FAQs on Incorporation |
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| 1. What is meant by incorporating? |
The act of setting up a corporation by filing incorporation papers with the appropriate state agency. Incorporating is essential to the success of any business. The process of incorporating entails the preparation of certain documents, including a document referred to as the “Articles of Incorporation,” and filing the documents with the Secretary of State. |
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| 2. Why to incorporate or what are the advantages of incorporating? |
Shield yourself from liability:
The most important reason to incorporate your business is to protect yourself from business liabilities. Unlike a sole proprietorship or general partnership, a corporation is a separate legal entity apart from the individuals who own or operate it. If you are operating an unincorporated business, its creditors may be able to reach your personal assets. If you incorporate, business creditors cannot reach your personal assets, as an incorporated business and its owners are separate entities. Because of this, the personal assets of the shareholders, directors and officers of a corporation are generally not at risk when the corporation is sued or goes bankrupt. If you own property or other significant assets, forming a corporation is one of the easiest ways to protect them. If you plan to hire employees, a corporate entity will protect you personally from employee lawsuits.
Gain tax advantages:
If you incorporate your business, there are tax deductions for a wide variety of operating costs which will substantially cut back your company’s overall tax liability. These deductions may include the cost of materials/production, employee wages, the cost of insurance, the cost of retirement plans, as well as business travel and entertainment expenses, lower payments for social security tax and Medicare tax, and greater opportunity to raise capital for the business through the issuance of stock.
Established perpetual existence and transfer of ownership:
Perpetual existence is an advantageous aspect of an incorporated business. Perpetual existence means that the life and continuation of the business will not be affected by the withdrawal or death of one of the owners. An unincorporated business’s existence, as well as its operation, is generally disrupted by the withdrawal or death of one of the owners. Subtract this risk from your business by incorporating.
Similarly, the ownership interest in an unincorporated business may be very difficult to transfer. If the business is incorporated the shareholders can easily transfer their interest by sale or gift.
Raising Capital:
In a corporation, there are no limits or restrictions on the amount of capital or the operating losses that a corporation may carry back or forward to subsequent tax years. Unincorporated entities, however, are subject to more stringent rules regarding corporate losses
Enhance the company’s image:
Another essential reason to incorporate your business is that it adds credibility to its operation. The perception of a business is improved by its incorporation and use of “Inc.,” “Co.,” or “LLC” following the name of the business. Customers are more likely to trust and deal with a business that has this positive image. More importantly, the business will be more attractive to banks and investors if and when the business seeks outside financing.
Improve ability to manage:
The decision-making authority of an incorporated business is centralized, which usually means that the shareholders have vested the authority in a Board of Directors. The Board of Directors can delegate this authority to the company’s officers. In an unincorporated business, the power structure and decision-making authority may not be defined and may be subject to manipulation by a co-owner or employee. This lack of structure will substantially affect the ability of the business to operate. Subtract this risk from your business by incorporating and thereby centralizing its management structure. |
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| 3. Where to form a Corporation or LLC? |
Most people choose to form their corporation or LLC in their home state because it’s the easiest and often the most cost-effective. The entity needs to be registered as a “foreign corporation” if incorporating in a different state and has to pay filing fee separately to the state in which it is incorporating. |
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| 4. What are the benefits of incorporating in Nevada? |
The state of Nevada offers maximum flexibility, maximum privacy, and a minimum of regulation and red tape.
It offers some tremendous advantages that many other states do not offer: |
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No Corporate Income Tax |
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No Taxes on Corporate Shares |
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No Franchise Tax |
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No Personal Income Tax |
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Nominal Annual Fees |
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Nevada corporations may purchase, hold, sell or transfer its own shares. |
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Nevada corporations may issue stock for capital, services, personal property, or real estate, including leases and options. The directors may determine the value of any of these transactions, and their decision is final. |
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No Franchise Tax on Income |
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No Inheritance or Gift Tax |
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No Unitary Tax |
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No Estate Tax |
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Competitive Sales and Property Tax Rates |
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| 5. What are the benefits of incorporating in Delaware? |
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No minimum capital is required to form a Delaware corporation. |
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Corporate records can be kept anywhere in the world. |
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It is only necessary for one person to act an officer, director and/or share-holder of a corporation or member of a limited liability company. |
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No formal meetings are required and shareholders need not be U.S. citizens. |
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Nominal Annual Fees |
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Nevada corporations may purchase, hold, sell or transfer its own shares. |
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Any legal business may be conducted in Delaware. |
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Ownership of a Delaware corporation or limited liability company is strictly confidential. |
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NOTE: Delaware companies do not have to file an annual corporate income tax with the state of Delaware "unless they have a physical presence in the state." However, all Delaware based companies must be an annual franchise tax or annual report to the Secretary of State of Delaware. |
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| 6. Can the business be operated from home? |
Typically a business can be operated from home but a business license is usually required. The business license can be obtained from the city or county where the business is located. |
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| 7. What is a C Corporation? |
A C-Corporation is the traditional and most common type of corporation. A C-Corporation is a regular corporation business structure considered by law as an entity by itself, separate from those (Shareholders) that own it. It is similar to a person in that it has its own assets and its social security number, called a Federal Tax Identification Number. Like other businesses, a C corporation needs to have a license to do business in towns in which it has offices and may use an assumed name. A corporation's assets or ownership is easily transferred through sale of the assets or sale of stock. The death of the shareholders or directors or officers of a corporation has no effect on the existence of the corporation. A corporation must be legally dissolved to terminate.
