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Corporate Opportunities

Corporate Opportunities

Does the Rule Apply to Real Estate? If you invest in and/or syndicate real estate what are the duties to your investors? You owe them a duty of loyalty. But how far does that go? The issue of corporate opportunities is important. I wrote a whole chapter on it (from...

Checkbook IRA

Checkbook IRA

A recent case has shed light on one of the riskiest retirement plan strategies put forth by promoters. In McNulty v. Commissioner (157 T.C. 10) a U.S. Tax Court brought clarity to the scheme of using self-directed IRAs for personal investments.

Piercing the Corporate Veil – How to Avoid It

Piercing the Corporate Veil – How to Avoid It

50% of piercing the veil court cases nationwide succeed because owners are failing to properly follow corporate formalities. This exposes business owners to personal liability - meaning they can lose their possessions. What is the Corporate Veil? What is the corporate...

The Crimes of a Nominee Officer

Manager Nominee Service
Matt wanted to open a confidential mail order business and he needed to operate with absolute privacy. No one could ever know that he ran a business that sold sensitive supplement products over the internet. Matt lived in Las Vegas and knew he needed a Nevada LLC for his new business. He had heard that the state of Nevada allowed both corporations and LLCs the use of nominee officers, whereby someone else’s name, a nominee, was used for all the state filings. In this way, privacy was achieved because Matt’s name would not be listed on the Nevada Secretary of State’s website as an LLC manager. No one could ever, he believed, find out about the new business. Matt’s friend told him there was a formation company in a nearby strip mall that set up LLCs for privacy. Matt made an appointment. The gregarious salesman explained to Matt how it worked. Their company provided an individual to serve as nominee manager. This person’s name was listed on the Annual List of Managers filed with the state. Once that was done the LLCs owner, Matt, then held a meeting and elected a new manager – Matt, to manage the business. Matt liked the privacy involved and paid a significant amount of money for the formation company to proceed. The nominee’s name was listed with the state and then Matt, signing the meeting minutes prepared by the formation company, named himself the real manager for the upcoming year. Matt got the business going. As the sole owner of the LLC he was a cosigner on the bank account. His in-house bookkeeper could sign checks up to $2,500. Anything above that amount required only Matt’s signature. In many cases where he didn’t want his name to appear, he paid the bills with cashier’s checks. The business grew. In the second year, when the Annual List to the state was due, the formation company prepared minutes that took Matt off as manager, put the nominee in as manager for the filing with the state and, once the filing was done, put Matt back in charge. Matt came to realize that he didn’t like the high fees the formation company charged for the nominee service. So before the third year’s filing was due he obtained a new registered agent. This essentially terminated his relationship with the formation company. Matt didn’t want to be bothered with all the minutes and managers being changed back and forth so he just left the nominee’s name on as manager and filed the Annual List with the state of Nevada. Matt assumed that the formation company would never know otherwise. It was just a name. Then disaster hit. Matt’s sensitive supplement products caused a number of heinous injuries to honest, doubt-free individuals. The online reviews indicated that many were in need of significant medical attention. Matt was confident he could beat this. He instructed his new registered agent company to dissolve the LLC. With the business shut down there would be nothing to go after, thought Matt. It would all blow over. But that is never the case when a large number of innocent people are injured. A government attorney was assigned the case. Using Nevada law, she went to the registered agent’s office and requested the names of the owners and managers. The registered agent was reluctant to turn it over until they learned that in a criminal case they were required to turn over such information. Learning of the investigation, Matt finally hired an attorney. Jerry set Matt straight on a number of legal issues. Selling untested compounds to the general public was one issue. But Matt’s misuse of the nominee service provided the government with an even easier case against him. Jerry clarified Nevada law with Matt. When the manager of an LLC (or the officer of a corporation) resigns, an amended list of managers should be filed with the state. Each time they annually switched managers around they ran afoul of Nevada law. Jerry told Matt that the formation company had provided him with inaccurate information. Matt was angry, which Jerry noted was a common experience when relying on non-lawyers to provide legal advice. Jerry said there was a wrinkle in all of this. If Matt had simply left the nominee on as manager for the whole year, with Matt serving as assistant manager and doing all the work, no filing problem would have occurred. It is perfectly acceptable to list someone as a nominee officer. It was the changing back and forth without notifying the state that caused the problems. Filing false reports with the state of Nevada can result in significant penalties. In this case the false filings were doubled. First, the Annual List was filed under a knowing falsehood. The nominee was listed as manager but would be replaced in days without proper notification. (Again, you are better off leaving the nominee as the manager.) Second, in later years, Matt listed the nominee as manager without paying the formation company for the nominee service. He used a name of a nominee who clearly was not acting as a nominee. Matt knowingly submitted a false report to the state.
Nevada corporate law (at NRS § 78.150(3)(a)(2)) and LLC law (at NRS § 86.263(3)(a)(2)) requires the lists to include a declaration under penalty of perjury that the corporation or LLC “acknowledges that pursuant to NRS 239.330, it is a category C felony to knowingly offer any false or forged instrument for filing with the Office of the Secretary of State.”
A category C felony requires a court to sentence a wrongdoer to state prison for not less than one year with a maximum term of five years. Monetary fines may also be imposed.
Nevada law further states in § 78.150 and § 86.263 that a person who files a list with the Secretary of State which identifies an officer, director, manager or managing member “with the fraudulent intent of concealing the identity of any person or persons exercising the power or authority…in furtherance of any unlawful conduct is subject to the penalty set forth in NRS 225.084.”
The penalty for filing a false statement of material fact includes actual damages (involving a minimum of $10,000 for each violation), costs of suit and attorney’s fees and punitive damages as the facts may warrant. Jerry represented Matt as the government investigated both the untested supplement issues and the LLC filing issues. In the end, the government didn’t want to deal with all the experts and time required to prove the supplement case. Matt had clearly done all the LLC filings with the intent of improperly concealing his identity. The government’s case was so easy. Jerry did his best, but as it turned out, Matt was sent to prison for five years and owed millions in actual and punitive damages.

