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Advantages and Unique Features of Corporation Sole
A discussion of Corporation Sole for financial services and asset protection professionals.
Recently, there has been a lot of information and misinformation passed around among estate planners and investment consultants about Corporation Sole. Corporation Sole have been around for over 450 years, so they are not a "new kid on the block". Corporations Sole are used primarily for holding and passing the title for property belonging to a church, religious society, or charitable organization. Two examples of well-known Corporations Sole are the Christian Brothers Winery and the Sierra Club.
Because you will be asked about Corporation Sole, if you haven't already been asked, I'll share a little background information on Corporation Sole and you may be able to decide if or how they fit in with the estate planning strategies that you provide for clients. This discussion is the result of five years of studying Corporation Sole, and writing Corporation Sole for dozens of clients.
In this learning curve, I have studied the documents written by most of the current Corporation Sole gurus. In various ways and to varying degrees, I find that there is a general lack of understanding of the historic usage of Corporation Sole, even among the so-called "gurus". There is also a general lack of understanding of the statutes regarding Corporation Sole that results in most cases in a giving away of the potential benefits gained by this unique form of corporation.
People use corporations when they need a means of limiting liability. Normal Corporations are a creation of the state, and begin their existence on the date that the state incorporates them. Normal corporations owe their existence and allegiance to the government. Normal corporations require several officers, they have boards of directors, stockholders, annual fees, annual reports, and operate under many statutory regulations. Corporations have a continual, perpetual existence unless limited by their own Articles of Incorporation.
People use trusts when they need a means of protecting assets. Trusts are used when one person entrusts another person with some valuable asset or a right. The asset or right must be sufficiently identified for title to pass to the trustee and title must actually pass to the trustee. The asset or right, therefore, belongs to the trustee, and is not returned into the ownership of the original owner [trustor] or a designated beneficiary until the trust terminates on a stipulated date or under certain conditions.
The reason why assets placed in trust are not liable for claims against the trustor or for taxes of the trustor is because the property really does belong to someone else. Statutory Trusts are not perpetual, and they are limited by statute to a certain number of years [20, 30, 99 years, etc.].
There are laws against perpetual trusts in virtually all, if not actually all, jurisdictions.
Wouldn't it be nice if we could have an organization that has the advantages of limited liability of a corporation, without the regulation, without the multiplicity of offices of a corporation, for an organization that the government does not create (therefore the organization does not owe its allegiance to the state), and also allow the organization to function as a perpetual trust in order to protect and convey assets for many generations?
Carefully reading and comparing the Nevada Corporation Sole statutes* and a well-written corporation sole instrument, we learn that the Corporation Sole can be everything that is listed above.
The requirements for state-filed documents are rather rigid, and the documents that don't meet the standards are rejected. Many documents that do meet the State's requirements are so poorly written that they give away all of the advantages recognized in the first amendment's "free exercise [of religion]" clause. Some Corporation Sole documents even attempt to form a contract with "the ALLEGED state of [State]".
Under UCC 1-203, Good Faith is a requirement in all contracts. Because it is not possible, in my opinion, to operate in good faith when one is alleging that the other party may or may not exist, then that kind of Corporation Sole instrument is inherently flawed and the courts will eventually walk right through them and seize all of the assets that your society accumulates.
I have friends who (in the past) had organized a church under Corporation Sole and promptly applied for IRS 501(C)(3) status. Applying for permission for exemption under 501(C)(3) voids the natural immunity against regulation found in the First Amendment to the Constitution as well as the Internal Revenue Code, section 508. In spite of some sad examples of poor planning, there are also some very solid Corporation Sole instruments that do hold up in the courts.
Being a "Corporation", the Corporation Sole is by nature a form of limiting liability within the assets of the corporation. The Nevada statutes on Corporation Sole stipulate that the property is held "in trust" for the membership of the organization. This makes this kind of corporation function as a trust! In fact, the Oklahoma statutes describing Corporation Sole are found in that state's trust successor provisions, with a waiver of the "rule against perpetuities".
One feature of religious societies is that they may accept vows of poverty by their members [like monks, nuns, and priests]. The IRS recognizes these vows of poverty. For a small part of the IRS information on Vows of Poverty, look at pages 2 and 5 in IRS Publication 517.
When one is under vow of poverty, the physical objects in their possession are not their own, although it may be their job to look after and use those objects. Thus, when you see a Bishop being moved between a cathedral and a golf course, he may be carried in a stretched limousine, but he is still under a vow of poverty that is recognized by the IRS, and he is not questioned or bothered by the IRS. Virtually all Catholic Dioceses are organized as Corporations Sole.
The procedure used by some ministers is to first take the vow of poverty, second, file a "final income tax return" on a Form 1040, and third, file along with the Form 1040 a "Notice of Final Income Tax Return". The Form 1040 is a Codicil [in Black's Law Dictionary, see: "Label", and then examine a Form 1040]. Because a codicil amends a codicil, the "final income tax return" ends any need for future filings.
The Notice informs the IRS of both the Vow of Poverty and the final Form 1040. IF, IF, IF the IRS sends one of their famous form letters asking for a donation [actually, a contribution] for the IMF, then the letter is turned over to a scribe who sends copies of the final 1040, the Vow of Poverty, and the Notice, and tells the requestor that the priest/member is under Vow of Poverty and has no possessions or income, therefore the alleged tax bill is un-collectable and all collection activities must be discontinued.
The Scribe could even request a donation from the IRS employee to promote the work of the mission!
One guaranteed way to fail in an attempt to avoid taxation is to work for W-2 wages and donate 100% of your income to a Corporation Sole of which you are the overseer. In cases like this, there is a contractual obligation not to exceed a certain percentage of one's income in charitable donations. Also, the IRS justifiably claims that the Corporation Sole is an "alter ego" of the W-2 wage earner, and liens, levies, and seizes all of the assets of the Corporation Sole.
The best way to avoid this scenario is to never work for W-2 wages, but if you do, stay within the guidelines of the IRS when making donations. You may use other tax strategies for lowering the tax bite if you wish, but please recommend that your clients protect their family assets by staying within the law (your contractual obligations). When the client eventually finds out that there is no way to safely reside within the tax system, they may want to get completely out of it.
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