However, there is a corporate level income tax on the profits of a C corporation. In addition, if a dividend is paid to shareholders from retained earnings, the dividend is included on the personal tax return of each shareholder. Thus, the profits of a C corporation are subject to potential double taxation. A corporation will be treated and taxed as a C corporation unless it elects itself to be treated as S Corporation for tax purpose. |
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| 8. What is an S Corporation? |
The S-Corporation is similar in structure to that of a C-Corporation, but must meet a few further requirements. In fact, an S-Corporation is initially formed as a C-Corporation by filing the articles of incorporation with the Secretary of State. The C-Corporation can then elect to become S Corporation by following the required procedure.
The primary benefit of an S-Corporation is that it allows the shareholders to receive profits free of taxation at the corporate level. The profits will only be taxed at the individual level, thereby avoiding the “double tax” that C-Corporation shareholders are subject to. (C-Corporations are taxed at the corporate and individual level). |
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| 9. What is meant by an S Corp election? |
Electing S Corp status means that income generated by the business is "passed-through" to the shareholders for computing tax liability. Most businesses start out as a general C corporation and are required to pay income tax on taxable income generated by the corporation. However, as soon as a corporation has been formed, it may elect S Corporation status by filing the required form with the IRS. Then, the shareholders are taxed like a partnership or sole proprietorship, and not the corporation. |
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| 10. What requirements need to be met for the S Corporation election? |
A corporation is only eligible for the S-Corporation election if it meets the following list of ownership requirements: |
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The company must have no more than 100 shareholders (a husband and wife qualify as one shareholder). |
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All shareholders in the company must be individuals and not other corporations or LLCs (estates, some exempt organizations and certain trusts qualify as shareholders). |
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No shareholders can be non-resident aliens. |
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There can only be one class of stock in the company (this limitation disregards differences in voting rights). |
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The company making the election cannot be a bank or thrift institution, an insurance company, or a domestic international sales corporation (DISC). |
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Each shareholder must consent to the S-Corporation tax status (as explained in column K of IRS form 2553). |
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No more than 25% of the company’s gross corporate income may be derived from passive income. |
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| 11. When S corporation can be changed to C Corporation? |
There are only a few circumstances when such a change is required: |
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The corporation is planning to have more than 100 shareholders (e.g. new investors are coming in); |
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Foreign nationals (non U.S. citizens / resident aliens) are going to become shareholders; |
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Other corporate entities (LLCs or other corporations) are going to purchase shares. |
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We suggest that if you are planning on converting your entity like this; you need to contact a lawyer or tax professional. |
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| 12. What are the documents required to incorporate a company? |
First, articles of incorporation in accordance with state law must be prepared and filed with the proper state authorities and filing fees, initial franchise taxes, and other initial fees must be paid. Second, by-laws and organization minutes of the corporation must be prepared |
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| 13. What is meant by Articles of Incorporation? |
Articles of incorporation are the legal documents filed with the state or other regulatory agency. This is one of the documents necessary to the incorporation process. It typically contain pertinent information such as the corporation’s name, its address, its objective, names and address of its directors, registered agent, distribution of corporate powers and the amount/type of stock to be issued. Some states will offer more favorable environments and, as a result, attract a greater proportion of firms seeking incorporation. Fee for filing the Articles vary from state to state. |
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| 14. What is a Certificate of Incorporation? |
The Certificate of Incorporation is what some states issue to evidence that yours is a valid corporation and has met state incorporation requirements. In some states, however, Certificate of Incorporation means Articles of Incorporation, the document that you file to incorporate your business. |
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| 15. What is a Charter? |
The terms Charter, Certificate of Incorporation, and Articles of Incorporation are used interchangeably. |
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| 16. who is an incorporator? |
The incorporator is the person that files the articles of incorporation. The incorporator's duties and title end after incorporating. The incorporator must be old enough to legally enter into contracts. |
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| 18. What are Corporate Bylaws? |
Bylaws are documents which govern the internal workings of the corporate. Such matters as voting, when meeting are held, how officers and directors are elected or removed, and how the company's owners may transfer their ownership interests, are set forth in these documents. Bylaws may not be changed without a majority of votes of the board of directors. Bylaws do not need to be filed with the State. They are created solely for the corporation and its shareholders. |
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| 19. What is a Register Agent? |
Although a corporation is a separate legal entity, it cannot physically receive documents, and therefore needs a real person to receive them on its behalf. A registered agent is a person designated to receive legal notices, services of process, and other official documents delivered to the corporation. All corporations must have a registered agent on file with the Secretary of State. The registered agent must have a physical address, not a post office box. The person designated to be the registered agent may be an employee, officer, director, or shareholder of the corporation, or he or she may not be affiliated at all with the corporation. Moreover, the registered agent must be available during normal business hours.
