by: Peter Kershaw, © 2004, All Rights Reserved
There are dozens of corporation sole sales companies, and they are all claiming numerous incredible benefits of the corporation sole, such as tax immunity and asset protection. Herein we'll list, and then debunk, some of the most common myths and urban legends being alleged about the corporation sole:
- A corporation sole offers bullet-proof asset protection.
The degree of effectiveness of asset protection has little to do with the type of entity you use. Rather, asset protection is only as good as your knowledge of the law, and your willingness to comply with those legal principles which afford you legal asset protection in the first place. Violate those principles and you lose everything.
Unfortunately, most corporation sole salesmen are teaching their clients legal theories that only undermine what few asset protection benefits they might have otherwise been able to achieve with the corporation sole (more on this later).
As alleged proof for the claim that the corporation sole offers bullet-proof asset protection (as well as a number of their other claims), corporation sole promoters routinely use the example of the Roman Catholic Church (they also regularly refer to the Mormon Church). However, they really need to come up with a better example, because their claims about the Roman Catholic Church are consistently false.
Just how well has being a corporation sole protected the assets of the Roman Catholic Church? In light of the hundreds of civil lawsuits that have already been filed against numerous Catholic dioceses (many of which are corporation soles), and the hundreds of millions of dollars which have already been awarded in civil judgements over charges of child molestation by Catholic priests (and many more lawsuits are already in process), it would seem that being a corporation sole hasn't done much to protect the assets of the Roman Catholic Church.
In point of fact, the corporation sole is remarkably vulnerable to civil judgements, and the Catholic Church isn't waiting around to tally up the final damages. As far as the Roman Catholic Church is concerned, the use of the corporation sole is rapidly coming to an end, and in many dioceses it already came to an end some years ago.
A corporation sole doesn't protect assets any better than any other type of corporation does and, at least in some ways, and as the Catholic Church has discovered, it may be even less effective than other types of entities.
- As titular head (corporate sole officer), you maintain complete control of everything at all times, e.g. property, funds, assets, investments, operations, banking, etc.
Control and discretion is hardly unique to a corporation sole, and is little different from being the President of a non-profit corporation. Therefore, "control" is never "complete" or unlimited in discretion, nor are corporation sole officers autonomous or a law unto themselves.
The legal validity of any corporation (sole, aggregate, or otherwise) is predicated upon the corporate officers not using corporate property for their own personal benefit, or treating corporate assets as though it were their own. This is referred to as "arm's-length dealing." However, corporation sole peddlers routinely encourage their clients to abuse the legal doctrine of "arm's-length dealing." For example, there is the claim that by using the corporation sole, "You can own nothing, yet maintain complete control, and get to use everything."
"Complete control with asset protection" has been hyped for many years prior to this latest fad of popular interest in the corporation sole. Much of the former asset protection hype focused on Trusts. Now the hype is on the corporation sole. By "complete control" what corporation sole peddlers are implying is that you can claim, "This isn't my house. This isn't my car. This isn't my bank account. I just get to use them. They're actually owned by a corporation sole. I get to use them because I'm the corporation sole officer. Oh, and I also maintain complete control. But none of it really belongs to me."
Such artifice only works if it's never legally challenged. Once challenged, it quickly implodes on itself. It offers no real asset protection benefits because there's no arm's-length dealing. In such arrangements the corporation sole serves as the "alter-ego" of the one who paid for its formation, and serves as its officer, and derives its personal benefit. It's a sham that the courts (and the IRS) all-too easily see through. Judges often use something they call, "the smell test." Contrary to the normally complex things that take place in court, the smell test is very simple. If the judge says, "This stinks," you're in trouble, and there go all your wonderful asset protection theories.
If corporate officers derive any personal benefit by the use of corporate assets (e.g. house, car, boat, etc.), they must pay the corporation for the use of the asset, based upon its "fair-market rental value." If they fail to do so, the courts (and the IRS) have routinely declared such corporations to be "shams" and the corporation to be the mere "alter ego" of the corporate officer. In other words, if you treat the assets of the corporation sole as though they belong to you, that's exactly how the courts and the IRS will treat it, as well.
