The protection of assets is generally one of the biggest reasons to form a legal entity. Specifically, the protection of business assets from an owner’s personal liabilities is critical to a business’ continuing success. In many states, a personal creditor may charge a stockholder’s stock with payment of a judgment. Such a remedy could result in the forced liquidation of a viable business to satisfy an owner’s personal debt to the detriment of other owners.

In Nevada, charging order protection is extended to partnerships, limited liability companies and, more recently, corporations. What this means is that a personal creditor’s only remedy against an owner’s stock is a charging order and, as a result, that creditor must wait for distributions from that entity to satisfy any judgment. The creditor cannot force distributions from the entity, nor can the creditor exercise any control over the entity, thereby allowing the business to continue operations despite the creditor’s claim.

LLCs and Partnerships

Nevada has long recognized charging order protection for limited liability companies and partnerships, but most states have not extended that protection to corporations. As stated above, this protection prevents a creditor from foreclosing on the ownership interest and from the forced sale of assets to satisfy the judgment.

Corporations

Nevada was the first state to provide charging order protection to certain corporations under NRS 78.746. This provision provides the exclusive remedy available to a judgment creditor related to a stockholder’s stock. The judgment creditor is only provided the rights of an assignee of the stock and has no rights to management or control of the corporation, provided that the corporation meets the following requirements:

(a)                Has more than one but fewer than 75 stockholders of record, at any time;
(b)               Is not a subsidiary of a publicly traded corporation; and
(c)                Is not a professional corporation

These restrictions closely mirror the IRS limitations for s-corporations and include most small businesses.

Conclusion

The expansion of these rights to certain corporations helps further Nevada’s business friendly reputation. However, it is unclear when and if other states will follow suit with similar legislation which leaves the answer unclear as to whether this law will be respected outside of Nevada.

© 2009 Drinkwater Law Offices

If you collect confidential data on your customers or clients, an important change in the law will provide you with a mechanism to reduce your liability if the data is lost or stolen.

On the heels of ineffective data breach notification laws, Nevada Senate bill 227, a more proactive approach, offers a safe harbor to businesses that collect personal information if a data breach occurs. Some important definitions apply:

Are you a “data collector?”

A “data collector” is defined in Nevada Revised Statute 603A as “any governmental agency, institution of higher education, corporation, financial institution or retail operator or any other type of business entity or association that, for any purpose, whether by automated collection or otherwise, handles, collects, disseminates or otherwise deals with nonpublic personal information.”

If you collect data, what constitutes “personal information?”

Personal Information is defined as a natural person’s first name or first initial and last name in combination with a (i) social security number (ii) driver’s license number or identification card number, or (iii) account number, credit card number or debit card number, in combination with any required security code, access code or password that would permit access to the person’s financial account.

So, if I am a data collector, what do I need to do to get the safe harbor?

Effective January 1, 2010, you will need to encrypt personal information that is either transmitted electronically or contained in a data storage device that has moved beyond the data collector’s control (e.g. on a laptop computer).

There are specific requirements contained in the statute! If you do encrypt the data, you, as a business owner, will avoid liability if that encrypted data is lost or improperly accessed! In addition, it is possible that courts will take the encryption requirement into account in determining what constitutes negligent conduct associated with data breaches.

Companies that follow the statutes may even be eligible for reductions on their insurance.

All of these are good reasons to check out SB 227 in the 2009 session information on the Nevada Legislature website at www.leg.state.nv.us or download the bill now  Senate Bill 227

© 2009 Drinkwater Law Offices