a

GAO

United States Government Accountability Office

Report to the Permanent Subcommittee 

on Investigations, Committee on 

Homeland Security and Governmental 

Affairs, U.S. Senate

April 2006 COMPANY 

FORMATIONS

Minimal Ownership 

Information Is 

Collected and 

Available

GAO-06-376
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 2006

COMPANY FORMATIONS 

Minimal Ownership Information Is 

Highlights of GAO-06-376, a report to the Collected and Available 

Permanent Subcommittee on 

Investigations, Committee on Homeland 

Security and Governmental Affairs, U.S. 

Senate 

Most states do not require ownership information at the time a company is

formed, and while most states require corporations and limited liability 

companies (LLC) to file annual or biennial reports, few states require 

ownership information on these reports. With respect to the formation of 

LLCs, four states require some information on members, who are owners of 

the LLC. Some states require companies to list the names and addresses of 

directors, officers or managers on filings, but these persons may not own the 

company. Nearly all states screen company filings for statutorily required 

information, but none verify the identities of company officials. Third-party 

agents may submit formation documents to the state on a company’s behalf, 

usually collecting only billing and statutorily required information for 

formations. These agents generally do not collect any information on owners

of the companies they represent, and instances where agents told us they 

verified some information were rare. 

Federal law enforcement officials are concerned that criminals are 

increasingly using U.S. shell companies to conceal their identity and illicit 

activities. Though the magnitude of the problem is difficult to measure, 

officials said U.S. shell companies are appearing in more investigations in 

the United States and other countries. Officials told us that the information 

states collect has been helpful in some cases because names on the 

documents, such as names of directors, generated additional leads. 

However, some officials said that the information was limited and that cases

had been closed because the owners could not be identified. 

State officials and agents said that collecting company ownership 

information could be problematic. Some state officials and agents noted 

that collecting such information could increase the cost of company filings

and the time needed to approve them. Some officials said that if they had 

additional requirements, companies would go to other states or jurisdictions. 

Finally, officials and agents expressed concerns about compromising 

individuals’ privacy because owner information disclosed on company filings 

would be part of the public record, which has not historically been the case 

for private companies. 

Information Collected on Ownership and Management at Formation 

Director/manager/ Owner/member

managing member

Name N Address ame N Address ame

Officer

Address

Both corporations and LLCs

Corporations only

LLCs only

Number of states

Source: GAO survey of state officials responsible for company formation. 

2 2

13

3

6

11

2

6

4 4

0

3

6

9

12

15

Companies form the basis of most

commercial and entrepreneurial

activities in market-based 

economies; however, “shell” 

companies, which have no 

operations, can be used for illicit 

purposes such as laundering

money. Some states have been

criticized for requiring minimal 

ownership information to form a

U.S. company, raising concerns

about the ease with which 

companies may be used for illicit 

purposes. In this report, GAO 

describes (1) the kinds of

information each of the 50 states

and the District of Columbia and

third party agents collect on

companies, (2) law enforcement 

concerns about the use of

companies to hide illicit activity 

and how company information 

from states and agents helps or

hinders investigations, and (3) 

implications of requiring states or 

agents to collect company

ownership information. 

What GAO Recommends

While not making 

recommendations, GAO observes

that if a requirement to collect

company ownership information is 

considered, it would be useful for 

policymakers to consider (1) 

options that balance the conflicting

concerns among states, agents, and 

law enforcement agencies; and (2) 

uniformly applying any such 

requirement to all states or agents. 

www.gao.gov/cgi-bin/getrpt?GAO-06-376.

To view the full product, including the scope 

and methodology, click on the link above. To 

view the results of GAO’s survey of state 

officials responsible for company formations, 

click: www.gao.gov/cgi-bin/getrpt?GAO-06-

377SP. For more information, contact Yvonne 

Jones at (202) 512-8678 or jonesy@gao.gov. 
Page i GAO-06-376 Company Formations

Contents

Letter 1

Results in Brief 4

Background 6

Most States Collect Limited Information on Company Ownership 

and Management 13

Agents Facilitate Company Formation but Are Not Required to 

Collect Ownership Information or Verify Information on 

Clients 24

Law Enforcement Officials Can Obtain Some Company Information 

from States and Agents, but a Lack of Ownership Information 

Obstructs Some Investigations 30

More Company Ownership Information Could Be Useful to Law 

Enforcement, but Concerns Exist about Collecting It 36

Observations 50

Agency Comments and Our Evaluation 51

Appendixes

Appendix I: Objectives, Scope, and Methodology 53

Appendix II: Company Formation and Reporting Documents Can Be 

Submitted in a Variety of Ways 57

Appendix III: Information on Company Formation Documents 61

Appendix IV: GAO Contact and Staff Acknowledgments 66

Glossary 67

Tables Table 1: Basic Types of U.S. Businesses 10

Table 2: Steps States Take to Review Articles of Incorporation/

Organization and Periodic Reports 23

Table 3: State Company Formation Fees as of November 2005 59

Figures Figure 1: How Companies Are Typically Formed 8

Figure 2: Domestic Corporations and LLCs Formed in States in 

2004 12

Figure 3: Number of Domestic Corporations and LLCs Formed in 

the Top Five States in 2004 13

Figure 4: Ownership Information Required in Articles and Periodic 

Reports 16
Contents

Page ii GAO-06-376 Company Formations

Figure 5: Management Information Required in Articles and 

Periodic Reports 18

Figure 6: Implications of All of the States Collecting Information on 

Company Ownership 38

Figure 7: States That Provide a Web Site for Filing Formation or 

Periodic Report Filings 58

Figure 8: Key Information Required on Articles of Incorporation/

Organization 62

Figure 9: Sample Articles of Incorporation Form for a 

Corporation 64

Figure 10: Sample Articles of Organization Form for an LLC 65
Contents

Page iii GAO-06-376 Company Formations

Abbreviations

CIP Customer Identification Program

DEA Drug Enforcement Agency

DHS Department of Homeland Security

EIN employer identification number

EOUSA Executive Office of the U.S. Attorneys

EPA Environmental Protection Agency

FATF Financial Action Task Force on Money Laundering

FBI Federal Bureau of Investigation

FinCEN Financial Crimes Enforcement Network

IACA International Association for Commercial Administrators

ICE Immigration and Customs Enforcement

ID identification

IRS Internal Revenue Service

IRS/CI Internal Revenue Service, Criminal Investigations

LLC limited liability company

LLLP limited liability limited partnership

LLP limited liability partnership

NAICS North American Industry Classification System

NCCUSL National Conference of Commissioners on Uniform State Laws

OECD Organization for Economic Cooperation and Development

OFAC Office of Foreign Assets Control

SAR suspicious activity report

SDN Specially Designated Nationals

SEC Security and Exchange Commission

SSA Social Security Administration

TIN taxpayer identification number

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-06-376 Company Formations

United States Government Accountability Office

Washington, D.C. 20548

A

April 7, 2006 Letr

The Honorable Norm Coleman

Chairman

The Honorable Carl Levin

Ranking Minority Member

Permanent Subcommittee on Investigations

Committee on Homeland Security and Governmental Affairs

United States Senate

Companies—business entities that conduct a variety of commercial 

activities and hold a variety of assets—form the basis of most commercial 

and entrepreneurial activities in market-based economies. Companies in 

the United States play an essential and legitimate role in the country’s 

economic system. They provide a wide variety of services that range from 

the provision of necessary utilities and investment services to retail sales of 

items such as clothing and furniture. Companies can also be set up that act 

as “shell” companies and conduct either no business or minimal business. 

Shell companies are used for legitimate purposes; for example, they may be 

formed to obtain financing prior to starting operations. However, 

government and international reports indicate that shell companies have 

become popular tools for facilitating criminal activity in the United States 

and internationally and can be involved in fraud and corruption or used for 

illicit purposes such as laundering money, financing terrorism, hiding and 

shielding assets from creditors, and engaging in questionable tax 

practices.1, 2

 Such schemes can conceal money movements that range from 

a few thousand to many millions of dollars.

Using U.S. shell companies for such activities can be appealing because of 

the perceived legitimacy of U.S. companies in international commerce and 

the potential for concealing the identity of the beneficial owners behind the 

legal entity. The beneficial owners are the persons who ultimately own and 

1

See U.S. Departments of the Treasury, Justice, Homeland Security, et al, U.S. Money 

Laundering Threat Assessment Working Group, U.S. Money Laundering Threat Assessment

(Washington, D.C., December 2005); and Organization for Economic Co-operation and 

Development (OECD), Behind the Corporate Veil: Using Corporate Entities for Illicit 

Purposes (Paris, 2001). 

2

Companies used to hide or facilitate illegal activity are sometimes also referred to as “front” 

companies and can sometimes conduct legitimate activity in addition to illegal activity. 

When we refer to “shell companies” in this report, we mean U.S. companies that do not 

conduct any legitimate activity.
Page 2 GAO-06-376 Company Formations

control a company.3 For example, a shareholder of a corporation could be a 

beneficial owner. State statutes have traditionally provided for the privacy 

of the identities of company owners and limited liability, which protects 

them against lawsuits and protects their personal assets. However, shell 

companies can provide beneficial owners with the means to conduct illegal 

activities while hiding the owners’ identity and involvement. Also, company 

formation agents who help individuals form companies may facilitate the 

formation of these shell companies, further shielding the identity of the 

individuals controlling the company. Law enforcement agencies 

investigating cases in which such companies may have been used for illicit 

purposes often need to know who the owners are in order to determine 

responsibility for criminal actions. 

In a previous investigation of foreign individuals laundering money through 

U.S. corporations formed in Delaware, we found that the state required 

very limited information when a company is formed.4

 The potential paucity 

of the information required when forming a company in the United States 

has raised concerns about the ease with which companies may be used for 

illicit purposes, particularly since the September 11, 2001, terrorist attacks. 

Given these concerns, you asked us to determine what types of information 

are routinely obtained and made available regarding the ownership of 

nonpublicly traded companies formed in each state.5

 Specifically, this 

report will describe

1. the kinds of information—including ownership information—that the 

50 states and the District of Columbia collect during company 

formation and the states’ efforts to review and verify the information;

3

While definitions of beneficial ownership vary, this is the definition we developed for the 

purposes of this report. 

4

See GAO, Suspicious Banking Activities: Possible Money Laundering by U.S. 

Corporations Formed for Russian Entities, GAO-01-120 (Washington, D.C.: Oct. 31, 2000).

5

Our focus is on the collection and availability of ownership information of nonpublicly 

traded companies whose securities are not registered with the Securities and Exchange 

Commission (SEC) pursuant to Section 12 of the Securities Exchange Act of 1934 (SEC Act) 

(codified at 15 U.S.C. § 78l), because significant shareholders of publicly traded companies 

are subject to certain federal regulatory requirements. For instance, every beneficial owner 

of more than 10 percent of any class of security registered with the SEC under Section 12 

must file certain disclosure statements under Section 16(a) of the SEC Act (codified at 15 

U.S.C. § 78p(a)) regarding the nature of such ownership.
Page 3 GAO-06-376 Company Formations

2. the roles of third-party agents, such as company formation agents, and 

the kinds of information they collect on company ownership;

3. the role of shell companies in facilitating criminal activity, the 

availability of company ownership information to law enforcement, and 

the usefulness of such information in investigating shell companies; 

and

4. the potential effects of requiring states, agents, or both to collect 

company ownership information.

Individuals can choose a variety of business structures when forming a 

company. The scope of this report covers corporations and limited liability 

companies (LLC) because corporations have historically been the 

dominant business form and LLCs have recently grown in popularity. We 

refer to corporations and LLCs collectively as “companies” unless 

otherwise specified.

To address the objectives, we conducted a survey of officials from all of the 

states and the District of Columbia on their company formation and 

periodic reporting practices and cross-checked the responses against our 

review of state statutes, company formation forms, and state Web sites. 

Each of the 50 states and the District of Columbia responded to our survey. 

