 Nevada Charging Order Law Revision Positions the State
as the Asset Protection Capital of the Country
Date: July 19th, 2007
Byline: Wayne Hoff: M.S., CEP; Director of Asset Protection and Estate Planning Services. Nevada Corporate Headquarters, Inc., Las Vegas, NV
SB 242 Goes Into Effect October 2007
Las Vegas – July 19 – The Nevada Resident Agent Association (NRAA), led by Derek Rowley, NRAA president and founder of Nevada Corporate Headquarters (NCH), the state's leading incorporation service, announced that the Nevada legislature adopted unique protections for stockholders of closely-held corporations in the session that wrapped up business last month. These protections, found in Senate Bill 242, which was approved by Governor Jim Gibbons on June 13th, protect stockholders of closely held corporations from the threat of "reverse-piercing" of the corporate veil. No other state provides this type of protection to corporate shareholders. The charging order became effective July 1st and applies to any legal action that begins after that date.
In all other states, a judgment against a stockholder of a corporation can result in judicial foreclosure of the debtor's stock, or "reverse piercing" of the corporate veil. Other types of business entities are not generally subject to this type of foreclosure, and can be subject to the protection of a legal restriction known as a "charging order." Historically, other types of business entities, such as limited liability companies and partnerships enjoy charging order protection, which makes the judgment creditor an "assignee" of profit generated by the business, but prevents the creditor from exercising control over business operations or forcing the sale of the business or its assets to satisfy the judgment.
The NRAA proposed to the Nevada legislature that charging order protection be provided as the judgment creditor remedy against the ownership of corporate stock of small business corporations, so that it is consistent with the application of the charging order as it currently applies to limited partnerships and limited liability companies.
"The primary benefit of a revision in the charging order is that innocent parties in LP and LLC corporations will be protected," said Rowley. "It will protect stockholders who have a partnership-type relationship with other stockholders in a small business and who have the potential to suffer economic loss in the event of foreclosure or liquidation by judgment creditors of other stockholders."
Rowley pointed out that the change does not protect the corporation or corporate assets from judgments against the corporation directly. Rowley said, "The charging order would not be used to insulate the corporation from risk associated with product liability, defects, errors and omissions and such that result from the corporation carrying on its business."
NRAA's purpose in requesting legislation was to provide charging order protection in circumstances related to small businesses where stockholders are likely to have partnership-type relationships. Rowley said because of that it was necessary to consider an appropriate cap on the number of stockholders to ensure that small business benefits from the change. One definition of small business, as defined by the Internal Revenue Service, is corporations with fewer than 75 shareholders.
Publicly traded companies are not affected by the change in the charging order. "The corporation's status as a public entity removes the partnership/owner relationship that the charging order is designed to protect," Rowley said. "In public companies, stockholders truly are impersonal and blind to one another."
Rowley said that the NRAA is confident the change will add significant additional value to corporate filings in the state of Nevada and position the state to capture a greater share of the new entity filing market.
"We feel the addition of charging order protection for Nevada corporate entities will provide the state with a significant tool to gain national market share in the incorporation market," said Rowley, who noted that SB 242 has an impact on many important levels. "When the number of corporate filings increase, there are associated revenues and economic development that occur, so as they say, ‘change is good.'
For more information, visit www.nchinc.com/nch or call 800-508-1878.
About NCH
Nevada Corporate Headquarters, Inc. (NCH) is the largest incorporation company in Nevada. The "one-stop" convenience provided by NCH is preferred by many business owners with corporate structuring, tax planning, corporate credit services and estate planning all coordinated under one roof. NCH and its sister companies have formed more than 30,000 business entities worldwide since 1989. NCH has a nationwide reputation for helping entrepreneurs, corporations and licensed professionals to protect their assets through corporate. Anyone in any state or country can own and operate a Nevada-based business entity.
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