The registered agent will forward these documents to the corporation at its principal office address. Corporations that operate in different states, but don't maintain offices in these states, use agent service companies to act as registered agent for them. The terms registered agent, resident agent, and statutory agent all have the same meaning. |
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| 20. Is it mandatory to appoint a Registered Agent? |
Yes, the failure to register and designate a registered agent may foreclose or hinder the company's ability to legally enter into contracts and gain access to the state courts. Moreover, it may subject the company to monetary, civil, and possibly criminal sanctions. Also, failure to maintain a registered agent may cause your company to fall out of "good standing" within the state. |
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| 22. Is there a difference between trade name and business name? |
The name that a business uses to identify itself is called a "trade name." This is the name the business uses on its invoices, letterhead, and signage.
Your business name may or may not be the name under which you trade. As long as a company name is available you will be able to register your company in that name. Successful registration of a business name does not give you automatic trade mark rights in that name. In order to secure trade mark rights you need to make an application for a trade mark. |
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| 23. Is there a difference between a corporate name and a trade name? |
A corporate name is used by an entity that is formed as a corporation. Profit corporation names are required to contain one of the following endings: "Corporation", "Incorporated", "Limited" or an abbreviation of one of those words. The name cannot be substantially identical to a name already registered with the Department.
A trade name is a name under which a person transacts business, other than one's legal name (personal name) or a registered corporate name, general or limited partnership name, limited liability company name or limited liability partnership name. A trade name is also known as a fictitious name or a DBA (doing business as). |
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| 26. What is meant by EIN? Is it necessary to obtain an EIN? |
Every corporation is required to have an EIN also known as Federal Tax Identification Number so that the IRS can track payroll and income taxes paid by the corporation. Like a social security number, an EIN is used for almost everything the business does.
To obtain an EIN an application for Employer Identification Number needs to be completed. The EIN can be received by mail, FAX, or by phone.
If you are converting your sole proprietorship or partnership and already have a tax ID number for that business, the IRS still requires that you obtain a brand new tax ID number for your corporation. |
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| 27. What happens if a business entity does not obtain an EIN? |
Legally, you are required to identify your business with one of two numbers: either your Social Security Number or an EIN (Employer Identification Number, i.e., Federal Tax ID Number). If you are a sole proprietor, your Social Security Number can be used on all of your government forms and other official documents, but most small business advisors recommend that you apply for an employer identification number and use the EIN number instead. If you are a corporation, LLC, or other state-level entity, you must obtain an EIN because your business is an entirely separate legal entity. Furthermore, banks require an EIN in order to open a business bank account. |
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| 28. How many directors are required to form a company? |
The minimum requirement for most states is only one director. Some state laws provide that if the number of stockholders is three or more, then the corporation must have three directors, but if the corporation has less than three stockholders, then the number of directors may equal the number of stockholders. |
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| 29. Who is a shareholder? |
The shareholders are the owners of the corporation. The owners can be individuals or other entities (such as Corporation, LLC or other entities). |
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| 31. What is meant by authorized, issued capital? |
Authorized shares is the maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation; changes in it may occur only if approved by the stockholders.