We also called and visited selected states to obtain further information 

about certain practices. In addition, we interviewed academics who have 

done research in the area, companies that provide filing and related 

services for businesses, law firms, financial institutions, state and industry 

associations, and state law enforcement agencies. Furthermore, we talked 

with officials from two jurisdictions outside of the United States that have 

recently implemented regulations for company formation agents.6

 We also 

spoke with officials from federal agencies in the Department of Homeland 

Security (DHS), including Immigration and Customs Enforcement (ICE); 

Department of Justice (Justice), including the Criminal Division, Drug 

Enforcement Agency (DEA), Federal Bureau of Investigation (FBI), and a 

U.S. Attorneys office and the Executive Office of the U.S. Attorneys 

(EOUSA); and Department of the Treasury (Treasury), including the 

6

We chose to interview officials from Jersey and Isle of Man, two United Kingdom crown 

dependencies, because these jurisdictions have implemented regulations for companies that 

provide filing and related services to businesses.
Page 4 GAO-06-376 Company Formations

Financial Crimes Enforcement Network (FinCEN), Internal Revenue 

Service (IRS), and Office of Foreign Assets Control (OFAC). 

We conducted our work from May 2005 through March 2006 in Arizona, 

Delaware, Florida, Maryland, Nevada, New York, Oregon, Virginia, and 

Washington, D.C., in accordance with generally accepted government 

auditing standards. A more extensive discussion of our scope and 

methodology appears in appendix I. The report also includes a glossary 

of terms. The survey and a more complete tabulation of state-by-state and 

aggregated results can be viewed at http://www.gao.gov/cgi-bin/getrpt? 

GAO-06-377SP. We provided a draft of this report to DHS, Justice, and 

Treasury. Justice and Treasury provided technical comments on the report 

that were incorporated, as appropriate. 

Results in Brief Most states do not require companies to provide ownership information at 

formation or in periodic reports. Similarly, states usually do not require 

information on other individuals who manage a company, including 

corporate officers and directors and LLC managers, on company formation 

documents, but most states require this information on periodic reports. 

However, these individuals may not be the owners of the company. States 

typically require basic information on company formation documents, such 

as the name of the company and the name and address of a contact where 

tax and other legal notices for the company should be sent. However, some 

may require other types of information, such as the company’s principal 

office address or a statement of purpose. Almost all state officials reported 

that they screen filings for the presence of statutorily required information, 

but none reported screening names against criminal watch lists or verifying 

the identities of company officials provided in company formation or 

periodic report filings. Some officials said they do not take these steps 

because they do not have the legal authority or means to perform them.

Third-party agents may submit formation and other documents on behalf of 

a company, but the agents seldom collect ownership information or verify 

the information they collect. Individuals may also submit their own 

company filing documents. Company formation agents file required 

documents with a state for individuals or their representatives, while 

agents for service of process receive legal and tax documents on behalf of a
Page 5 GAO-06-376 Company Formations

company.7 Although these agents provide different services, one company 

may serve in both capacities. Some state statutes have basic requirements 

regulating agents for service of process, such as state residency, but 

otherwise there is little oversight of either type of agent and no verification 

of the information they provide. For example, some states may require the 

agent for service of process to have a local address but do not check to see 

whether the address is valid. Wyoming is the one state we found that 

requires agents for service of process to register yearly to discourage 

agents from providing false information and to have the information 

available if the agent is under investigation. Agents generally collect billing 

information and the information required by state statute for company 

formation but generally do not collect any additional information on 

ownership or management of the companies they represent. Agents are 

generally not required to verify information from clients, although some 

agents we spoke with may request additional information or verify the 

identity of international clients by requiring copies of passports. In some 

circumstances, a legal firm may be the contact for a company, and the 

agent may not interact with anyone affiliated with the company being 

formed. 

Law enforcement officials are concerned about the use of shell companies 

in the United States that enable individuals to conceal their identities and 

conduct criminal activity and have encountered difficulties in investigating 

these shell companies because they cannot determine the owners of the 

companies. Quantifying the magnitude of the use of shell companies used 

in crimes is difficult because creating a shell company is not a crime but 

rather can be a method for hiding criminal activity. However, law 

enforcement officials told us they are seeing many investigations within the 

United States and in other countries where individuals have used U.S. shell 

companies to facilitate illicit activity involving billions of dollars. Most of 

the law enforcement officials we interviewed said that when they need 

company information, they obtain some information from state Web sites 

and company filings, and some said they also requested information from 

agents. Some law enforcement officials noted that the information 

available from states had proven helpful because names on the documents 

generated additional leads. However, some officials said that the 

information states collected was limited in revealing who owned and 

7

Agents for service of process may be known as registered agents, resident agents, statutory 

agents, or clerks in different states. Agents can be individuals or companies operating in one 

state or nationally with only a few clients to thousands of clients. 
Page 6 GAO-06-376 Company Formations

controlled the company and that cases had been closed because of 

insufficient information. For example, an Immigration and Customs 

Enforcement (ICE) official provided an example of a Nevada-based 

corporation that received 3,774 suspicious wire transfers totaling $81 

million over a period of approximately 2 years. However, the case was not 

prosecuted because ICE could not identify the beneficial owner of the 

corporation. 

Although law enforcement officials noted that information on owners was 

useful in some cases, state officials, agents, and others we interviewed said 

that collecting company ownership information could be problematic. For 

instance, if states or agents collected such information, the cost of filings 

and the time needed to approve them could increase, potentially slowing 

down business dealings or even derailing them. A few states and some 

agents also said they might lose business to other states, countries, or 

agents that had less stringent requirements, a consequence two foreign 

jurisdictions experienced after regulating agents and requiring collection of 

ownership information. Further, state officials and agents pointed out the 

difficulties of collecting information when companies are being formed or 

on periodic reports since ownership can change frequently. In addition, 

state officials and agents expressed concerns about maintaining privacy 

when making public information about legitimate businesses that 

historically has been protected. State officials, agents, and other experts in 

the field suggested internal company records, financial institutions, and the 

IRS as alternative sources of ownership information for law enforcement 

investigations. However, collecting information from these sources could 

present many of the same difficulties.

Background States historically have had jurisdiction over the way business entities 

within their boundaries are formed and over reporting requirements for 

these entities. Statutes and requirements vary from state to state. In 

general, however, forming a company involves certain steps. Initially, a 

company principal or someone acting on the company’s behalf submits 

formation documents to the appropriate state office—usually a division of 

the secretary of state’s office—but in some cases to a different state
Page 7 GAO-06-376 Company Formations

agency.8 All formation documents filed with the state are matters of public 

record and are available to anyone. Documents may be submitted in 

person, by mail or, increasingly, online. A minimal amount of basic 

information generally is required to form a company, although these 

requirements also vary from state to state. Generally, the documents must 

give the company’s name, an address where official notices can be sent to 

the company, share information for corporations, and the names and 

signatures of the persons incorporating (see fig. 1). State officials generally 

check to see that the documents supply the information required by 

statute. Fees vary by state from $25 to $1,000, and the process can take 

anywhere from 5 minutes to 60 days.9

 See appendix II for more information 

on how formation documents are submitted and on the company formation 

fees in each state. Expedited services, available in some states, decrease 

processing times but may require an additional fee. Most states also require 

companies to file annual or biennial reports in order to stay in good 

standing, for a fee ranging from $5 to $500.10

8

Formation documents may be called articles of incorporation, certificates of incorporation 

(for corporations), or articles of organization or certificates of formation (for LLCs) in 

different states. In Alabama, formation documents are submitted to the probate judges at 

the county level. After a judge reviews and approves the documents, they are forwarded to 

the Secretary of State’s office for review and filing.

9

In Nebraska, the fees for filing articles of incorporation are based on the value of capital 

stock and can range from $60 to over $300. In New Mexico, the fees can range from $100 to 

$1,000, depending on the total amount of the authorized shares for the corporation.

10A certificate of existence or good standing shows that a company is in existence or 

authorized to transact business; that all fees, taxes, and penalties owed the state have been 

paid; that its most recent annual report has been filed; and that articles of dissolution have 

not been filed. States, cities, or counties may impose taxes or requirements for obtaining 

licenses or permits on businesses. We did not review the application or reporting 

requirements that businesses may have to submit to other state or local agencies in order to 

conduct business. 
Page 8 GAO-06-376 Company Formations

Figure 1: How Companies Are Typically Formed 

a

Share information applies only to corporations.

b

In two states, New Mexico and Nebraska, the filing fee for corporations was a range. The median was 

calculated using the lowest fee in the range. 

Types of Companies Businesses may be incorporated or unincorporated. A corporation is a legal 

entity that exists independently of its shareholders—that is, its owners or 

investors—and that limits their liability for business debts and obligations 

and protects their personal assets. For example, the owners of a small store 

may desire limited liability protection in case a customer is accidentally 

injured inside the store and decides to sue. In this hypothetical case, the 

owners’ personal assets, such as their home and retirement savings, 

generally would not be subject to any award if the customer won the 

lawsuit. Limited liability means that owners or shareholders in a business 

entity are personally responsible only for the amount they have invested in 

the business, while the corporation itself is responsible for the debts and 

other obligations it incurs. The exception occurs when a court “pierces the 

corporate veil,” or disregards the legal entity that is the corporation, and 

holds the owners, shareholders, and sometimes the officers and directors 

Submission of company formation documents to state Document processing

Who may submit How to submit What is typically required What steps are taken Possible outcomes

Company

principal

n

or individual

acting on 

behalf of the

company 

Attorney, 

Other agent

(e.g., 

company

formation

agent)

In

person

Mail

Fax

Online

or

e-mail

Company name

Name and address of

agent for service of process

Number or type of shares

a

Names, addresses, or 

signatures of incorporators

or organizers

SUSPEND States may delay

 company formation

if information is missing. States

may contact original submitter

to obtain needed information.

REJECT

States accept

 company formation

if information is complete. States

provide certified articles indicating

date and time of formation.

ACCEPT

Sources: GAO; Art Explosion (images).

Duration of entire process:

5 minutes to 60 days

Who is responsible

Median fee: $95b

Check for availability of 

desired company name

Check for presence of all 

required information

Process payment

State agency

Division of secretary 

of state's office or a

division of tax/

revenue agency, or 

other agency

State may reject

 company formation,

if for example, information is

missing or not in compliance 

with state law.
Page 9 GAO-06-376 Company Formations

responsible for the corporation’s acts and obligations.11 In contrast, the 

owners of unincorporated businesses, such as partnerships and sole 

proprietorships, are generally liable for all debts and liabilities incurred by 

their businesses. However, these types of businesses also offer tax 

advantages that corporations do not.12

The limited liability company (LLC) is a fairly new business form that is a 

hybrid of the corporation and the partnership. Wyoming passed the first 

law permitting formation of LLCs in 1977, and Florida followed suit in 1982. 

By the mid-1990s, all states had enacted LLC statutes. Like a corporation, 

an LLC protects its owners, which are referred to as members, from some 

debts and obligations; like partnerships and sole proprietorships, however, 

it may confer certain tax advantages.13 In addition, LLCs can choose a more 

flexible management structure than corporations. Table 1 shows the key 

characteristics of the different types of U.S. businesses. 

11Piercing the corporate veil is justified only in extraordinary circumstances where a court 

finds that a unity of interest and ownership between an individual and a corporation exists 

to such an extent that recognizing a separate existence between the two would result in an 

injustice. In such cases, a court may disregard the corporate entity and impose personal 

liability on the individual. See 1 Fletcher Cyclopedia of Private Corp. §41 and 45 Am. Jur. 

Proof of Facts 3d 1.

12Corporations are generally subject to income taxes on the corporation’s taxable income. 

26 U.S.C. § 11. Shareholders are generally subject to income taxes on dividends they receive 

from corporations with respect to its stock. 26 U.S.C. § 61(a)(1)(7). Certain small business 

corporations on the other hand may elect under the federal tax code to be taxed as an S 

corporation, which generally allows corporate income to pass through to the shareholder 

level before it is subject to federal income taxation. 26 U.S.C. §§ 1361(a)(1), 1363 and 1366. 

Partners in business are generally liable for income tax in their separate, individual capacity 

rather than the partnership being liable for income tax. 26 U.S.C. § 701.

