflaged corporate ownership prompted the IRS to list the tactic this week in its 2007 “Dirty Dozen” tax scams. The IRS said anonymous entities are facilitating “underreporting of income, non-filing of tax returns . . . money laundering, financial crimes and possibly terrorist financing.”

A February 2, 2009, story entitled “Forgery alleged in fraud probe,” states, “‘Federal law enforcement officials are concerned that criminals are increasingly using U.S. ‘shell’ companies … to conceal identities and illicit activities,’ a U.S. Government Accountability Office report stated in late 2006.” The story tells how attorney Michael L. Potter’s name was forged on a contract for Centurion Asset Management, or CAM, a company involved with Dennis Bolze. CAM is alleged to have defrauded investors of more than $20 million. Potter said his name likely came to Dennis Bolze’s attention when he was general counsel for CAM’s incorporator, Nevada Corporate Services, Nevada’s largest incorporation service.

See also “Nevada a Scam Haven,” an April 29, 2007, story in the Las Vegas Sun newspaper.

IRS Targets Nevada Entities

On November 14, 2006, K. Steven Burgess, Director, Examination Small Business/Self employed Division, IRS, testified before the Senate Committee on Homeland Security & Governmental Affairs Permanent Subcommittee on Investigations Hearing. His topic was on company formations in states that encourage owner secrecy.

The following key statements in Director Burgess’ testimony should make everybody carefully consider whether they want to risk forming an entity in Nevada:

  • The IRS has authorized several investigations under Section 6700 of the Internal Revenue Code (IRC) into promoters of Nevada corporations and resident agents.
  • An initial sampling of the client lists showed that anywhere from 50 to 90 percent of those listed are currently, or have been previously, non-compliant with Federal tax laws
  • We are contemplating mass audits of non-filers that would produce a list of non-filer and non-compliant participants.
  • We are also looking at additional promoter investigations.
  • The Service will consider “John Doe summonses” to resident agents.

Robert Lambert, a nationally known asset protection expert, recently told me that a friend of his in the U.S. Department of Justice told him that the DOJ was investigating entities formed in Nevada. See Mr. Lambert’s website called Asset Protection Corporation. It is an excellent asset protection information resource.

Entity Formation Fundamental Concept Number 1

If you want to form an entity to operate a business or own investments, the first question you should ask is:

In what state should I form the entity?

Most of the time, the answer to that question is:

In the state where the entity’s activities will occur.

For example, a person who wants to form an entity to operate a widget sales business in Arizona should form the entity in Arizona unless there is some over-riding reason to form in another state, which rarely exists by the way. If your entity will be doing business in more than one state, you should compare the legal attributes of the entity in each state and form the entity in the state that has the best entity law unless there are good reasons to form in a different state.

Entity formation fundamental concept number 1 is:

Form your entity in the state where it will be located or in which it will engage in business unless there are one or more good reasons to form in another state.

For the reason I discuss below, you should note that whether the state has or does not have a state income tax is not a consideration in determining if you should form an entity in the state.

Entity Formation Fundamental Concept Number 2

The second question you must ask when you are forming a new entity is:

What type of entity should I form?

Most of the time, the answer to that question is:

a limited liability company

Entity formation fundamental concept number 2 is:

Form a limited liability company unless there is a compelling reason to form a different type of entity.

Nevada Entities & Applicable Adages

When people ask me about forming a Nevada limited liability company or corporation I immediately think of the following trite, but applicable proverbs:

  • A little knowledge is a dangerous thing.
  • It sounds too good to be true.
  • All that glitters is not gold.
  • A fool and his money are soon parted.
  • There’s no such thing as a free lunch.
  • Look before you leap.
  • There are none so blind as those who refuse to see.
  • Fools rush in where angels fear to tread.
  • A sucker is born every minute.

If at this point you have gotten the impression that I am not a fan of forming a limited liability company or a corporation in Nevada unless the entity will do business in Nevada, you would be correct.

