Nevada v. California

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Nevada provides stronger indemnification for corporate officers, directors, agents and employees - those who think or act on behalf of the company.  

Nevada's indemnification statute provides that a person is not liable if he/she "acted in good faith and in a manner which he REASONABLY BELIEVED to be in OR NOT OPPOSED TO the best interests of the corporation". (NRS 78.752)  Nevada law also states that a director or officer is not individually liable to the corporation, its stockholders or creditors for any damages as a result of any act or failure to act, unless it is proven that "his breach of those duties involved INTENTIONAL MISCONDUCT, FRAUD, or a KNOWING VIOLATION of the law." (NRS 78138)

California's indemnification statute, on the other hand, provides protection to corporate officers and directors only when three factors are present.  They are: 1) That the person is being sued because they represented the corporation; 2) That the person acted in good faith, and IN THE BEST INTERESTS of the corporation, and; 3) The person is successful on the BASIS OF THE LAWSUIT!  (Ca. Corp Code 317(d))

There is a significant distinction between the statutory indemnification offered by these two states.  In Nevada, the statute uses the terms "reasonably believed", "intentional misconduct", "fraud", and "knowing violation".  The single factor that each of these terms have in common is that of INTENT.  In other words, a corporate officer or director only loses their statutory indemnification when their intentions are to harm the corporation, commit fraud, or violate the law.  To prove the intent of an individual is a much more difficult - and much higher standard - that proving the objective-based criteria provided under California law.

California requires that the actions of the individual must be "in the best interests of the corporation".  This has nothing to do with intent, but is applied toward their actions.  In other words, the person can unintentionally act in a manner that is not in the best interests of the company and lose statutory indemnification. Further, the statutory protection is not determinative because, ultimately, the statute requires that the person must prevail on the merits and basis of any lawsuit.  This places the ultimate determination of officer/director liability in the hands of judges and juries, instead of on strength of statute.

Nevada provides a much stronger corporate veil.

 In order to pierce the corporate veil in either state, it must be proven that the corporation is the "alter ego" of the individual - in other words, the individual and the corporation are essentially the same.  To prove "alter ego" presence in Nevada, the court must find the presence of the following elements:  1) There must be a "unity of interest" and "unity of ownership" that makes the company and the person inseparable; 2) The corporation is "influenced and governed" by the individual, and; 3) Keeping the person and the corporation separate would "promote fraud or manifest injustice."  This is the highest stand of corporate veil protection available, and is consistent with Nevada's statutory objective of determining ill intent on behalf of the individual as the basis for losing protection.

Regarding California's position on limited liability, Robert B. Thompson wrote in Piercing the Corporate Veil: An Empirical Study (76 Cornell L. Rev. 1036, 1052 (1991)) that "a perception [exists] that public policy in California favor[s] piercing the corporate veil."  According to Thompson's study, among the states with the largest number of reported veil piercing decisions, California courts pierce the corporate veil at the highest rate - 45% of attempted veil piercing cases in California are successful.  The case law in California allows for piercing the corporate veil in TWENTY-EIGHT different circumstances. (Associated Vendors, Inc. v Oakland Meat Co., 26 Cal. Rptr. 806, 813-15 (Cal. App. 1962))  These circumstances, which are given to courts without any guidance as to how they should be weighed, include the following:

✔ Commingling of personal and corporate funds and other assets;
✔ Failure to segregate funds of separate business entities;
✔ Unauthorized diversion of corporate funds and assets to other than corporate uses;
✔ Treatment by an individual of the assets of the corporation as his own;
✔ Failure to obtain authority to issue or subscribe to stock;
✔ Failure to maintain minutes or adequate corporate records;
✔ Confusion of records between separate business entities;
✔ Identical equity ownership in two separate entities;
✔ Domination and control of the corporation by same owners;
✔ Identical officers and directors responsible for supervision and management of corporation;
✔ Sole ownership of all the stock in a corporation by one individual;
✔ Sole ownership of all the stock in a corporation by members of a family;
✔ The use of the same business office or location for different business entities;
✔ The employment of the same employees between two companies;
✔ The employment of the same attorney between two companies;
✔ Failure to adequately capitalize a corporation;
✔ Total absence of corporate assets;
✔ Using a corporation as a shell;
✔ Using a corporation as a conduit for a single venture or the business of another individual or company;
✔ Using a corporation for concealment of personal business activities;
✔ Disregard for legal formalities;
✔ Failure to maintain arm's length relationships among related entities;
✔ Using a corporation to procure labor, services or merchandise for another person or entity;
✔ Diverting assets from a corporation to the detriment of creditors;
✔ Concentrating assets in one entity and liabilities in another;
✔ Contracting with the intent to avoid performance;
✔ Using a corporation for illegal transactions;
✔ Attempting to transfer existing liabilities of another person to a corporate entity.


Nevada provides a much stronger LLC veil.

Because the limited liability company is a relatively new entity type in the United States, states do not have the same history of legal precedent regarding veil piercing of LLCs as they do for corporations.  As a result, most states - including California - generally apply their corporate veil piercing standards to LLCs, as well.  In fact, California law provides that the liability of the members of an LLC exists, "subject to common law alter ego doctrine" - with the exception of the requirement to hold meetings and maintain formalities.

Nevada, on the other hand, provides bright line protection of the LLC veil.  Under Nevada statute, a member of a Nevada LLC "is not a proper party to proceedings against the company".  (NRS 86.381)

Nevada is the only state to provide charging order protection to stockholders.

Nevada protects innocent, third-party stockholders from the economic damages of reverse-piercing by providing charging order protection to the stock of closely-held corporations. (NRS 78.746)  In California, as in other states, corporate stock is an attachable asset for creditors of debtor stockholders, which provides for foreclosure of ownership interest.  This potential for foreclosure upon a stockholder as a result of external liabilities or judgments can create significant negative economic consequences for other stockholders.