13In late 1996, the IRS issued regulations that generally allowed LLCs to elect how they will 

be treated for federal tax purposes—that is, as sole proprietorships (disregarded entities), 

partnerships, or corporations, depending on the number of members. 26 C.F.R. §§ 301.7701-2 

& 301.7701-3.
Page 10 GAO-06-376 Company Formations

Table 1: Basic Types of U.S. Businesses

Sources: Black’s Law Dictionary (8th ed. 2004); Uniform Limited Liability Company Act, § 202(a) (1996); 26 U.S.C. §§ 1361, 1363 and 

1366; Uniform Limited Partnership Act 2001 Refs.; and Annos., Prefatory Note (Main Vol. 2003).

Corporations and LLCs Historically, the corporation has been the dominant business form, but 

recently the LLC has become increasingly popular. According to our survey, 

8,908,519 corporations and 3,781,875 LLCs were on file nationwide in 2004. 

That same year, a total of 869,693 corporations and 1,068,989 LLCs were 

formed. Figure 2 shows the number of corporations and LLCs formed in 

each state in 2004. Five states—California, Delaware, Florida, New York, 

and Texas—were responsible for 415,011 (47.7 percent) of the corporations 

and 310,904 (29.1 percent) of the LLCs. As shown in figure 3, Florida was 

the top formation state for both corporations (170,207 formed) and LLCs 

(100,070) in 2004. New York had the largest number of corporations on file 

in 2004 (862,647) and Delaware the largest number of LLCs (273,252). Data 

from the International Association of Commercial Administrators (IACA) 

shows that from 2001 to 2004, the number of LLCs formed increased 

Business form Key characteristics

Corporation An artificial construct (usually a business entity) created by law that acts as a separate and 

distinct legal entity apart from its owners and that has other legal rights, such as the ability 

to issue stock.

C corporation (for tax purposes) Generally, any corporation that is not an S corporation. 

S corporation (for tax purposes) A small business corporation that elects to be taxed as an S corporation under the federal 

tax code. The taxable income of an S corporation is passed through to the shareholders 

and taxed at the shareholder level.

Limited liability company (LLC) A company that offers its owners (members) some protection from responsibility for the 

company’s debts and obligations. An LLC may have only one member and may be 

managed by its members or managers.

Partnership An association of two or more persons who jointly own and conduct a business and agree 

to share the profits and losses of the business.

Limited partnership A partnership consisting of one or more limited partners who contribute capital to and 

share in the profits of the partnership but who are responsible for the company’s debts only 

up to the amount of their contribution and one or more general partners who control the 

business and are personally liable for its debts.

Limited liability partnership A partnership in which the participants are not responsible for negligent acts committed by 

other partners or by employees not under the partner’s supervision. Certain businesses 

(typically law firms or accounting firms) are allowed to register under state statutes as this 

type of partnership.

Limited liability limited partnership A partnership in which general and limited partners are not responsible for the 

partnership’s debts and obligations.

Sole proprietorship A business operated by one person who owns all assets and is responsible for all of the 

liabilities.
Page 11 GAO-06-376 Company Formations

rapidly—by 92.3 percent—although the number of corporations formed 

increased only 3.6 percent.14

14IACA is a professional association for government administrators of business organization 

and secured transaction record systems at the state, provincial, and national level in any 

jurisdiction. The IACA data include domestic, foreign, and professional companies. 

Domestic companies are those doing business in the same state in which they are 

incorporated or formed. Foreign companies do business in a state, but they are incorporated 

or formed in another jurisdiction, either in another U.S. state or a foreign country. 

Professional corporations may include professional services, such as those performed by 

doctors, dentists and attorneys. Combining figures for these different types of companies 

overestimates the number of companies formed under the state statutes examined in this 

report, which covers only domestic companies. Some states did not report data to IACA. 
Page 12 GAO-06-376 Company Formations

Figure 2: Domestic Corporations and LLCs Formed in States in 2004

Fewer than 25,000

25,000 - 50,000

50,001 - 100,000

More than 100,000

Sources: GAO survey of state officials responsible for company formation (data); Art Explosion (map).
Page 13 GAO-06-376 Company Formations

Figure 3: Number of Domestic Corporations and LLCs Formed in the Top Five 

States in 2004 

Most States Collect 

Limited Information on 

Company Ownership 

and Management

Most states do not require ownership information at the time a company is 

formed, and while most states require corporations and LLCs to file annual 

or biennial reports, few states require ownership information on these 

reports. Similarly, only a handful of states mandate that companies list the 

names of company managers on formation documents, although many 

require managers’ information on periodic reports. States may require 

other types of information on company formation documents, but typically 

they do not ask for more than the name of the company and the name and 

address of the agent for service of process (where legal notices for the 

company should be sent). Most states conduct a cursory review of the 

information submitted on these filings, but none of the states verify the 

identities of company officials or screen names against federal criminal 

records or watch lists.

0 50 100 150 200 250 300

Total

Corporations

LLCs

Delaware

New York

California

Florida

Number of corporations/LLCs formed (in thousands)

Source: GAO survey of state officials responsible for company formation.

Texas
Page 14 GAO-06-376 Company Formations

Information States Collect 

on Company Ownership

The owners of a company are, in the case of a corporation, the 

shareholders of that corporation and in the case of an LLC, the members of 

that LLC.15 According to our survey results, none of the states collect 

ownership information in the formation documents—articles of 

incorporation—for corporations (see fig. 4). State statutes generally do, 

however, require corporations to prepare and maintain lists of 

shareholders that, unlike formation documents, are not filed with the state 

or part of the public record.16

With respect to LLCs, states generally require a manager-managed LLC to 

name the designated manager instead of a member on the formation 

document—articles of organization. However, the manager is not 

necessarily an owner of the LLC.17 LLCs usually prepare and maintain 

operating agreements that name the owners, members, and their financial 

interests in the company, but these operating agreements are not filed with 

the state or part of the public record. According to our survey results, four 

states—Alabama, Arizona, Connecticut, and New Hampshire—request 

some ownership information when an LLC is formed.18 For example, in 

Alabama, the formation documents must list the names and mailing 

addresses of the initial members of an LLC. A Connecticut official said that 

either a member’s or a manager’s name was required on the articles of 

organization. In New Hampshire, a member or manager is required to sign 

the articles of organization. Arizona statutes mandate that manager 

managed LLCs must list on formation documents the name and address of 

each member owning more than a 20 percent interest and that 

member-managed LLCs must list all members’ names and addresses. 

Depending on the management structure of an LLC, ownership information 

15Companies may have complex structures with multiple organizational layers—beyond the 

two-tier parent/subsidiary construct—of different types of business entities, and the 

shareholders of a corporation and members of an LLC could be individuals or other 

businesses. Therefore, identifying the individual who is the beneficial owner directing the 

company and receiving the proceeds or other advantages of the company may involve 

uncovering the ownership of various layers of entities.

16Unless otherwise specified, data are from our survey of state officials responsible for 

company formations.

17An LLC can be member managed, with the owners collectively running the business, or 

manager managed, with one or more persons or entities—either designated members or an 

outside party—taking the managerial role.

18One state did not respond to the survey question on providing names of owners of 

corporations, and two states did not respond to the question on the addresses of owners.
Page 15 GAO-06-376 Company Formations

may be included on the formation documents in more states. If an LLC is 

managed by its members, some states require the LLC to provide the name 

and address of at least one member on the formation document. 

Most states require corporations and LLCs to file periodic—annual or 

biennial—reports, but not many states require ownership information on 

these reports (see fig. 4).19 With respect to corporations, three states 

(Alaska, Arizona, and Maine) indicated on our survey that the name of at 

least one owner was required on corporations’ periodic reports. In Alaska, 

any person owning more than a 5 percent interest in a corporation must be 

listed on the periodic report, according to a state official. An official from 

Arizona said the state requires that corporate periodic reports list the 

names and addresses of shareholders owning more than 20 percent of 

company stock. In Maine, statutes require that periodic reports include the 

names and addresses of shareholders of a corporation only if there are no 

directors. 

With respect to LLCs, our survey showed that five states require LLCs to list 

at least one member on their periodic reports.20 As with corporations, 

Alaska requires the name and address of any person owning more than a 5 

percent interest in an LLC to be listed on the company’s periodic report. A 

state official told us that LLCs in Kansas are required to list on their 

periodic reports the names and post office addresses of members owning 

at least 5 percent of the capital in the company.21 Connecticut and New 

Hampshire require either a manager or at least one member name on their 

periodic reports. Maine requires the name and business or residential 

address of each manager, or if there are no managers, each member with a 

street address on the periodic report. Finally, in states that require a 

manager’s or managing member’s name on periodic reports, the reports for 

member-managed LLCs might include a member’s name.

19Forty-eight states require an annual or biennial report for corporations, and 37 states 

require an annual or biennial report for LLCs. In some states, such as Alabama, New Jersey, 

and Oklahoma, the annual report may be submitted to a different office, such as the 

department of revenue, rather than the office that handles formation filings. In addition, an 

Iowa official told us that as of January 1, 2006, LLCs are required to submit biennial reports.

20The five states are Alaska, Connecticut, Kansas, Maine, and New Hampshire. One state did 

not respond to this survey question.

21In 2004, Kansas removed a requirement that corporations list the names and post office 

addresses of shareholders owning at least 5 percent of capital stock in order to limit the 

reporting requirements for corporations.
Page 16 GAO-06-376 Company Formations

Figure 4: Ownership Information Required in Articles and Periodic Reports

a

New Mexico and Arkansas did not respond to some of our survey questions. Arkansas responded on 

our survey that a member’s address is not required for LLC articles or reports. However, the state did 

not respond to the question asking whether the address of an owner of a corporation is required on 

articles or reports. We found from our legal review that Arkansas does not require the address of an 

owner on articles or periodic reports. New Mexico did not respond to our survey questions on the 

information required about owners or members. Our legal review found that New Mexico does not 

require corporations to list the name or address of an owner on articles or periodic reports. For LLCs, 

we found that New Mexico does not require member names and addresses on formation documents or 

periodic reports. 

Information States Require 

on Company Management 

Less than half of the states require the names and addresses of company 

management or directors on company formation documents. Management 

may include officers—chief executive officers, secretaries, and 

treasurers—who help direct a corporation’s day-to-day operations, as well 

as managers or managing members of LLCs.22 Directors serve on the 

governing board of a corporation and are responsible for making important 

business decisions, especially those that legally bind the corporation. Two 

states require officers’ names and addresses on company formation 

documents, 10 states require the names of directors, and 9 states require 

the addresses of directors (see fig. 5). Some states have additional 

Source: GAO survey of state officials responsible for company formation.

AlabamaAlaska

ArizonaArkansas

CaliforniaColoradoConnecticutDelawareDistrict of ColumbiaFloridaGeorgia

HawaiiIdahoIllinoisIndianaIowaKansas

KentuckyLouisianaMaineMarylandMassachusetts

MichiganMinnesotaMississippi

Missouri

MontanaNebraskaNevadaNew HampshireNew JerseyNew MexicoNew YorkNorth CarolinaNorth DakotaOhioOklahomaOregon

PennsylvaniaRhode IslandSouth CarolinaSouth DakotaTennessee

TexasUtahVermontVirginiaWashington

West Virginia

Wisconsin

Wyoming

Beneficial

owner/

member: Reports

Articles

Reports

Articles

Names

Addresses

Both corporations and LLCs

Corporations only

LLCs only No response

a

22Management of LLCs is in the hands of either managers or managing members, depending 

on the structure of the LLC. In a manager-managed LLC, one or more owners or an outsider 

is assigned to take responsibility for managing the LLC. These managers make decisions and 

act as agents of the LLC. A managing member is an owner that participates in the 

management of the business.
Page 17 GAO-06-376 Company Formations

information requirements for company formations. For instance, our 

review of state statutes found that Louisiana does not require information 

on directors on the incorporation documents, but does require directors’ 

names and addresses on an initial report that must be filed with the 

incorporation documents. We also found that Oklahoma requires the 

names and addresses of the directors only if the persons incorporating the 

company are not responsible for its operations after the incorporation 

documents are filed. More states require management information on LLCs. 