Asset Protection Resources

Randall K. Edwards on Forming Entities in Nevada

  • “I’ve been practicing law in Nevada since 1983. . . . At present, I rarely recommend to any of my clients that they utilize Nevada entities, unless they have some connection to Nevada other than a perception that they will have better privacy or some tax advantage. Regardless of the purported advantages for corporations provided in the Nevada Revised Statutes (and I would disagree that they are really any more advantageous than the laws of any other state, if the laws of that other state are utilized correctly), I believe that the burden is on the owner of a Nevada corporation to justify using a Nevada entity, given the current political and legal climate. Unfortunately, for a non-Nevadan, having a Nevada corporation is more and more seen as a per se attempt to defraud a creditor, unless there exists some easily identifiable reason for using an entity from Nevada as opposed to an entity from that person’s home state.”
  • “When it comes to seeking and taking advice about the efficacy of Nevada legal entities, I believe that the consumer should rely on someone other than a promoter of Nevada companies, who makes his living setting up and maintaining Nevada entities. All of the huff and puff of such promoters about Nevada’s strong ranking for asset protection (by whom, one might ask) is usually just hustle. There may be some advantages to using a Nevada company under certain circumstances (Nevada resident, actual operations in Nevada, Nevada manufacturing or Nevada warehousing), but relentlessly pushing Nevada corporations or LLCs on the public simply on the basis of some perceived “Nevada advantage” is simply unjustifiable. I am amazed at the number of people who continue to push the same old scam regarding Nevada corporations, using the same tactics, the same sales pitch and the same strategies that sunk APG. Folks, it doesn’t work. It can’t work. It’s crap. Don’t fall for it.”
  • “Of course, as I’ve said . . ., any asset protection strategy that relies on ‘hide the ball’ privacy, nominee officers and directors, blind bank accounts and, worst of all, so-called “bearer shares,” is doomed from the outset. The only meaningful way to protect one’s assets is going to be based on a combination of factors and strategies that are legally and logically defensible. Right now, I’d say that Nevada entities are under a microscope (some might argue, a proctoscope), and their use will be automatically suspect where debtors are challenged. That’s the simple fact, right or wrong. The USA Today article is only the tip of the iceberg in this regard.”
  • “For most entities, the choice of jurisdiction is not as crucial as the bylaws (for a corporation) or the operating agreement (for a LLC). And while some simple governance matters for these defining documents may be spit out from a basic template, it really takes an expert to fashion the nuances and details to optimize both tax and asset protections for any particular business entity. This should usually be done by an experienced lawyer, accountant or financial planner (or, better yet, a combination of these advisers) — not a promoter whose “asset protection packet” or “corporate packet” or whatever it is they are hawking looks the same regardless of who the client is or what their particular needs are.”
  • “[Y]ou might want to check out the State Liability Systems Ranking Report for 2006. . . . After considering not only the statutes, but also a state’s case law and the general ‘liability friendliness’ tenor of the legislature’s approach to corporate and personal liability issues, the Ranking analyzes all 50 states. It finds the best as Delaware. Interestingly, Nevada, which ranks 37th, is in the “worst” category. Yeah, that’s right, there are 36 states ranked better than Nevada. That, coupled with the increased scrutiny that Nevada entities are undergoing right now, should give one pause about whether Nevada’s really the best way to go, unless you happen to be a Nevada resident, have important Nevada contacts, or have your business either headquartered in or engaging in operations in Nevada.”

Jay Adkinson

Jay Adkinson is a nationally known asset protection attorney and prolific writer and speaker about asset protection law. Mr. Adkinson is the creator of, one of the first internet websites to educate the public about financial scams and tax frauds. His website at is one of the best asset protection websites on the internet. In addition to general discussions on various asset protection topics, the website contains in depth analysis of asset protection in all fifty states. See more on this topic in an article called False and Misleading Claims Regarding Nevada Corporations.

Jay Adkinson on Forming Entities in Nevada

  • “I don’t have anything against Nevada, and in fact I like some features of their laws, but it’s reputation is getting REALLY bad. In a given case, the difference between somebody having a Nevada corporation and a (and I pick this state randomly) Kansas corporation might make the difference in a judge deciding that the arrangement was a sham. Because of this, Nevada is now probably the one state that you DON’T want to use for asset protection planning.”
  • “IMHO, a person is 100x better having a properly organized entity with good operating documents in their home state than they are attempting to “import” an entity and its laws from another state.”
  • “The “best” state for forming an entity is 99% the state you are resident in, have assets in, or are doing business in. Attempting to “import” law from another state is generally more of a forlorn hope than a strategy.”

Ike Devji

Ike has many years of legal practice experience devoted exclusively to Asset Protection and Wealth Preservation planning. Devji and his colleagues protect over $5 Billion in personal assets for a national client base that includes several thousand physicians, business owners and entrepreneurs. He is a noted national educator (CME, CLE, CE) and author with over 300 nationally published bylines and a contributing author to several books including Optimal Financial Health: The Doctor’s Essential Wealth Management and Preservation Handbook and Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

A frequent professional speaker on asset protection and risk management, Devji regularly presents to professional organizations including the California Society of CPAs, The Arizona State Bar Association, the Financial Planning Association of Colorado, The American Education Institute (AEI), the Arizona Society of CPAs and the Financial Planning Association of Arizona in addition to numerous medical groups and entrepreneurial associations. Devji is of-counsel to the law firms of Lodmell & Lodmell P.C. and Davis Miles McGuire Gardner, where he helped establish the firm’s formal Asset Protection and Wealth Preservation practice groups. Reach him at [email protected].

Written by Richard Keyt on January 28, 2009.