- A corporation sole automatically qualifies as being tax exempt under Internal Revenue Code section 508c1A as a mandatory exception and, therefore, does not have to apply for IRS 501c3 status. A corporation sole has no tax liability, and no tax returns ever have to be filed.
Nowhere in the tax code, the tax regs, federal (or state) statutes, or in any case law does it state that any corporation sole is automatically tax exempt. The only thing that is automatically tax exempt is a church. The corporation sole peddlers mistake the church for the legal form that some churches occasionally assume. Furthermore, some of the case law dealing with corporation soles did not involve churches, and some have been tax-paying non-church entities. Many corporation soles today are for-profit businesses. As such, it's obvious that not every corporation sole is automatically tax exempt.
IRC 508c1A and IRS Publication 557 make it clear that a church is "automatically tax-exempt" without having to apply for 501c3 status. The reason that churches aren't taxed is because of the "charitable and religious" activities they engage in. If you organize a real church, it doesn't matter to the IRS whether you organize as a church, as an unincorporated association, as a non-profit corporation, or as a corporation sole. The legal manner in which you organize a church is irrelevant for tax purposes. Provided that it really is a church, it's always automatically tax exempt without having to apply for 501c3 status.
On the other hand, if you organize as a corporation sole, claiming to be a church, yet in reality you are not a church, and you are not engaged exclusively in the religious and charitable activities commonly associated with churches, or perhaps you are even operating a business, then you are not tax-exempt. It's a ridiculous leap of logic to say that a corporation sole, in and of itself, and apart from actually being a real church and engaging exclusively in the activities of a church, is "automatically tax-exempt."
- A corporation sole may own companies and businesses as "integrated auxiliaries" which can avoid all taxes by paying all profits directly to the corporation sole. The corporation sole is not liable for taxes on any monies it receives.
Those alleged "integrated auxiliary" companies do not avoid their legal obligation to file tax returns merely because they're owned by a corporation sole. Furthermore, in order to avoid paying taxes, any such business must report to the IRS that it paid out 100% of its profits to its owner (typically on Schedule K1), the corporation sole. So there's a paper-trail leading right back to you, the corporation sole officer. When the IRS demands tax returns, are you planning on telling them that a corporation sole doesn't have to file tax returns? If you listen to the advice of your corporation sole peddler, that's exactly what you'll tell them, and it will be your undoing.
It's been a long-standing myth that a church may own or have subordinate businesses and receive business profits tax-free. Neither a church, nor the business it owns, will avoid taxes, just because the church is a 501c3 (or claims a 508 mandatory exception). If a church owns, operates, manages, or receives the profits of a business, those profits are taxable under what is termed, "Unrelated Business Income" pursuant to IRC 511, 512 and 513. The UBI tax regs, as they apply to churches, have been in effect since 1976.
As such, even if a corporation sole really is a church, it cannot own a business and claim that the proceeds it receives from that business are exempt from taxation. Sections 501c3 or 508c1A do not exempt an organization from all taxes, and unrelated business income is just one example.
- Corporation sole funds may be paid out for your personal support as an officer of the corporation sole, just like priests and nuns of the Catholic church receive, with no tax reporting or tax liability.
This is just another one of those myths being promulgated by corporation sole peddlers about the Roman Catholic Church. Catholic Churches pay their priests and nuns as "employees," or in some cases as "self-employed ministers," and report employee compensation as ordinary income on form W-2. Catholic priests and nuns file and pay personal income taxes on their salaries.
There are, however, several Roman Catholic "religious communities" (e.g. monasteries) which, as a condition for joining their community, require their monks and nuns to take a vow of poverty (also sometimes known as an "oath of poverty"). The IRS does recognize such arrangements if indeed they are legitimate vows exercised under the auspices of a legitimate religious order.
