New state law to boost incorporations industry

A little-noticed change in state law is likely to play a key role in keeping Nevada among the favorite locations to form new corporations, an industry group says.

"This is huge," says Derek Rowley, president of the Nevada Resident Agent Association and founder of Corporate Service Center in Reno. "In my opinion, this is one of the biggest changes in corporate law in the United States in the past 50 years."

In essence, the new state law provides an additional level of individual protection to shareholders in closely held corporations.

The corporation itself still can be required to pay a judgment, but a lawyer can't demand disclosure of the identities of the shareholders a "reverse piercing of the corporate veil" in lawyers' terms to come after the stock that they own.

Nevada becomes the first state to provide protection against reverse-piercing actions against closely held corporations, Rowley says, and it's a protection that is desired by businesspeople who are organizing new corporations.

It's likely, he says, that Nevada's business-formation industry will benefit as businesses that decide to operate as corporations choose to organize themselves under Nevada law.

Among the biggest beneficiaries will be the state's registered agents, who act as the legal agents for businesses around the world who organize under Nevada law.

"When the number of corporate filings increase, there are associated revenues and economic development that occur, so as they say, 'change is good,'" Rowley says.

The residents agents association estimates that the business-formation industry generates about $100 million a year for the state government, and more than 70 percent of the companies that choose to organize under Nevada law conduct their operations elsewhere.

And that, Rowley says, means that the business-formation industry places little demand on the state's resources.

"We don't use the roads," he says. "We're not using the health-care system."

The registered agents association began seeking legislation to protect shareholders of closely held corporations during the 2005 legislative session.

It argued that individual owners in other types of business formations limited-liability companies and partnerships, for instance already enjoy similar protection in lawsuits.

Publicly traded companies are not affected by the change in state law.

And the resident agents association noted that the change in state law doesn't protect closely held corporations from lawsuits such as product liability actions. A creditor still can win a judgment that assigns him the profits from a corporation but can't foreclose on the stock or take control of the corporation's operations.

Gov. Jim Gibbons signed the law on June 13, and it applies to any legal action begun after July 1.