Nineteen states require the names of managers or managing members on 

formation documents, and 18 states require their addresses.23

Most states require the names and addresses of corporate officers and 

directors and of managers of LLCs on periodic reports (see fig. 5). For 

corporations, 47 states require the names of officers on periodic reports, 

and 46 states require officers’ addresses. Thirty-eight states require 

directors’ names and 37 require directors’ addresses. For LLCs, 28 states 

require the manager’s or managing member’s name, and 27 states require 

their addresses. However, even if states require disclosure of directors’ 

names, those listed may not be the individuals who are truly directing the 

company because in some cases, the individuals could be nominee 

directors that act only as instructed by the beneficial owner of the 

company.24 Also, managers may or may not be owners of the LLC.

23One state did not respond to this survey question.

24A nominee director may be an individual who is located where the business was formed 

and may sign for the business on behalf of the beneficial owner. Typically, the nominee 

director will have no knowledge of the business affairs or accounts, cannot control or 

influence the business, and will not act unless instructed to by the beneficial owner. We did 

not review state statutes on the use of nominee directors. While this mechanism may serve 

legitimate purposes, it can also be used to conceal identities and evade scrutiny. See 

Organization for Economic Co-operation and Development (OECD), Behind the Corporate 

Veil, Using Corporate Entities For Illict Purposes (Paris, 2001); and U.S. Money 

Laundering Threat Assessment (Washington, D.C., December 2005).
Page 18 GAO-06-376 Company Formations

Figure 5: Management Information Required in Articles and Periodic Reports

a

Information on officers applies only to corporations.

b

New Mexico did not respond to some of our survey questions. New Mexico did respond that corporate 

directors’ names and addresses are required for both articles and reports, but did not respond to the 

questions about the names and addresses of LLC managers/managing members. However, we found 

in our review of state statutes that New Mexico does not require LLC manager names and addresses 

on formation documents or periodic reports. 

c

New Jersey responded on the survey that the names and addresses of corporate directors are 

required for reports only and that the names and addresses of LLC managers/managing members are 

not required for articles or reports. However, our review of state statutes found that the names and 

addresses of corporate directors are also required on articles and that the names and addresses of 

LLC managers/managing members are required on reports. We were unable to clarify this discrepancy 

with New Jersey state officials. Utah responded to the survey that the names and addresses of 

corporate officers and directors are required on articles; however, our review of state forms found that 

this information is optional.

States May Also Collect 

Other Information 

States may also ask for other general information about a company, 

including its name; the name and address of the agent for service of 

process (where legal notices for the company should be sent); and for 

corporations, information about the number and types of shares the 

company will issue. Appendix III shows the type of information that each 

state collects on formation documents. Many states specify that the agent’s 

address must be a physical street address and not a post office box. In 

AlabamaAlaska

ArizonaArkansasCaliforniaColoradoConnecticutDelawareDistrict of ColumbiaFloridaGeorgiaHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaineMarylandMassachusetts

MichiganMinnesotaMississippi

Missouri

MontanaNebraskaNevadaNew Hampshire

New Jerseyc

New MexicoNew YorkNorth CarolinaNorth DakotaOhioOklahomaOregon

PennsylvaniaRhode IslandSouth CarolinaSouth DakotaTennessee

TexasUtahc

VermontVirginia

Washington

West Virginia

Wisconsin

Wyoming

Director/

manager/

managing

member:

Reports

Reports

Reports

Articles

Articles

Articles

Officer:a

Reports

Articles

Names

Names

Addresses

Addresses

Source: GAO survey of state officials responsible for company formation.

Both corporations and LLCs

Corporations only

LLCs only No response

b
Page 19 GAO-06-376 Company Formations

addition, a majority of the states include on their formation documents 

space for an individual to sign as the incorporator (in the case of a 

corporation) or organizer (in the case of an LLC) of the company.25 The 

incorporator or organizer may be the agent who is forming the company on 

behalf of the owners or it may be an individual affiliated with the company 

being formed. Most states permit an individual or entity to serve as 

incorporator without regard to state residency or later participation in the 

company, but at least two states require that the incorporator be associated 

with the company in some way. For example, the articles of incorporation 

for Arkansas and California state that if a newly incorporated company has 

chosen initial officers or directors, one or more of them must sign as the 

incorporator. Otherwise, an unaffiliated individual can sign as the 

incorporator.

Many states require a brief statement of purpose or a principal office 

address in order to form a corporation or LLC.26 In reviewing state statutes 

and state forms, we found that 20 states require a statement on the purpose 

of a corporation and 16 require a statement of purpose for LLCs on 

formation documents. In some states that ask for a statement of purpose, a 

general statement such as “the purpose of the corporation is to engage in 

any lawful act or activity...” is sufficient. Alaska requires an additional 

form that discloses the North American Industry Classification System 

(NAICS) number that most closely describes the activities of a 

corporation.27 Fourteen states require a principal office address to form a 

corporation, and 23 states require a principal office address to form an LLC. 

The principal office generally means either the address of the company’s 

place of business or its mailing address. Therefore, even in states where a 

principal office address is required, this address may not indicate the 

company’s actual place of business. For example, Arizona’s form asks for a 

25Many states also ask for this individual’s address more often for corporations than for 

LLCs. The primary role of the incorporator is to execute and deliver the formation 

document to the state company formation office. Although state statutes may not require 

this information, states may request or require this information be included on the company 

formation documents.

26Some states may require this information for corporations or LLCs, but not both. Appendix 

II has information on each state’s information requirements for company formation 

documents.

27The North American Industry Classification System is a system for classifying businesses 

that was developed jointly by the United States, Canada, and Mexico for the collection, 

analysis, and publication of statistical data related to the business economy across North 

America.
Page 20 GAO-06-376 Company Formations

known place of business in Arizona, but the instructions for the form state 

that this address may be in care of the address of the company’s agent. 

Some states have unique requirements for information on newly forming 

companies. For example, the articles of incorporation forms for Louisiana, 

Rhode Island, and South Dakota must be notarized. Similarly, an attorney 

licensed to practice in South Carolina must sign company formation 

documents in that state. Private sector officials told us that more states 

used to require a notary’s signature on company formation documents, but 

that most had repealed this provision. A Louisiana state official said that 

requiring a notary’s signature was a “historical” decision and, despite an 

effort to change the law, was likely to remain a requirement. 

A few states (Louisiana, Massachusetts, Mississippi, and Pennsylvania) 

also require a federal taxpayer identification number (TIN) on some 

company formation documents.28 Kansas requests a TIN on formation 

documents, but it is not required by statute. Louisiana and Massachusetts 

state officials told us that even though a TIN is required, company 

formation documents are not rejected if it is not included. These states 

originally used the TIN as a tracking number for filings. For instance, the 

Kansas Department of Revenue uses the information to match companies 

in its database. A Massachusetts official said that the state was moving 

away from using TINs in all cases and now assigns a private unique 

identification number to each company for tracking purposes. While the 

requirement to include a TIN is still in place for LLCs in Massachusetts, it 

was recently deleted from the corporation statute because the Secretary of 

State’s office received many complaints about this number being publicly 

available on filing documents. 

Forty-two states reported on our survey that their information 

requirements for persons or entities from outside the United States forming 

a U.S. company were the same as for U.S. citizens. Those states that say 

there was a difference also said that the difference was simply that proof of 

the company’s existence had to be included and that documents had to be 

translated into English. For example, Minnesota and North Carolina 

commented that if an entity from another country was applying to conduct 

28A taxpayer identification number is an identification number used by the Internal Revenue 

Service in the administration of tax laws. It can be either a Social Security number issued by 

the Social Security Administration (SSA) or another number, such as an employer 

identification number (EIN), issued by the IRS. 
Page 21 GAO-06-376 Company Formations

business in those states, the entity must provide proof of good standing or a 

document certifying that the company existed in the original country.29

Alaska is the only state that requires the name and address of each alien 

affiliate or a statement on the articles of incorporation that there are no 

alien affiliates. An “alien affiliate” is an individual from another country 

who has some ownership or control of a company or an entity controlled 

by an individual or a corporation from another country.30 An Alaska state 

official said that this information was originally required to identify 

offshore fisheries and their owners.

State Officials Reported 

That They Generally 

Reviewed Documents for 

Basic Information but Did 

Not Verify the Information

Nearly all of the states reported that they reviewed filings for the required 

information and fees and checked to see if the proposed name was 

available (see table 2). In Arizona, for example, state officials said that the 

main reasons filings were rejected were that required information, such as 

the agent’s address or signature or the type of management structure of an 

LLC, was missing and that the company name was not distinguishable from 

an existing entity’s name. Other state officials said they also rejected filings 

because they were missing key information, the company name was not 

available, or the fee was not included. Many states also reported that they 

reviewed filings to ensure compliance with state laws.31 In Virginia, for 

instance, filings are reviewed for more than just the required information. 

An attorney in the state office reviews all formation filings for substantive 

issues. For example, Virginia law requires that shareholders elect directors, 

and state officials said that they would reject a filing if the articles stated 

that the company’s directors would be chosen by a different method. 

None of the states reported verifying the identities of incorporators or 

company officials or using federal criminal records or watch lists to screen 

names. State officials gave several reasons for not taking this step when 

reviewing formation documents. In interviews and on the survey, many 

state officials emphasized that their role was authorized by statute as only 

administrative, not investigative. In fact, 45 states reported that they did 

29Minnesota also commented that an agent is required for persons or entities from other 

countries forming a Minnesota company.

30An “alien affiliate” could also be an entity that was either created or organized in another 

country or whose principal place of business is located outside of the United States. 

31We do not have information on the extent of this legal review in all of the states that 

responded that they conduct such a review.
Page 22 GAO-06-376 Company Formations

not have investigative authority to take action if they identified information 

that could indicate criminal activity, although some state officials said they 

can refer suspicious activity to law enforcement. Only two 

states—Colorado and North Carolina—reported that they did have 

investigative authority.32 Further, two states noted that their state statutes 

required them to file formation documents as long as the documents 

contained the required information. In addition, one state official said that 

states did not have the resources to verify the information submitted on 

formation documents and other officials commented on the survey that 

verification would significantly increase the costs and workloads of their 

offices. Another stated that the staff would not know how to determine the 

validity of information individuals provided to verify their identity. 

While states do not verify the identities of individuals listed on company 

formation documents, an individual may be charged with perjury in some 

states if law enforcement officials find in the course of an investigation that 

an individual submitted false information on a company filing. We found in 

our review of state forms that 10 states note the penalties for providing 

false information on their company formation documents. One state 

official provided an example of a case in which state law enforcement 

officials charged two individuals with, among other things, perjury for 

providing false information about an agent on articles of incorporation.

32Four other states responded either “no response” or “do not know” to this question.
Page 23 GAO-06-376 Company Formations

Table 2: Steps States Take to Review Articles of Incorporation/Organization and Periodic Reports 

Source: GAO survey of state officials responsible for company formation.

A few states reported that they directed staff to look for suspicious activity 

or fraud in company filings. For example, an official in Alabama told us that 

staff who reviewed filings looked for anything out of the ordinary, such as a 

bank from another country that wanted to form a company in Alabama but 

would not provide the required information. An official in Missouri said 

that despite not having a formal procedure or policy for reviewing filings 

for suspicious activity, staff were trained to look for things that were out of 

the ordinary. Such things might include discrepancies like two signatures of 

the same name with different handwriting. However, most states reported 

that they did not direct staff to look for suspicious information. According 

to an official in Alaska, the state has no formal mechanism for identifying 

or reporting suspicious information. The official said that staff would 

notice unusual fictitious names on filings, but with a filing fee of $250 in 

Alaska, this type of activity was rare. Two state officials told us that when 

staff noticed something unusual, they typically contacted the applicant for 

an explanation but still usually filed the documents. If something appeared 

especially unusual, they referred the issue to state or local law enforcement 

or the Department of Homeland Security. One official said his office had

Corporations LLCs

Processing steps

Articles 

only

Reports 

only Both

Not performed 

or no

response

Articles 

only

Reports 

only Both

Not performed

 or no 

response

Review for availability of company 

names 47 0 3 1 45 0 2 4

Review for presence of information 

and fees 11 39 0 1 16 2 31 2

Determine whether submitted 

information is in compliance with 

state law 10 1 35 5 16 2 28 5

Verify with picture IDs the 

identities of incorporators, 

directors, or officers 0 0 0 51 0 0 0 51

Use federal criminal records or 

watch lists to screen names of 

incorporators, directors, or officers 0 0 0 51 0 0 0 51

Direct staff to look for suspicious 

activity or fraud in filings 2 0 4 45 3 0 3 45
Page 24 GAO-06-376 Company Formations

never received a response from law enforcement about issues that had 

been forwarded.