Under a vow of poverty, the adherent forgoes all earthly possessions, other than the bare necessities of life. Furthermore, they contribute and turn over all their worldly possessions to their religious order (there is no such thing as "personal possessions" in religious communities who operate under a vow of poverty). Their religious order then provides their food, clothing and shelter, but little more than that. The adherent is required to live in a literal state of poverty, so their religious order doesn't pay them a salary, wage, or compensation (for more info see Vow Of Poverty).
It's not merely the oath of poverty which eliminates their obligation to file an income tax return. The reason they don't file an income tax return is because they don't have any income, and the income tax only applies to people who have income.
What some corporation sole peddlers claim is that you can organize a corporation sole, be appointed as the corporate sole officer, take a vow of poverty, but then continue, for all practical purposes, enjoying the same comfortable lifestyle as you always had before. They claim, "Cardinal O'Conner rode around in a limo and lived in a mansion, and he never paid any taxes, because he took a vow of poverty." But that's simply another corporation sole myth. The fact of the matter is that Catholic bishops and cardinals don't take vows of poverty, they are paid salaries, and they do pay income taxes.
Vow of poverty scams are nothing new or unique to the corporation sole. The IRS has carefully monitored vow of poverty tax scams for many years, and has prosecuted many people for claiming they don't have to pay taxes because they've taken a vow of poverty, when it's obvious they're not living in poverty. If you take an oath of poverty, that's exactly how the IRS expects you to live -- in poverty.
The IRS can, and often does, assess income taxes based upon your lifestyle. This is termed the, "Lifestyle Profile Assessment," and it's performed particularly in the case of non-filers, as well as those the IRS suspects of under-reporting. In other words, if you don't file tax returns, yet you enjoy the personal use of assets whose fair market rental value would require a salary of, say, $100,000 to pay for, the IRS will assess you personal income taxes based upon a salary of $100,000.
- A corporation sole can make "charible donations" and engage in other acts of "benevolence." Therefore, it can pay your children's tuition, donate a new wardrobe to you and your wife [and while you're at it, why not a new Rolex?], contribute your family groceries, pay your mortgage, utilities, etc.
If corporation sole officers pay out money to themselves, or their relatives or friends, or write checks to pay personal bills, that cannot be construed as a "charitable contribution." Such payments aren't "charitable donations" because they fail to comport with the legal criteria of a "charitable purpose." Furthermore, such a "donation" clearly violates the legal requirements for being and maintaining a tax exempt status, under both IRC 501c3 and 508c1A:
"...no part of the net earnings of which inures to the benefit of any private shareholder or individual."
The IRS terms such "donation" arrangements "abusive." Making "donations" to your own family and claiming that it's an act of "charity" is nothing less than tax fraud, for which the IRS has a nasty habit of prosecuting.
- Your corporation sole can contract your labor to another business. Rather than being a W-2 employee and getting paid by another business, you work for that business under contract from your corporation sole, for which the corporation sole gets paid. You have no income, so you don't have to file tax returns and pay income tax.
The IRS has been onto this tax scheme for many years. It's called "assignment of income." Not only is it illegal, it's very easy for the IRS to figure out; and when they do, plan on paying some hefty civil penalties, along with the taxes and interest (penalties and interest will far exceed the amount of the tax that was originally owed had you not assigned your income to a corporation sole). Once they figure out a corporation sole is involved, plan also on becoming the subject of a criminal investigation.
When the company you work for sends the corporation sole a 1099 for what they paid the corporation sole for your labor, what do you plan on doing with it? If you listen to the advice of your corporation sole peddler, you'll probably do nothing with it. You're certainly not going to file a tax return for the corporation sole, because they've told you a corporation sole doesn't have to file tax returns.
In two to three years, you'll get a form letter from the IRS asking the corporation sole why it hasn't filed its tax returns (the IRS is a little slow, but that doesn't mean they're ignorant). The entire tax system is an automated process, and is based upon reporting. Reporting on the corporation sole occurred when it had income reported on a 1099. The first time an entity has something reported on it the IRS creates a new system of records in the name of the entity, and enters a new transaction code (TC) reflecting the amount and year of the 1099.
