Maintaining a Nevada Corporation’s Liability Protection in a Foreign Jurisdiction

When using your Nevada corporation in a foreign jurisdiction, what can you do to maintain the strong liability protection afforded under Nevada’s statutes?

So-called “long arm” laws have been used to claim jurisdiction over “foreign” corporations, stripping away the benefits that would otherwise accrue to them based on the statutes prevailing in their home jurisdiction.  These “long arm” laws have been used to great effect in California, for example, ostensibly to protect that state’s citizens from encroachments and predatory practices by “outsiders”. Nevada corporations are not immune from this potentially devastating application of the law that would deny them the liability protection inherent in Nevada’s Revised Statutes—BUT IT WOULD APPEAR THAT THEY CAN BE.

Article I, section 10, clause 1 of the U.S. Constitution prohibits the states from passing any “law impairing the obligation of contracts”.  The test for determining a violation of this “contract clause” in the Constitution was stated in Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978):

“The first inquiry must be whether the state law has, in fact, operated as a substantial impairment of a contractual relationship. The severity of the impairment measures the height of the hurdle the state legislation must clear.  Minimal alteration of contractual obligations may end the inquiry at its first stage. Severe impairment, on the other hand, will push the inquiry to a careful examination of the nature and purpose of the state legislation.”

The solution to retaining the superior liability protection made inherent to Nevada corporations in the Nevada Revised Statutes thus appears to be fairly simple:

As a part of any contract (and remember that a contract does not have to be in writing) with any entity or entities in a foreign jurisdiction, ensure a clear understanding that the contract is transacted in Nevada, AND THAT ANY DISPUTE SHALL BE RESOLVED IN NEVADA.

Secondarily, you might also want to consider liberal use of the suffix, “a Nevada corporation”, which can be appended to your corporation’s name to add a measure of protection. In legal terms, there is a “rebuttable presumption” that Nevada law applies to any contract between a Nevada “person” (yes, a corporation IS a “person”, by legal definition) and any other entity, so long as the second party is aware of the fact that they are dealing with a Nevada corporation.  For this reason alone it can be wise to ensure that the Nevada corporation is identified as such while operating within a foreign jurisdiction.

If you have been following along in this series of tips, you already know that it is wise in any case to separate assets from potential liabilities. As long as the assets end up properly sheltered in Nevada (“at arm’s length”, i.e. not related by ownership to the active business), only the entity doing business in the foreign jurisdiction stands to lose in any case.