Agents Facilitate 

Company Formation 

but Are Not Required 

to Collect Ownership 

Information or Verify 

Information on Clients

The roles of company formation agents and agents for service of process 

differ, as do the state statutes that govern them.33 Company formation 

agents submit documents on a company’s behalf, and agents for service of 

process receive legal and tax documents for clients. Most states do little to 

oversee these agents and do not verify information about them. Further, 

states generally do not require agents to collect information on company 

ownership or management or to verify the information they collect. The 

agents we interviewed generally collect only contact information and any 

information required by the states and do not verify the information. In 

some circumstances—primarily with international clients and clients 

requesting special services—some agents may verify a client’s identity.

Company Formation Agents 

and Agents for Service of 

Process Play Different Roles 

Company formation agents are firms that help individuals form companies 

by filing required formation documents and other paperwork with the 

appropriate state agencies. Although individuals may file their own 

formation documents directly, a company formation agent can facilitate the 

process. Agents for service of process can be either persons or entities that 

are designated to receive important tax and legal documents on behalf of 

businesses. For example, if a company is being sued, the agents for service 

of process will accept the legal paperwork and forward it to their company 

contacts. Historically, the role of agents was to ensure companies had a 

presence in each state they operated in and were able to be reached. Our 

review of state statutes showed that almost all states require companies to 

designate an agent for service of process on company formation

33We interviewed a total of 12 third-party agent companies that provide company formation 

and service of process services. The companies ranged from large national companies to 

small companies. In this report, we refer to company formation agents and agents for 

service of process as simply “agents” unless otherwise specified. Some agents and state 

officials told us that most companies are formed by individuals who also designate 

themselves as the agent for service of process. Anecdotally, agents told us that they may 

work with up to 30 percent of the total companies formed.
Page 25 GAO-06-376 Company Formations

documents.34These agents may provide other services, such as filing 

amendments and periodic reports, assisting with mergers and acquisitions, 

obtaining certificates of good standing, and conducting other public record 

searches. Agents may also provide assistance in setting up bank accounts 

or providing directors, although only a couple of the 12 agents we 

contacted said that they would provide these services, and then only in 

special situations.35 According to a few agents we interviewed, large 

companies are more likely to hire agents, especially large companies that 

need an agent for service of process in multiple states.

Most states have basic requirements for agents for service of process. 

Forty-six states indicated on our survey that they required agents for 

service of process to have a physical address in the state (not a post office 

box) where documents could be received, while seven states required 

agents to keep specific office hours. Individuals serving as agents for 

service of process generally must be state residents or have a state address, 

but firms acting as agents generally must be authorized to do business in 

the state and must have filed company formation documents. A few states 

have additional requirements for agents. For example, in Maine, an agent 

must be a natural person, while in Louisiana, a professional law 

corporation or partnership may serve as the agent.36 In Virginia, agents for 

service of process must be individuals who are both a resident and an 

officer of the company being formed, members of the state bar, or 

companies authorized to do business in the state, and must specify their 

qualification on the company formation documents. 

34In New York, the Secretary of State serves as the designated agent but another agent may 

be designated. Minnesota and Pennsylvania require a registered office but the name of an 

agent is not required. Louisiana does not require an agent on the formation documents, but 

does require an agent to be listed on the initial report that is filed with the formation 

document.

35Typically, the nominee or dummy director is a mere figurehead and will have no knowledge 

of the business affairs or accounts, cannot control or influence the business, and will not act 

unless instructed to by the beneficial owner. Special circumstances could arise, for 

example, if a bank required someone independent of a corporation to serve as director for 

purposes of granting a loan.

36A natural person is a legal term and means a “human being.” 
Page 26 GAO-06-376 Company Formations

Few States Verify 

Information from or 

Otherwise Oversee Agents

We found limited incidences of state oversight of agents. A few state 

officials we spoke with reported checking company formation documents 

to ensure that agents had a local address, but in general they did not check 

to see whether the address was valid. One state official said the office 

verified addresses only in special cases. Delaware reviews its agents’ 

addresses if several hundred transactions occur from the same address to 

ensure it is an actual address and not a post office box. In addition, 

Delaware is unique in allowing approximately 40 agents to have direct 

access to the state’s database to enter or access company information. The 

state contracts with these agents, and in return they must meet certain 

guidelines and pay access fees. The state reserves the right to terminate 

these contracts at any time but thus far has not done so because of 

nefarious behavior. State officials in Florida and Wyoming told us that they 

checked their records to ensure that companies acting as agents for service 

of process were authorized to conduct business in the state. 

Thirty-nine states said they did not track the number of agents for service 

of process operating in the state and 36 did not have an official listing of 

agents. However, a couple of states have registration requirements for 

operating within their boundaries. Wyoming requires agents serving more 

than five corporations to register with the state annually, under a law that 

was enacted after some agents gave false addresses for their offices, 

according to a state official. To register, agents must pay a $25 annual fee 

and complete a form each January giving contact information, including a 

physical and mailing address, and indicating whether the applicant or any 

company principal has ever been convicted of a felony. The state official 

said that the office kept the information on file in case an agent was 

investigated. California law requires any corporation serving as an agent 

for service of process to file a certificate with the Secretary of State’s office 

and to list the California address where process can be served and the 

name of each employee authorized to accept process. Seventeen states 

indicated on the survey that they provide the names of all or some agents 

on a Web site, and 6 states reported having some requirements for agents 

wanting to be listed on the Web site.37 For example, Delaware requires a 

business to have been operating for at least 1 year, to be in good standing, 

and to serve more than 50 clients. 

37Seventeen states indicated on our survey that they provided the names of all or some 

agents. However, we were unable to verify the listing of agents for all of these states. 
Page 27 GAO-06-376 Company Formations

Although the notion is controversial, some state officials and agents said 

that some level of uniform registration or certification in the industry might 

be desirable, for several reasons. One agent told us that the few agents who 

do not follow the current rules give the industry a bad name and that 

regulation would eliminate some of these agents. Another agent felt that 

registration would create some standards in the industry and provide some 

legitimacy for firms conducting business in international jurisdictions that 

require registration. However, some agents felt that regulation would be 

difficult if not detrimental to the industry. One agent felt that if the industry 

were regulated, individuals would avoid using agents and form their 

companies themselves. Another agent believed that the costs associated 

with meeting standards could be high enough to drive smaller firms out of 

business. In either case, both agents that supported and opposed regulation 

said that the industry should be involved in efforts to develop some type of 

registration or regulation that would affect their business.

Agents We Talked with Said 

They Generally Do Not 

Collect Ownership and 

Management Information on 

Companies Because States 

Do Not Require Them to 

Collect It

Agents we spoke with generally collected only contact information and the 

information required by a state for company formation documents or 

periodic reports. This information may include contact names for billing 

and for forwarding service of process, annual reports, or tax notifications. 

These agents said they may have only one contact name for a company. 

According to several agents, they rarely collect information on ownership 

since states do not require it. In general, agents said they collect the names 

and addresses of officers and managers, if required, and when serving as an 

incorporator, agents may collect information on the company directors or 

shareholders, even if it is not required. This information allows agents to 

resign as incorporators and pass on the authority to conduct business to 

the new company principals. Depending on the size of the company, the 

directors and the officers may also be the owners, but one agent told us 

that he did not try to determine if they were. Several agents also told us that 

they do not always work directly with the principals of the company 

because the agents interact directly with law firms or transact a large part 

of their business online, and therefore may not have access to additional 

information not required by the state. One agent also noted that collecting 

ownership information was not necessary to doing his job.

Even if agents collect information such as the names of officers and 

directors, a few agents said that they might not keep records of the 

information. For example, two agents told us that their firms did not keep a 

database of company information, in part because company documents 

filed with the state are part of the public record. Because the information is 
Page 28 GAO-06-376 Company Formations

public, one agent felt it was not necessary to bear the additional cost of 

storing it internally. According to our review of state statutes, some states 

have record retention requirements that oblige corporations to make 

shareholder lists or the stock ledger available at the registered office within 

the state (which may be the agent’s office), although the requirements vary 

by state. For example, in Nevada, the registered office is required to keep 

the stock ledger or a file listing the location of the ledger, and in New 

Mexico, a list of shareholders must be available at a company’s registered 

office 10 days prior to a shareholders’ meeting.

Agents Are Not Required to 

Verify Information in 

Company Filings, but a Few 

Do 

States generally do not require agents to verify the information collected 

from clients, and few agents we interviewed do. In general, agents told us 

they do not verify the validity of names or addresses provided, screen 

names against watch lists, or require picture identification of company 

officials. The extent of agents’ verification might include checking that the 

minimum statutory requirements have been met, researching an address if 

a client’s mail is returned, or comparing a credit card address to a 

company’s address. One agent said that his firm generally relied on the 

information that it received and that in general did not feel a need to 

question the information, although another agent said that his firm might 

request additional information to assess risk if something about a potential 

client seemed suspicious. 

Two agents with whom we spoke indicated that they collected additional 

information that could be used to verify the identity of clients, often when 

working with international clients, although the choice to verify 

information did not appear to be based on a formal risk assessment. These 

agents said they might check names against caller identification systems on 

their telephones or against the Office of Foreign Assets Control (OFAC) list 

of Specially Designated Nationals and Blocked Persons.38 One agent said 

that her firm created a document to collect additional information from 

38OFAC is an office within the U.S. Department of the Treasury that administers and 

enforces economic and trade sanctions based on U.S. foreign policy and national security 

goals, as well as a master list of “Specially Designated Nationals and Blocked Persons” 

(SDN) that includes numerous foreign agents and front organizations, terrorists, terrorist 

organizations, and narcotics traffickers. See the U.S. Department of Treasury’s Web site: 

http://www.treas.gov/offices/enforcement/ofac/. All U.S. persons, both individuals and 

entities, are responsible for ensuring they do not do business with a person or entity listed 

on the SDN list. Undertaking any type of business or financial transaction with a person or 

entity on this list is illegal under federal law.
Page 29 GAO-06-376 Company Formations

clients from unfamiliar countries. This agent’s document was based in part 

on federal standards for financial institutions from the USA PATRIOT 

ACT.39 On the document, the agent asks for a federal tax identification 

number (TIN); company ownership information; information from the 

company Web site; e-mail addresses; and, for individuals, identification, 

proof of occupation, and citizenship status. 

Another agent we interviewed in Delaware asked for identification and 

used a specific agreement with certain international clients. In some cases, 

international agents contact the Delaware agent for assistance in forming 

U.S. companies for their clients in other countries. According to this 

agreement, international agents must verify the identity of an individual 

wishing to form a company through the Delaware agent by requiring their 

client to provide the principals’ names, addresses, dates and places of birth, 

nationalities, and occupations, as well as certified copies of their passports, 

proof of address, and a reference letter from a bank.40 This agent also 

required a client requesting mail forwarding services to provide additional 

information, such as a Social Security number, in addition to the 

information required by the U.S. Postal Service on its mail forwarding form. 

The agent said the firm collected this information to screen potential 

clients and protect the firm and that it would stop representing a client if 

the client generated a significant amount of service of process, complaints, 

or visits from investigative agents. In general, the agent felt the additional 

requirements were not burdensome. Another agent noted that any extra 

time added to the process was a result of the time required for the client to 

provide the information. 

39Title III of the USA PATRIOT ACT of 2001, passed after the September 11, 2001, terrorist 

attacks, amended U.S. anti-money-laundering laws and imposed new requirements on 

financial institutions. Section 326 of Title III required the Secretary of the Treasury to 

develop regulations establishing minimum standards for financial institutions to follow 

when verifying the identity of its customers in connection with the opening of an account. 