Something must (and will) close that TC, and in most cases what closes it is a tax return filed by the taxpayer. However, if the taxpayer doesn't file the return, the IRS has other methods at it's disposal to encourage "voluntarily compliance." "Encouraging the taxpayer to voluntarily comply" may include liens, levies, garnishments, seizures and, if necessary, a criminal indictment.
- The corporation sole has no employee withholding tax requirement.
If a corporation sole has employees, or pays any employee compensation, whether it be to the corporate sole officer(s), staff, or otherwise, it is legally required to withhold employee income taxes, as well as FICA, FUTA, etc., and file form 941. The only exception to this is where the corporation sole is a real church, and the church's minister has made an election with the IRS to be "self-employed." In such a case the minister then is personally responsible for self-employment taxes. The corporation sole church is still legally required to file form W-2.
All corporations, whether sole or aggregate, are legally required to obtain an EIN. By default the EIN makes the corporation an "employer" and all staff become "employees." Furthermore, all corporations are required to be "withholding agents" (tax collectors) for the IRS. The only way to avoid being a withholding agent is to not incorporate and not have employees.
- A corporation sole can be used for estate planning purposes, even though that's not what it's really intended for. Your corporation sole bylaws can state that upon your death, other corporation soles are to be established with each of your children appointed as head of their own corporation sole, and the assets of your corporation sole bequeathed to their corporation soles.
It should be self-evident why this is a sham, and would never pass legal muster if challenged. When property is conveyed to a religious entity, it must be conveyed in perpetuity, and given solely and exclusively for religious purposes. It may not, and it can not, be given to in any way benefit your heirs. Under English Common Law this is termed a "Dedication of property for a sacred purpose."
Those who sell the corporation sole for alleged "religious purposes" and then claim that there are any estate planning benefits to the corporation sole, whatsoever, are either
a). Demonstrating a remarkable ignorance of the legal attributes and legitimate purposes of the corporation sole.
b). Demonstrating an eagerness to violate the laws which govern the corporation sole with impunity.
c). Demonstrating a calloused disregard for the likelihood of their clients going to jail.
d). All of the above.
If your wish is to protect assets for the benefit of your heirs then select an entity, or an overall legal structure, that is specifically intended for that purpose (such as a Trust).
- A corporation sole is not a corporation. When you form a corporation sole, you are not incorporating with the government. For legal purposes, you are considered "unincorporated" and "unregistered."
Corporation sole peddlers know that "the corporation is a creature of the State" (Hale v. Henkel 201 U.S. 43 at 74) and a "statutory entity." Their beliefs about freedom and "personal sovereignty" preclude forming corporations because they think it would make them subordinate and beholden to the government. Their desire for privacy also means that they don't much care for government registrations.
So rather than just admit that a corporation sole is a corporation, they claim that it is something altogether different. This fallacious assertion is typical of the dishonest methods and jumbled logic (e.g. "corporation sole vs. 501c3 corporation") being employed by corporation sole peddlers. They either don't cite any law to support their theories, or what little law they do cite they misrepresent or take completely out of context. With respect to a corporation sole allegedly not being a corporation, they furnish no legal support, whatsoever.
The fact of the matter is that all corporations sole are statutory entities and "creatures of civil law." The claim that any corporation sole is "unregistered" is particularly ludicrous in light of the fact that no corporation sole can legally come into existence without first filling out and filing government forms with a Secretary Of State in a state where the corporate statutes recognize the corporation sole (most do not). If the Secretary Of State approves the filing, they then issue Articles Of Incorporation and publicly register that corporation sole as a "nonprofit corporation."
For those who remain sceptical I would recommend calling a Secretary Of State's office in any state which legally recognizes the corporation sole (e.g. Nevada, Washington, Oregon) and ask to speak to the chief legal counsel in the corporations division. Then ask him, "Is a corporation sole a civil law entity governed by state statute, or not?" While you've got him on the phone, ask him if anything else you've seen touted by the corporation sole peddlers is valid.