Be very cautious when using a nominee service.

Do not blindly accept the advice of those who don’t know the law. Leave your nominee on the annual list and work as an assistant manager or vice president. When the nominee is no longer used, file an amended list with the state. If you use the nominee’s name but you don’t pay for the service you can be charged with a felony and sent to prison. If you use a nominee to conceal your involvement in wrongful conduct the penalties are significant. It is easy to follow the law. It is also easy to avoid the advice of people who don’t know the law. Now that you know what not to do, here are some points to help you understand how and why you would use a Nominee Manager/Officer.
  • Nominee Manager / Officer can be used to provide privacy on state records. Each jurisdictions business statutes determine what information is made part of the public record, so this can vary depending on the state your entity is formed in.
  • Once a Nominee Manager/Officer is in place, the Member/Shareholder retains all operational authority, signature rights over any financial accounts, the right to enter any sort of financial or lease arrangement with any other entity, etc.
  • Agreement is signed between Member(s) and Nominee that outlines the parameters of the service.
  • Members/Shareholders retain the ability to vote the nominee officer out of the corporation if you so choose. Any state records that name the Manager, etc., must then be updated to show who is the current Manager/Officer/Director.
Corporate Opportunities

Corporate Opportunities

Does the Rule Apply to Real Estate? If you invest in and/or syndicate real estate what are the duties to your investors? You owe them a duty of loyalty. But how far does that go? The issue of corporate opportunities is important. I wrote a whole chapter on it (from...

Checkbook IRA

Checkbook IRA

A recent case has shed light on one of the riskiest retirement plan strategies put forth by promoters. In McNulty v. Commissioner (157 T.C. 10) a U.S. Tax Court brought clarity to the scheme of using self-directed IRAs for personal investments.