These regulations require financial institutions to establish a written customer identification 

program (CIP) that includes procedures for obtaining minimum identification information 

from customers that open an account with the financial institution, such as a person’s date 

of birth, a government identification number, and physical address. The regulations 

stipulated that the CIP must include risk-based procedures for verifying the identification of 

a customer that enable the financial institution to form a reasonable belief that it knows the 

true identity of the customer. See Uniting and Strengthening America by Providing 

Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) of 

2001, Pub. L. No. 107-56, 115 Stat. 272 (2001).

40Proof of address can be satisfied by providing a utility bill, an original bank statement, or a 

letter from an employer.
Page 30 GAO-06-376 Company Formations

In addition, a few other agents said that they used the OFAC list to screen 

names on formation documents or on other documents required for other 

services provided by their company, although several agents told us they 

were not aware of the OFAC list.A few agents we interviewed in Delaware 

used commercially available software to screen client names against the 

OFAC list, a step strongly encouraged by the Secretary of State. However, 

one agent told us that his staff had never gotten a match on the list. One 

agent felt that running checks on the names listed on company documents 

could add time to the process but would likely not be a burden. Other 

agents found the list difficult to use and saw using it as a potentially costly 

endeavor. OFAC officials reported that they had also heard from agents 

that screening names against the OFAC list would result in increases in the 

time and cost of the process, which could lead to a loss in business.

Law Enforcement 

Officials Can Obtain 

Some Company 

Information from 

States and Agents, but 

a Lack of Ownership 

Information Obstructs 

Some Investigations

Law enforcement officials are concerned about the use of U.S. shell 

companies to facilitate or hide criminal activity. Law enforcement officials 

we interviewed noted that they often used the information available from 

states in investigating shell companies that were suspected of criminal 

activities and said that, in some cases, the names of officers and directors 

on company filings had generated additional leads. However, officials also 

said that the information states collected was limited, noting that it could 

provide a place to start but that some cases had been closed because of 

insufficient information on beneficial owners. 
Page 31 GAO-06-376 Company Formations

Law Enforcement Officials 

Are Concerned about the 

Use of U.S. Shell Companies 

to Facilitate Criminal 

Activity

Law enforcement officials and other reports indicate that shell companies 

have become popular tools for facilitating criminal activity, particularly 

laundering money.41 In December 2005, several agencies of the federal 

government, including the Departments of the Treasury, Justice and 

Homeland Security, issued the first governmentwide analysis of money 

laundering in the United States, which described, among other things, how 

shell companies can be used to launder money. Shell companies can aid 

criminals in conducting illegal activities by providing an appearance of 

legitimacy—for example, an artificial source of income or proof of the type 

of transactions legitimate companies conduct. Shell companies can also 

provide access to the U.S. financial system through U.S. bank accounts or 

offshore accounts in banks that have a correspondent relationship with a 

U.S. bank.42 For example, in a Financial Crimes Enforcement Network 

(FinCEN) December 2005 enforcement action, FinCEN determined, among 

other things, that the New York branch of ABM AMRO, a banking 

institution, did not have an adequate anti-money-laundering program and 

had failed to monitor approximately 20,000 funds transfers—with an 

aggregate value of approximately $3.2 billion—involving the accounts of 

U.S. shell companies and institutions in Russia or other former republics of 

the Soviet Union.43

Determining a precise number of criminal cases involving the use of shell 

companies to hide illicit activity is difficult because forming such 

companies is not a crime but rather is sometimes used as a method for 

moving money that may be associated with a crime. Therefore, the use of 

shell companies for illicit activities is not tracked by law enforcement or

41Our review focuses on state information requirements when companies are formed and 

when they submit periodic reports. Other reports cite additional state practices that may 

also facilitate criminals hiding their identity such as allowing bearer shares, nominee 

directors, and nominee shareholders. See U.S. Departments of the Treasury, Justice, 

Homeland Security, et al, U.S. Money Laundering Threat Assessment Working Group, U.S. 

Money Laundering Threat Assessment (Washington, D.C., December 2005); and 

Organization for Economic Co-operation and Development (OECD), Behind the Corporate 

Veil: Using Corporate Entities for Illicit Purposes (Paris, 2001). 

42A correspondent account is an account that a foreign bank opens at a U.S. bank to gain 

access to the U.S. financial system and to avoid bearing the costs of licensing, staffing, and 

operating its own offices in the United States. Many of the largest international banks serve 

as correspondents for thousands of other banks.

43Without admitting or denying the allegations, ABN AMRO Bank N.Y. agreed on December 

19, 2005, to enter into a consent agreement to the assessment of civil money penalty.
Page 32 GAO-06-376 Company Formations

government agencies.44 However, law enforcement officials told us they are 

seeing a wide range of indicators that suggest the increased use of U.S. 

shell companies for illicit activities.

• FinCEN officials told us they see many suspicious activity reports (SAR) 

filed by financial institutions that potentially implicated shell companies 

in the United States. For example, FinCEN reported in the U.S. Money 

Laundering Threat Assessment that financial institutions filed 397 SARs 

between April 1996 and January 2004 involving shell companies, East 

European countries, and correspondent bank accounts. The aggregate 

amount of activity reported in these SARs totaled almost $4 billion.

• Justice officials said that law enforcement officials from other countries 

have asked the United States to help them track down the individuals 

that had formed U.S. shell companies to hide illicit activity, but the lack 

of ownership information is obstructing their investigations. For 

example, a review by Justice of requests for legal assistance in 2005 

from Russia and Ukraine found 30 requests for assistance from Russian 

authorities and 75 requests from Ukraine authorities involving U.S. shell 

companies. These requests typically ask for assistance in identifying 

individuals associated with the U.S. companies. However, Justice’s 

attempts to gather information in response to these requests on the 

companies are obstructed by the lack of information maintained by 

states and agents. These requests often involve serious crimes occurring 

in other countries but implicate a U.S. company. For example, in early 

2006, one request was seeking information on a U.S. corporation 

allegedly used to smuggle a toxic controlled substance between two 

Eurasian countries because the name of the U.S. corporation was on the 

foreign customs papers.

• OFAC expressed concerns that shell companies can be used to facilitate 

transactions with targets (individuals, entities, or countries) of U.S. 

economic sanctions. In one example, during the period when the United 

States maintained sanctions against Yugoslavia (Serbia and 

Montenegro), a U.S. company formation agent filed incorporation 

papers for a Serbian entity, which then opened bank accounts in the 

44The 2005 U.S Money Laundering Threat Assessment reported that the U.S. government 

currently does not have a systematic way of collecting data on the total amount of money 

laundering activity being apprehended by federal law enforcement agencies or the methods 

used to launder money.
Page 33 GAO-06-376 Company Formations

United States as a U.S. company to transfer money through the United 

States.

• The FBI told us they currently have over 100 ongoing cases investigating 

market manipulation and that the majority of these cases involve the use 

of shell companies. One closed case, for example, involved the sale of 

fraudulent private placement offerings to the investing public. The 

convicted individuals used U.S. shell companies to give investors the 

impression that they were investing in legitimate companies, but instead 

the individuals stole the investors’ proceeds. In some cases, individuals 

have used shell companies to pump up the price of a stock and then sell 

their entire position in the stock while legitimate investors are left with 

worthless stock.

• The FBI has also expressed concern about the use of third-party agents 

to form thousands of shell companies in the United States for criminals 

operating in other countries; the criminals then use the shell companies 

to open U.S. bank accounts. The FBI believes that U.S. shell companies 

are being used to launder as much as $36 billion from the former Soviet 

Union. An FBI analysis of the use of these third-party agents found that 

they often register the shell company using nominee officers to keep the 

foreign beneficial owner anonymous and use companies created at an 

earlier date—“aged shelf companies”—to give banks and regulatory 

authorities the impression the company has longevity.

Law enforcement officials provided us with examples of cases involving 

the use of U.S. shell companies. According to a Department of Justice 

report on Russian money movements, many of the investigations involving 

shell companies use common schemes to launder money and conceal 

money movements. In a “fictitious services” scheme, the criminals enter 

into a contract with a company purportedly offering an intangible service, 

such as consulting. The consulting company is actually a shell company 

owned by the criminals, so that payments for consulting services are 

actually payments into a bank account under their control. In one case 

involving a fictitious services scheme, a former public official from the 

Russian Federation allegedly helped to unlawfully divert international 

nuclear assistance funds that were intended to upgrade the safety of 

nuclear power plants operating in Russia and several former republics of 

the Soviet Union. The indictment stated that the suspects formed shell 

companies in Pennsylvania and Delaware that received the nuclear 

assistance payments and then diverted over $15 million of this money to 

corporate bank accounts. Ultimately the money was allegedly transferred 
Page 34 GAO-06-376 Company Formations

to other personal bank accounts in the United States and other countries 

and the transfers concealed behind fictitious business contracts. The 

subjects of the indictment allegedly used at least $9 million to fund 

business investments and loans for their personal enrichment.

IRS investigations have also uncovered the use of U.S. shell companies in 

tax evasion schemes. In one tax evasion case, two co-conspirators used 

nominee names to open bank accounts and form U.S. corporations in 

Florida to hide their assets and income to avoid tax liabilities. One 

co-conspirator was sentenced to 10 years in prison and ordered to pay $1.6 

million in restitution. The other co-conspirator was sentenced to 25 years 

imprisonment for his involvement in the tax evasion scheme, as well as a 

related investment fraud scheme. 

ICE officials also told us they have encountered the use of U.S. shell 

companies in their investigations. ICE officials interviewed a third-party 

agent who had registered approximately 2,000 companies for international 

clients. The registrations took place mostly in Oregon, but also in Arkansas, 

Colorado, Idaho, Iowa, Kentucky, Montana, South Dakota, Washington, and 

West Virginia. The investigation was prompted by a bank that had reported 

suspicious transactions in an account of one of the companies registered 

by this agent. This case was subsequently closed because the agent moved 

from the area and could not be found.

Information from Company 

Filings and Agents Is 

Available and Useful to Law 

Enforcement, but Is Often 

Too Limited to Solve Cases

Law enforcement officials obtain some company information from states 

and agents through a variety of methods. Our review of states’ Web sites 

found that 46 states provide some company information online for free, but 

that states post different amounts of company information on their Web 

sites.45 For instance, Virginia officials told us that while the name of the 

incorporator is on the articles of incorporation, it is not added to the on line 

database. In addition, Delaware lists only the company name and the name 

and address of the agent online, while Florida makes copies of all 

documents available with all of the information they contain, including 

names of directors and managers. Given the variations in what is available 

online, law enforcement officials may request paper copies of filings that 

could provide more information. Law enforcement officials may also 

45The states that do not provide information online for free are Arkansas, Hawaii, Maine, 

New Jersey, and Texas. In these states, we found that some information is available online 

for a fee.
Page 35 GAO-06-376 Company Formations

obtain company information from agents, although some law enforcement 

officials said they do not usually request information from agents because 

too little would be available, and one state law enforcement official said the 

agents might tell their clients about the investigation. Some agents told us 

they usually collect the same information as the state, but other agents and 

law enforcement officials indicated that agents might have additional 

information that could be useful in investigations, such as contact 

addresses and methods of payment. 

While ownership information is typically not available from states or 

agents, some law enforcement officials said the names of officers and 

directors and other information on forms could be helpful in some 

investigations. If ownership information is not available, law enforcement 

officials said that the names of officers and directors—even false 

names—could provide productive leads. In addition, law enforcement 

officials said that other information, such as addresses, could be 

investigated and also might provide productive leads. 