For all practical purposes, it doesn't really matter what any peddler claims about the corporation sole. What matters is what the powers that be have to say about the corporation sole. If the government doesn't agree with your interpretation of the law, who do you suppose is most likely to win the legal argument?
Most Secretaries Of State are quite knowledgeable about corporation sole promotions and several Secretaries Of State have already publicly voiced their opinions and concerns.
- A corporation sole is not a 501c3 tax-exempt non-profit corporation. A corporation sole is a 508 mandatory exception. Churches and ministries should dissolve their incorporated 501c3 status and reorganize as a corporation sole so that they can come out from under IRS jurisdiction.
Civil courts refer this type of irrelevant and incoherent "corporation sole vs. 501c3" argumentation as, "A difference without a distinction." The fact is that no church is required to have 501c3 status in order to be tax exempt. However, corporation sole peddlers make it sound as if your church has to first become a corporation sole in order to take advantage of 508c1A mandatory exception provisions. This is little different from those duplicitous attorneys who tell pastors they first need to incorporate their church in order to obtain 501c3 status.
Not every incorporated church is a 501c3, and not every 501c3 church is incorporated. The same applies to corporation sole churches; but in point of fact, most corporation soles in America have sought and obtained IRS 501c3 recognition, including the Roman Catholic Church and the Mormon Church.
Incorporation and 501c3 status originate from two entirely distinct jurisdictions: one is state and the other federal. A church may obtain one, or both, or neither. In all cases, irrespective of how it's legally organized, a church automatically qualifies as tax-exempt under section 508c1A, and need not apply for 501c3 status.
501c3 status is, indeed, a problem for the church. However, it is not the problem. The problem is incorporation. 501c3 status is merely a symptom of the problem. All corporations, including every corporation sole, are civil law entities and "creatures of the State," and the IRS does have jurisdiction over every creature of the State, whether or not it's 501c3.
If 501c3 status were really the problem, you could just terminate your 501c3 status, leave your non-profit religious corporation intact and then, just like the corporation sole peddlers do, claim your incorporated church is a "508 church."
However, no real church should use the Internal Revenue Code as the source of its legal authority. Claiming to be a "508 church," as many of the corporation sole peddlers encourage their clients to do, becomes a tacit acknowledgement that your church is regulated by, and subject to, the federal tax code.
No Bible-believing Christian church should seek corporate status of any kind. Reorganizing your church or ministry as a non-501c3 corporation sole doesn't fix the problem. Indeed, all you do is create a "frying pan into the fire" predicament. It's not worth wasting your money on. Don't allow a corporation sole huckster to dupe you into believing he'll liberate your church from government jurisdiction, when all he'll do is exchange one form of State incorporation for another.
The corporation sole is not a solution for any church. The corporation sole is part of the problem, as are all corporation sole peddlers. The solution is to organize as a free-church.
- The corporation sole operates exclusively under canon law (church law) and is governed exclusively by its own bylaws. The corporation sole is not subject to, or governed by, secular law (civil law).
Is the office of corporation sole a purely canon law institution, or is it a civil law entity, governed and regulated by state statute? Long ago and far away, the office of corporation sole was recognized, in a few countries, as a purely canon law institution. However, the historic record simply doesn't support the notion that the corporation sole was ever recognized in North America as a purely canon law institution. The evidence clearly shows that the corporation sole, as it is known in North America, is a civil law entity, and subject to civil law jurisdiction.
When Catholic Archbishop George was appointed in 1997 to head the Chicago Archdioceses, it was done by a letter of appointment from Pope John Paul II. However, when Archbishop George was sworn into the office of corporation sole, he wasn't sworn in by the Pope, or another Archbishop, or any other church official. Rather, he was sworn into the office of corporation sole by three civil court judges. As the Catholic Church's press release stated:
"George will assume his responsibilities under secular law
when three judges swear him in as a corporation sole."
Being sworn in by three judges was not a mere formality or a courtesy extended by Illinois State. Rather, there was a clear message being made about what jurisdiction the office of corporation sole operates under.