Issued capital: as mentioned above the company does not usually operate its business with the amount as high as authorized capital because it is above it current requirement. Hence the companies do not issue the whole of authorized capital. The part issued for public subscription is referred to issued capital. |
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| 34. What is a Certificate of Good Standing? |
A certificate of good standing (also known as a certificate of existence or certificate of authorization) is a document issued by a state official as conclusive evidence that a corporation or LLC is in existence or authorized to transact business in the state, and that the company is in compliance with all state-required formalities. |
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| 35. Who issues a Certificate of Good Standing? |
Certificates of Good Standing for corporation or LLC are issued by the Secretary of State in which the corporation or LLC is formed, or in which the corporation or LLC has qualified as a "foreign corporation." |
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| 36. What is meant by Foreign Qualification? |
Corporations and Limited Liability Companies (LLCs) are considered domestic only in their state of formation. In all other states, they are considered a “foreign” entity. If the company expects to transact business outside the state of formation, the company may be required to qualify as a foreign corporation or foreign LLC in the applicable state(s). The typical completion time for the Foreign Qualification Service is 6 to 8 weeks. |
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| 37. What is a professional corporation? |
A professional corporation is a special kind of corporation that only members of certain professions, such as lawyers, doctors, and healthcare workers, can create. By forming a professional corporation, professionals can limit their personal liability for the malpractice of their associates. |
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| 39. What is the purpose of Annual Meeting? |
Annual meeting is held once a year in order to inform shareholders of the progress of the company, as they are not involved in the day-to-day activities of the company. Officers and directors normally serve a one-year term and are therefore re-elected at annual meeting. |
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| 40. Why Delaware? |
As you are evaluating where to form your corporation or LLC, you may be considering Delaware. Maybe you’ve heard that over half of the public companies and Fortune 500 companies are incorporated in Delaware. While this is true, you should closely assess whether Delaware is the appropriate choice for your particular business
For large businesses, there are a number of reasons why it is advantageous to incorporate in Delaware; however, these reasons may not be as beneficial to smaller businesses
Advantages of Forming in Delaware |
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Delaware’s business law is one of the most flexible in the country. |
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The Court of Chancery focuses solely on business law and uses judges instead of juries. |
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For corporations, there is no state corporate income tax for companies that are formed in Delaware but do not transact business there (there is a franchise tax, however). |
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The taxation requirements are often favorable to companies with complex capitalization structures and/or a large number of authorized shares of stock. |
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There is no personal income tax in Delaware for non-residents. |
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Delaware does not require director or officer names (corporations) or member/manager names (LLCs) to be listed in the formation documents, thereby providing a level of anonymity. |
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Shareholders, directors and officers of a corporation or members or managers of an LLC need not be residents of Delaware. |
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Shares of stock owned by persons outside Delaware are not subject to Delaware taxes. |
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| 41. Why Nevada? |
In deciding which state is the best state in which to incorporate, several factors must be analyzed. What is a state's regulatory climate? What is a state's tax situation? What is a state's stance on individual privacy? Which state will allow you the greatest flexibility to run your business the way you see fit? Which state has the best body of statute? Which states offer the best business climate?
Seen as an extremely "corporate-friendly" and pro-business region, Nevada is perfect for business. It offers some tremendous advantages that many other states do not offer. And even if another state does offer these advantages, they are usually not as strong, or as favorable to the business owners and officers at Nevada corporations. Nevada is the only state which does not share information with the Internal Revenue Service. Nevada Corporations information is completely private! The fact is Nevada doesn't really ask for much information in the first place, so doesn't have much to share even if it wished.
The state of Nevada offers maximum flexibility, maximum privacy, and a minimum of regulation and red tape.
Benefits of Incorporating in Nevada |
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No Corporate Income Tax |
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No Taxes on Corporate Shares |
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No Franchise Tax |
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No Personal Income Tax |
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Nominal Annual Fees |
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Nevada corporations may purchase, hold, sell or transfer shares its own stock. |
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Nevada corporations may issue stock for capital, services, personal property, or real estate, including leases and options. The directors may determine the value of any of these transactions, and their decision is final. |
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No Franchise Tax on Income |
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No Inheritance or Gift Tax |
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No Unitary Tax |
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No Estate Tax |
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Competitive Sales and Property Tax Rates |
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Minimal Employer Payroll Tax - 0.7% of gross wages with deductions for employer paid health insurance |
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Nevada's Business Court |
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Developed on the Delaware model, the Business Court in Nevada minimizes the time, cost and risks of commercial litigation by: |
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Early, comprehensive case management |
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Active judicial participation in settlement |
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Priority for hearing settings to avoid business disruption |
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Predictability of legal decisions in commercial matters |
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