In other cases, though ownership information is not required, the actual 

owners may include personal information on the state’s documents. For 

example, IRS investigated four people in Michigan who formed 15 shell 

corporations in Michigan and Indiana. Using these shell companies, the 

co-conspirators established 37 lines of credit at a bank and charged a 

number of large purchases, including real property, several luxury cars, 

jewelry, boats, and a motor home. The bank incurred losses of 

approximately $9.6 million. The IRS investigators found key pieces of 

evidence, including the identity of the co-conspirators, on the articles of 

incorporation and annual reports maintained by the states where the 

corporations were formed. Two of the co-conspirators were sentenced to 

45 months and 51 months in prison and ordered to pay $327,500 and $2.8 

million in restitution, respectively. In another IRS case, a man in Texas used 

numerous identities and corporations formed in Delaware, Nevada, and 

Texas to sell or license a new software program to investment groups. He 

received about $12.5 million from investors but never delivered the product 

to any of the groups. The man used the corporations to hide his identity and 

to provide a legitimate face to his fraudulent activities. He also used the 

companies to open bank accounts to launder the money obtained from 

investors. IRS investigators found from state documents that he had 

incorporated the companies himself and often included his co-conspirators 

as officers or directors. The man was sentenced to 40 years in prison. 
Page 36 GAO-06-376 Company Formations

In some cases, law enforcement officials have evidence of a crime but 

cannot connect an individual to the criminal action without ownership 

information. For example, an Arizona law enforcement official charged 

with helping investigate an environmental spill that caused $800,000 in 

damage said that the investigators could not prove who was responsible for 

the damage because the suspect had created a complicated corporate 

structure involving multiple company formations.46 ICE officials described 

a subject who allegedly used an agent to establish a Nevada-based 

corporation that in almost 2 years received 3,774 wire transfers totaling $81 

million from locations such as the Bahamas, British Virgin Islands, Latvia, 

and Russia. However, ICE could not identify the suspect as the beneficial 

owner of the corporation because other people had handled the 

transactions. These cases were not prosecuted because investigators could 

not identify critical ownership information. Most of the law enforcement 

officials we interviewed said they had also worked on cases that reached 

dead ends because of the lack of U.S. company ownership information. 

More Company 

Ownership Information 

Could Be Useful to Law 

Enforcement, but 

Concerns Exist about 

Collecting It

State officials, agents, and others we interviewed said that collecting 

company ownership information could be useful to law enforcement and 

other interested parties. As we have discussed, investigations can be closed 

because of a lack of information, such as the names of the beneficial 

owners of a company. But if states or agents collected additional 

information on companies, filing times could increase, and a few states 

worried that costs could increase and company start-ups could be deterred. 

Further, information collected when companies were being formed might 

not be complete or up to date, as officers and directors might not have been 

chosen and the ownership could change after the company was formed. In 

addition, including such information in public records could cause 

concerns about privacy and related issues. State officials, agents, and other 

experts in the field suggested internal company records, financial 

institutions, and the IRS as alternative sources that might already be 

collecting this information. However, obtaining information from these 

46Dispersing assets among as many different types of entities and jurisdictions as possible is 

also a way to protect assets. The goal of this approach is to create complex structures that, 

in effect, provide multiple protective trenches around assets, making it challenging and 

burdensome to pursue. See GAO, Environmental Liabilities: EPA Should Do More to 

Ensure That Liable Parties Meet Their Cleanup Obligations, GAO-05-658 (Washington, 

D.C.: Aug. 17, 2005).
Page 37 GAO-06-376 Company Formations

sources also has limitations because the information may not be up to date 

or available.

States and Agents 

Acknowledged Benefits of 

Having Additional 

Information on Company 

Ownership but Raised 

Concerns about Collecting 

It

Collecting ownership information when companies are formed could have 

some positive impacts for law enforcement as well as members of the 

public searching for this information. As shown in figure 6, 21 states in our 

survey said that if more ownership information were collected at company 

formation, that additional information would be available to law 

enforcement and the public. And as we have discussed, law enforcement 

investigations can benefit from knowing who owns and controls a 

company. A couple of state officials said that collecting such information 

would also allow them to be more responsive to consumer demands they 

have received for this information. For example, officials in Arizona and 

the District of Columbia told us that they often received phone calls from 

the public asking for ownership information they could not provide. In 

addition, one agent suggested that requiring agents to collect more 

ownership information could discourage dishonest individuals from using 

agents and could reduce the number of unscrupulous individuals in the 

industry. 

State officials and agents noted that collecting additional information could 

increase filing times, and a few were concerned about other negative 

effects. Our survey showed that 29 states reported that the time needed to 

review and approve formations would increase if information on 

ownership was collected, since more data would need to be recorded in 

their databases (see fig. 6). A few states calculated that they would incur 

additional costs in modifying their forms, databases, and online filing 

systems to accommodate the new requirements. One state official said the 

extra time that would be required to review filings would reduce the 

benefits of electronic filing. Agents we interviewed also said that collecting 

and storing ownership information would increase the time necessary to 

provide their services and raise costs for both themselves and their clients. 

Other agents said that collecting and verifying ownership information 

would be difficult because they may have contact only with law firms and 

not company officials when a company is formed. State officials and others 

also noted that individuals could easily provide false names if ownership 

information were required without being verified. 
Page 38 GAO-06-376 Company Formations

Figure 6: Implications of All of the States Collecting Information on Company Ownership

Our survey results showed that in nearly half the states (23), officials 

thought the number of companies formed in their jurisdictions would stay 

about the same if all of the states collected this additional information (see 

fig. 6). But some state officials and others we interviewed said that if the 

requirements were not uniform, states with the most stringent 

requirements could lose business to other states or even countries, 

potentially losing state revenue. Some state officials noted the importance 

of the fees generated from company formations to state general revenue 

funds. For example, a Delaware official said that 22 percent of the state’s 

revenue comes from the company formation business. Also, Nevada and 

Oregon officials stated that their offices were revenue-generating offices 

for the state. State officials, agents, and industry experts commented that 

states would be unlikely to pass comparable laws because state officials 

have such different opinions about the amount of information that should 

be disclosed.47 As a result, individuals could form companies in states 

where the requirements were easiest to follow. Agents also expressed 

concern that they could lose business if they collected ownership 

information, because individuals might be more likely to form their own 

companies and serve as their own agents. 

Source: GAO survey of state officials responsible for company formation.

Fees charged for company formations

Number of companies formed in the state

Information available to the public

Information available to law 

enforcement officials and courts

Time to approve company formations

8

5

21

21

29

0

6

0

0

0

31

23

17

14

15

12

17

13

16

7

Decrease Increase Not applicable or no re Stay the same sponse

Number of states that responded on the following impacts

47The National Conference of Commissioners on Uniform State Laws approved the Uniform 

Limited Liability Company Act and the American Bar Association, Committee on Corporate 

Laws approved the Model Business Corporation Act to serve as uniform legislation for 

states to consider. Various states have used these legislative proposals when adopting their 

state statutes for business corporations and LLCs. 
Page 39 GAO-06-376 Company Formations

Individuals forming businesses could also be affected by new requirements 

for collecting company information. Some officials noted that the 

additional time required to review filings could slow down and might derail 

business dealings. One state official commented that such requirements 

would create a burden for honest business people who would have 

provided accurate information in the first place but would not deter 

criminals, who would provide false information in any case. According to a 

report on the use of companies for illicit purposes, requiring companies to 

disclose up front and to update ownership information may impose 

significant costs, particularly on small businesses.48 A few state and some 

private sector officials noted that an increase in the time and costs involved 

in forming a company might reduce the number of companies formed, 

because entrepreneurs and investors might be less likely to take the risks 

involved in forming or investing in new companies. 

Some state officials also noted that to change the information 

requirements, state legislatures would have to pass new legislation and 

grant company formation offices new authority. A few states indicated that 

collecting additional information would require higher fees that would also 

need to be set by their state legislatures. State officials also noted that since 

they are administrative agencies, they generally do not have the authority 

to question or verify the information provided on the forms and would need 

additional authority from state legislatures to do so.

State and private sector officials pointed out that ownership information 

collected at formation or on periodic reports might not be complete or up 

to date. Information collected at formation, for instance, might not be 

useful because ownership information can change frequently throughout 

the year. For example, an official from Delaware commented that many 

privately held LLCs and corporations in Delaware and other states may 

have thousands of shareholders and LLC members that buy and sell shares 

and memberships on a daily basis. Another state official commented that 

collecting this information at formation would not be useful without 

requiring that it be updated frequently. In addition, since LLCs can be 

owned by individuals or other businesses, even if states required LLCs to 

list a member name, the name provided may not be that of an individual but 

48See OECD, Behind the Corporate Veil. This report examined the misuse of different types 

of companies in both onshore and offshore jurisdictions, including corporations, trusts, 

foundations, and partnerships with limited liability features. The report excluded companies 

engaged in financial services activities and those whose shares are publicly traded or listed 

on a stock exchange.
Page 40 GAO-06-376 Company Formations

another company. Disclosing ownership information on periodic reports, 

however, could mean that a year or more would pass before it was 

collected—too long to be of use in many investigations. In addition, we 

found that some states do not require these reports.49 Further, once it is 

formed, a shell company being used for illicit purposes in the United States 

or other countries may not file required periodic reports. Law enforcement 

officials told us that many companies under investigation for suspected 

criminal activities had been dissolved by the states in which they were 

formed for failing to submit periodic reports. 

State Officials and Others 

Were Concerned about 

Privacy Issues

State officials, agents, and other industry experts said the need for access 

to information on companies must be weighed against privacy issues. 

Company owners may want to maintain their privacy in part because state 

statutes have traditionally provided this privacy and in part to avoid 

lawsuits against them in their personal capacity. Some business owners 

may also seek to protect personal assets through corporations and LLCs. 

One state law enforcement official also noted that if more information were 

easily available, criminals and con artists could take advantage of it. He 

noted that information available on official Web sites was sometimes used 

to target companies for scams. For example, the official described a case in 

which an individual sent letters that appeared to be from a secretary of 

state’s office to companies listed on the state Web site, telling the recipients 

that they were to file their annual meeting minutes with the state, although 

no such requirement existed. The individual offered to provide filing 

services for a fee, and collected the fees from companies, but did not 

forward any minutes to the state. Providing more easily accessible 

information to the public could result in more such activities.

Business owners might be more willing to provide ownership information if 

it were not disclosed in the public record. Some state officials we 

interviewed said that since all information filed with their office is a matter 

of public record, keeping some information private would require new 

legislative authority. The officials added that storing new information 

would be a challenge because their data systems are not set up to maintain 

49Our review of state statutes indicated that 14 states did not require periodic reports for 

LLCs and that 3 did not require them for corporations. In at least 3 states (Alabama, New 

Jersey, and Oklahoma), the annual report is submitted to a different office, such as the 

department of revenue, than the office that handles formation filings. In addition, biennial 

reports were required to be filed by corporations in 7 states and by LLCs in 5 states. 
Page 41 GAO-06-376 Company Formations

confidential information. However, one official from Maryland said that 

keeping some information private would not be a problem since the office 

that accepted company formation and periodic report filings also handled 

tax filings and already had procedures for keeping information such as 

taxpayer identification numbers confidential. An official in Oregon also 

told us that the Corporations Division office had recently enacted 

procedures to keep some information private in cases such as domestic 

abuse. Individuals can petition the state to have information removed from 

databases available online and redacted in the paper file, but it is still 

available to law enforcement. The Arizona Corporation Commission also 

tries to remove Social Security numbers from its Web site if applicants 

include them on their paper forms, but maintains the information on paper 

forms.50

Two Foreign Jurisdictions 

Have Had Mixed 

Experiences with Requiring 

the Collection of Company 

Ownership Information

Because states do not typically collect and verify ownership information 

and because state and private sector officials could not quantify the extent 

of the possible costs of taking these steps, we reviewed the experiences of 

Jersey and Isle of Man in implementing the regulation of firms that provide 

services such as company formation (company service providers).51 Fewer 

companies are formed in both jurisdictions, especially by local residents, 

than in the United States, and the number of company service providers is 

much smaller.52 However, some of the concerns states and agents 

expressed about increased regulation also have been born out in Jersey and 

the Isle of Man, although officials also pointed to certain benefits of 

collecting ownership information and the new regulatory regime. Company 

service providers in both jurisdictions must be licensed, and are subject to 

periodic monitoring and inspections by government agencies. In both of 

50Arizona requires companies to include a Certificate of Disclosure with their articles of 

incorporation and annual reports that includes information about certain types of felonies 

and bankruptcies. Persons who have been convicted of specific types of felonies must 

include their Social Security numbers and other personal information, and according to 

Arizona officials, this information may be publicly available.