For corporation sole peddlers to claim that a corporation sole is not subject to the civil law and those statutes which authorize its formation in the first place, and to claim that a corporation sole is only subject to its own bylaws, demonstates only a remarkable degree of ignorance (and for some, even a cavalier arrogance) about civil law.
- The government has no jurisdiction over the corporation sole because the corporation sole is inherently "spiritual" and "religious," and the government only has jurisdiction over matters that are secular.
The civil government, and its courts, have often acknowledged that they have no jurisdiction in religious and spiritual matters. However, a corporation sole is not a "religious" matter, but a civil law matter governed by state statute. A corporation sole is both "secular" and "temporal" and the state does have jurisdiction.
The state statutes of those alleged "17 states that legally recognize the corporation sole" that corporation sole peddlers often make reference to, make it abundantly clear that those states do exercise jurisdiction over every corporation sole. Furthermore, those same statutes make it clear that "a corporation sole may sue and be sued." If a corporation sole can be sued (and they all can be), they can all be brought into court. If they can be brought into court, the court clearly has jurisdiction over it. It is, therefore, ridiculous to claim that the government has no jurisdiction over a corporation sole.
In a case involving a Roman Catholic corporation sole, the California Supreme Court declared that the:
"suit hinged solely on the corporation's articles and the
statutes governing corporations sole, so the dispute was
within the jurisdiction of the civil courts."
Moreover, the Court also ruled that the corporation sole "is a creature grounded in civil law." It would appear that the courts don't agree with the corporation sole peddlers and their incredible legal theories.
Corporation sole peddlers are confused. What they have done is assume that because the government has no jurisdiction over the exercise of religion, the government has no jurisdiction over a corporation sole. This is flawed logic.
If a church organizes as a corporation, such as a non-profit corporation (and indeed many do), it's no longer, in the eyes of the law, a church. It's a corporation. For all practical purposes all states treat the corporation sole just like they do any other non-profit corporation.
- The State does not create a corporation sole. The corporation sole exists under its own Articles of Incorporation, and is created by its incorporators, not the State. The State merely "recognizes" it as a legal entity when it is registered with the Secretary Of State's office. Therefore, a corporation sole is not a "creature of the State," like all other corporations.
Corporation sole statutes and case law clearly demonstrate that this specious theory is 180-degrees out of sync with reality.
Review the corporation sole statutes for yourself, and do so honestly (rather than just using wishful thinking), and you will soon see that there are striking similarities between the way the states legally treat the corporation sole, and the way they treat all other non-profit religious corporations.
In America we have an inalienble right to practice our religion, free of government interference or regulatory control. We also have the right of peaceful assembly. As such, we have the right to organize a church as a church. A church needs no legal recognition of the civil government. One should carefully ponder whether it's wise to seek legal recognition for their church, as this usually results in an admission by that church that the government has jurisdiction over it.
Corporation sole promoters have a hard time grasping this concept. They want very much to have the legal recognition of the State. Such people demonstrate no difference in their thinking from those attorneys and accountants who counsel pastors and ministers to organize their churches as non-profit tax-exempt corporations -- both are equally desirous of State recognition, and even registration. Every corporation sole church is a "government-registered church."
- The corporation sole has no annual corporate returns or reports to file with the Secretary Of State.
Corporation sole statutes vary state by state as to the legal requirements for filing annual corporate information returns, filing fees, etc. Some states may have just a single one-time filing requirement. Others have annual filing requirements. The fact that the corporation sole is legally required by the state to file at all, however, makes it abundantly clear that the state does assert its jurisdiction.
Each state also has requirements for reporting to the Secretary of State's office certain "extraordinary business" issues, such as any significant management change in the corporation sole. This would include a change in officers, directors, or resident agent. Failure to notify the state timely could have serious consequences, up to and including "involuntary dissolution" of the corporation sole. In the case of an involuntary dissolution, state statutes also dictate how the state will wind down the corporation sole and distribute its assets. The State Attorney General also has the authority to dissolve a corporation sole and distribute its assets if it commits a fraud or violates public policy.
Few states permit the formation of the corporation sole, and fewer still have corporation sole statutes which the peddlers consider to be "favorable." Nevada and Washington (in that order) appear to be the two states that are the most popular with corporation sole peddlers. However, relatively few people who will form a corporation sole will actually operate their corporation sole in those states, since they do not live there.
When a corporation sole is formed in one state, but is operated in another state, it is legally classified in that state as a "foreign corporation." A good example of this is the Mormon Church, which was incorporated in Utah in 1918 as a corporation sole, but which has a presence in a number of other states. The Mormon Church is legally required to register as a foreign corporation and file annual returns (and pay the associated filing fees) in every state where it has a physical presence. The same applies to any foreign corporation sole, and failure to file timely the necessary annual returns will result in that corporation sole being in "default." A defaulting corporation sole results in serious legal consequences, not the least of which is an "involuntary dissolution" by the Secretary Of State.
- The corporation sole has no annual fees.
The inference that corporation sole peddlers make with such an assertion is twofold:
1). The costs of maintaining a corporation sole are negligible,
2). The State ackowledges its lack of jurisdiction over the corporation sole, and does so by not imposing annual fees.
While the first inference may be true in some cases (depending on the state), the second is patently false.
Filing fees are dictated state by state. In some states, it may be true that once the corporation sole is incorporated and has paid its initial incorporation fees, it may not have a statutory obligation to pay annual renewal fees, as do other non-profit corporations. However, we would be remiss in not noting that state statutes are subject to change, based upon the sentiment of the state legislature. What may be true today could easily be changed, by legislative vote, tomorrow. In point of fact, the corporation sole, just like all other corporations, is very much subject to "public policy," and public policy is always subject to change.
An excellent example of this is Nevada. In the past, Nevada only required that the name and address of the Resident Agent be disclosed, and did not require that the names and addresses of corporation sole officers be disclosed (a distinct privacy advantage, indeed).
However, in 2003 the Nevada legislature ratified Senate Bill 1, and at Section 69.3 amended their corporation sole statute NRS 84.007 to require all Nevada corporation soles, including those organized prior to the passage of S.B. 1, to file new disclosure forms with the Nevada Secretary Of State's office, disclosing all corporation sole officer names and addresses, under penalty of perjury, pursuant to incorporation statute NRS 78.150. As such, Nevada now treats the corporation sole very much like it does any other nonprofit corporation. All the former privacy advantages are a thing of the past.
The Nevada Secretary Of State is required by S.B. 1 to impose a $25.00 filing fee for this newly required disclosure form, and a $50.00 late fee for any corporation sole which fails to comply with the February 1, 2004 filing deadline. Hundreds of Nevada corporation soles have missed the deadline, including many of those used personally by the corporation sole peddlers themselves. It would appear that many of the Nevada corporation sole peddlers have failed to inform their own clients of this recent change, either by their own ignorance or incompetence.
By statute, all Nevada corporation soles which have failed to file the new disclosure form are now in "default." If they remain in default for a year or more, the Secretary Of State is authorized to "involuntarily dissolve" them. In point of fact, the corporation sole peddlers are notorious for failing to disclose important legal matters to their clients, either because they are ignorant of the laws which govern the corporation sole, or they have read the law but don't want to tell their clients the truth about it for fear that they will lose sales.
In the context of annual filing fees, one thing that seems to never be disclosed by the corporation sole promoters is the fact that if a corporation sole is formed in one state, but operates in another state, it is legally required to register with that state's Secretary of State as a "foreign corporation." Most states require that registration as a foreign corporation be renewed annually, and there is usually a filing fee associated with doing so. Failing to register, when discovered, will result in serious legal consequences.
Furthermore, state statutes always require that the corporation sole have a "Resident Agent" (sometimes also known as a "Registered Agent"). The primary purpose of a resident agent is to receive legal service of process, e.g. to receive court papers when the corporation is sued. Based upon the particulars of your situation, you may need to hire a resident agent in the state in which you incorporate. There is always an annual fee for hiring a resident agent. Failure to obtain and maintain a resident agent can have serious legal ramifications, the least of which is that the Secretary Of State can assume the position of Resident Agent (still think they don't have jurisdiction?), and the worst of which could include an involuntary dissolution.
- There is no government control, regulatory oversight, or right of visitation (review of books and records) over the corporation sole.
The same states whose statutes permit the formation of a corporation sole also govern and restrict its use, management, and government oversight of the corporation sole. Each and every one of those states, by statute, does maintain its right of visitation and may, upon demand of the Secretary of State or State Attorney General, or any court of original jurisdiction, demand to review the books and records of any corporation sole that is organized within its borders, even if it is not operated within its borders.
Furthermore, most of the corporation soles being formed today will not be operated in the state of its formation (e.g. Nevada, Washington, etc.). Therefore, they will be treated as "foreign corporations" in the state of their operation. If a state has no corporation sole statute, the doctrine of "comity" may indeed necessitate that a state permit a corporation sole to operate within its borders (provided that it first register with the Secretary Of State). However, without a corporation sole statute, that state will treat that corporation sole just like any other non-profit religious corporation. In other words, you'll be no better off than if you just formed a non-profit corporation.
- No tax liens or levies, and no legal judgements, can attach against property owned by a corporation sole.
A corporation sole is a "legal entity" that is "recognized in law." If it has a tax liability that goes unpaid, it can, and it most certainly will, be liened and levied and, if necessary, the premises thereof raided and the property and assets seized. The IRS, and many of the state tax boards as well, are very accomplished at collecting the taxes they claim are due.
Furthermore, if a corporation sole is sued in civil court, and a legal judgement is awarded against it, the court will issue a "charging order" which the plaintiff may then exercise against any and all of the assets held by that corporation sole to settle the amount of the judgement awarded. The fact that so many of the corporation sole peddlers continue to use the Roman Catholic Church as their shining example only demonstrates their ignorance of what's taking place in civil courts all over the country, at this very moment.
- The IRS furnishes a special non-reporting EIN to the corporation sole for ease of opening bank accounts, that the bank does not report, and the IRS does not track.
There is nothing in the tax code, tax regs, or banking regs, that speaks of the IRS issuing "a special EIN to the corporation sole" or any other entity, for banking purposes. The fact of the matter is that there is no such "special EIN."
One should be extremely wary of such claims. They often come from people who are actually giving you a 9-digit number they make up themselves. Using a bogus EIN, TIN or SSN for any reason, whether it be with the bank or otherwise, could result in charges of fraud. It's easy to get caught because it's a common practice that banks send form W-9 to the IRS after you furnish them a TIN, to verify if the number is valid.
- Bank transfers of up to $10 million can be made without bank reporting to the IRS.
There is no Treasury or bank regulation of any kind to support this bogus claim. Bank accounts for corporations sole are treated no differently by any bank than they do any other account.
There are many more myths than just those that we have debunked above, being promulgated by the corporation sole peddlers. Our intention is not to debunk each and every corporation sole myth and urban legend that can be identified (that would probably be a full-time job), but to give you some cause to question whether any corporation sole peddler is worthy of your trust and confidence.
If you wish to gain some further appreciation for the kinds of misrepresentations commonly being made by corporation sole peddlers, read the Legal Review at the bottom of this page. In it I evaluate the legal claims that former (disbarred) attorney, Jeffrey Thayer (aka "Geoffrey Craig benRichard barAbba") started making some years ago about the corporation sole.
I give Jeffrey Thayer considerable credit for having originated many of the corporation sole myths. Jeffrey Thayer was also a very effective self-promoter, giving seminars and teaching his corporation sole myths all over the country (and getting rich doing so). Jeffrey Thayer's myths have since been repeated far and wide by the corporation sole peddlers he has spawned (such as Elizabeth Gardner), as a direct result of his seminars. After reading this Legal Review, you should quickly appreciate why Jeffrey Thayer was disbarred.
Corporation Sole Legal Review (of Jeffrey Thayer), by Peter Kershaw