51Jersey and Isle of Man use the term trust companies or company service providers to refer 

to firms that provide company formation and registered agent services. We refer to these 

types of firms in the United States as agents. We chose to speak with officials from Jersey 

and the Isle of Man because they are two of a small number of jurisdictions that require 

disclosure of beneficial ownership when a company is formed.

52Jersey has about 30,000 incorporated entities and 183 company service providers, and the 

Isle of Man has about 35,000 incorporated entities and 180 company service providers.
Page 42 GAO-06-376 Company Formations

these jurisdictions, company service providers are required to conduct due 

diligence to verify the identity of their clients and obtain company 

ownership information to form a new company. The ownership information 

is not maintained in the public record, but is kept at the registry in Jersey 

and with company service providers in Isle of Man and is available only to 

law enforcement.

Despite strong initial resistance, the company service provider industry in 

these two jurisdictions is now perceived as successful because licensed 

companies have continued to remain profitable. In addition, one company 

service provider told us that the regulations have instilled a degree of 

professionalism in the company service provider industry. Further, law 

enforcement officials can obtain information about company ownership 

when they need it.

However, government and private sector officials told us that implementing 

these regulations was a significant challenge. Both jurisdictions 

experienced consolidation in the company service provider industry. Some 

companies merged, and others moved to locations with fewer requirements 

or went out of business because they either did not want to comply with 

the new regulations or could not charge fees high enough to cover due 

diligence costs. One company service provider said the time required to 

form a company increased, as the due diligence requirements company 

service providers must follow can take weeks to complete depending on 

the client, though once documents are submitted to the Jersey or Isle of 

Man registry offices, formations are finished in 48 hours or less. The 

workload of company service providers has also increased. One company 

service provider told us that the company had increased its staff by 25 

percent to 30 percent because of the requirement that the company verify 

customer information. Fewer companies are formed in Isle of Man, 

according to an Isle of Man official. Before the regulations, Isle of Man had 

40,000 incorporated entities, but it now has 35,000. Finally, because 

ownership is fluid, it is a challenge to keep the information up to date. In 

Isle of Man, the responsibility for keeping information up to date lies with 

the company service providers. In Jersey, ownership information is 

updated on annual reports.

Jersey and Isle of Man

England

Ireland

France

Isle

of

Man

Jersey

Source: Art Explosion.

Jersey, which lies about 100 miles south of 

mainland Britain and 14 miles from the coast 

of France, has an area of 45 square miles. 

Isle of Man is located in the Irish Sea and has

an area of 227 square miles. The two islands

are self-governing crown dependencies that 

do not belong to the United Kingdom and are 

not members of the European Union. Each 

has its own parliament and laws. In response 

to international concern in the mid-1990s

about the role of companies formed in 

offshore jurisdictions such as these two 

islands in tax evasion schemes and other 

illicit activities, Jersey and Isle of Man began 

regulating company service providers in 2001 

and 2000, respectively. The Financial 

Services Commission in Jersey and the 

Financial Supervision Commission in Isle of 

Man oversee the regulation of the company 

service provider industry. Officials from both 

jurisdictions noted that the regulations were 

implemented to improve the legitimacy and 

reputations of companies formed there. 
Page 43 GAO-06-376 Company Formations

Other Potential Sources of 

Company Information May 

Be Available, but Obtaining 

Information from These 

Sources May Also Be 

Challenging

State officials, agents, and others told us that some other sources of 

company ownership information that law enforcement officials could 

access existed, including internal company documents, financial 

institutions, and the IRS. 

Internal Company Documents Our review of state statutes found that all states require corporations to 

prepare a list of shareholders, typically before the mandatory annual 

shareholder meeting, and that almost all states require that this list be 

maintained at the corporation’s principal or registered office.53 Industry 

experts told us that LLCs also usually prepare and maintain operating 

agreements that generally name the members and outline their financial 

interests.54 These documents are generally not public record, but law 

enforcement officials can subpoena them to obtain ownership information, 

and ICE officials in one field office said they always looked at LLC 

operating agreements during an investigation. However, accessing these 

lists may be problematic, and the documents themselves might not be 

accurate or even exist. For example, law enforcement officials said that 

shell companies may not prepare these documents and that U.S. officials 

may not have access to them if the company is located in another country. 

In addition, law enforcement officials may not want to request these 

documents in order to avoid tipping off a company about an investigation. 

Industry experts also cautioned that even these internal documents may 

not reveal the true beneficial owners of a company. For example, the list 

could include nominee shareholders, which would reduce the usefulness of 

the shareholder list because the shareholder on record may not be the

53Delaware, Kansas, and Oklahoma statutes do not expressly state that a corporation is 

required to maintain a list of shareholders, but shareholders must be able to extract 

information on shareholders from corporate documents maintained by the corporation.

54Some states may not require written operating agreements. If there is no operating 

agreement, the LLC follows default provisions of the LLC act of the state where the 

company was formed.
Page 44 GAO-06-376 Company Formations

beneficial owner.55 In addition, shareholders could sell their stock and not 

register the sale with the company; in such cases, the new owners would 

not be known. Shareholders could also sell their stock before the filing date 

and then buy it back after the filing date to avoid being listed. Further, in 

states that allow bearer shares, the owners’ names are anonymous because 

bearer share certificates do not contain the names of the shareholders.56

Therefore, while law enforcement authorities could obtain lists of 

shareholders from companies by subpoena, further investigation might still 

be needed to find the true beneficial owners.

Financial Institutions Financial institutions may also have ownership information on some 

companies. Customer Identification Program (CIP) requirements 

implemented by the USA PATRIOT ACT in 2001 establish minimum 

standards for financial institutions to follow when verifying the identity of 

their customers in connection with the opening of an account.57 Under 

these standards, financial institutions must collect the name of the 

company, its physical address (for instance, its principal place of business), 

and an ID number, such as the tax identification number. The regulations 

also mandate that financial institutions develop risk-based procedures for 

verifying the identity of each customer to the extent that doing so is 

reasonable. For example, representatives from financial institutions told us 

that they typically requested a company’s articles of incorporation when a 

new account was opened to verify that the entity existed. One 

representative said that his institution also checked names against the 

OFAC list and requested photo identification from all signers on the 

account. Industry representatives noted that institutions may also compare 

the customer information with information obtained from a consumer 

55With publicly traded shares, nominees (e.g., shares registered in the names of 

stockbrokers) are commonly and legitimately used to facilitate the clearance and settlement 

of trades. Nominee shareholders can also be used in privately held companies to shield 

beneficial ownership information. 

56According to the U.S. Money Laundering Threat Assessment, Nevada and Wyoming allow 

the use of bearer shares, which accord ownership of a company to the person who 

possesses the share certificate. 

57Section 326 of the USA PATRIOT ACT directs Treasury and the federal financial regulators 

to adopt CIP requirements for all “financial institutions,” which is defined broadly to 

encompass a variety of entities, including, among others, (1) banks that are subject to 

regulation by one of the federal banking regulators, as well as credit unions that are not 

federally insured, private banks, and trust companies; (2) securities broker dealers; (3) 

futures commission merchants and introducing brokers; and (4) mutual funds. See 31 U.S.C. 

§ 5312; 31 C.F.R. part 103.
Page 45 GAO-06-376 Company Formations

reporting agency, public database, or other sources. Finally, based on a risk 

assessment, the institution may obtain information about individuals with 

authority or control over the account in order to verify their identities.58

Representatives of financial institutions told us that although they are not 

required to obtain ownership information in all cases, they may investigate 

high-risk applicants to uncover the ultimate beneficial owners. These 

applicants may include casinos, companies that are not listed on world 

stock exchanges, companies with complex structures, or companies from 

certain high-risk countries.59 For such applicants, financial institutions may 

ask about information such as beneficial owners and officers of the 

company. Financial industry representatives said that conducting the 

necessary due diligence on a company absorbs time and resources, 

because institutions must sometimes peel back layers of corporations or 

hire private investigators to find the actual beneficial owner or owners of a 

company. 

One financial institution we interviewed collects the name, date of birth, 

and tax identification number of all individuals with ownership and control 

of a corporation or LLC. However, officials from some institutions told us 

that obtaining such information on all applicants would be an added 

burden to an industry that is already subject to numerous regulations. 

Some industry officials also said that financial institutions may not want to 

request ownership information in all cases for fear of losing a customer. In 

addition, industry representatives noted that collecting ownership 

information at financial institutions might not always be useful or available, 

because ownership might change after the account was opened and not all 

companies opened bank or brokerage accounts. Furthermore, Department 

of Justice officials noted that, in some instances, the financial activity of a 

shell company under investigation does not involve U.S. financial 

institutions. Finally, correspondent accounts create opportunities to hide 

the identities of the account holders from the banks themselves. A foreign 

bank can open a correspondent account with a U.S. bank to avoid bearing 

58See GAO, USA PATRIOT ACT: Additional Guidance Could Improve Implementation of 

Regulations Related to Customer Identification and Information Sharing Procedures, 

GAO-05-412 (Washington, D.C.: May 6, 2005).

59Industry representatives told us that high-risk countries include those that are listed on the 

OFAC list of countries that U.S. entities are prohibited from doing business with and 

countries that are identified by the Financial Action Task Force on Money Laundering 

(FATF) as “non-cooperative countries and territories.” 
Page 46 GAO-06-376 Company Formations

the costs of licensing, staffing, and operating its own offices in the United 

States. Many of the largest international banks serve as correspondents for 

thousands of other banks. The USA PATRIOT ACT requires financial 

institutions that provide correspondent accounts to foreign banks to 

maintain records of the foreign bank’s owners and of the name and address 

of an agent in the United States designated to accept service of process for 

the foreign bank for records regarding the correspondent account.60

However, law enforcement and industry representatives told us that the 

foreign banks may commingle funds from many different customers into 

one correspondent account, making it difficult for U.S. banks to identify 

the individuals with access to the account.61

IRS IRS was mentioned as another potential source of company ownership 

information for law enforcement, but IRS officials pointed to several 

limitations with this data. First, IRS may not have information on all 

companies formed. The agency collects company ownership information 

on certain forms, such as the application for an employer identification 

number (EIN) (SS-4).62 Form SS-4 requires the name and tax identification 

number (such as the Social Security number) of the principal officer if the 

business is a corporation, or general partner if it is a partnership, or owner 

if it is an entity that is disregarded as separate from its owner (disregarded

6031 U.S.C. § 5318(k)(3)(B)(i).

61In January 2006, FinCEN issued a final rule to implement the requirements in section 312 

of the USA PATRIOT ACT that requires U.S. financial institutions to establish policies, 

procedures, and controls to detect and report money laundering through correspondent 

accounts. See 71 Fed Reg. 496 (Jan. 4, 2006). According to the rule, financial institutions 

must assess the money-laundering risk of correspondent accounts based on the nature of 

the foreign financial institution’s business, the type of account, the institution’s relationship 

with the foreign financial institution, the anti-money-laundering regime of the jurisdiction 

that issued the charter or license of the foreign financial institution, and information about 

the foreign financial institution’s anti-money-laundering record. In addition, U.S. financial 

institutions must apply risk-based procedures and controls to each correspondent account, 

including a periodic review of account activity to determine consistency with anticipated 

activity. 31 C.F.R § 103.176.

62The Internal Revenue Code authorizes IRS to collect such information as may be necessary 

to assign an identifying number to any person. 26 U.S.C. § 6109(c).
Page 47 GAO-06-376 Company Formations

entity), such as a single member LLC.63 Disregarded entities owned by a 

corporation enter the corporation’s name and EIN. However, not all LLCs 

are required to have EINs.64 In addition, the name of an owner may be on 

the form LLCs file to select how they will be taxed. IRS also currently 

collects some general ownership information, including an identifying 

number, name, and address, on certain LLCs on separate schedules that the 

company files with the IRS.65 For LLCs that are taxed as partnerships, this 

form specifies whether members are member-managers or another type of 

member of an LLC and reports the member’s share of the company profits, 

losses, and capital. But if an LLC has only one member, the individual 

reports income on an individual tax return.66 In addition, IRS classifies 

certain LLCs as corporations for tax purposes, and others may choose to be

63IRS regulation, 26 C.F.R. § 301.7701-2, classifies the following entities as corporations, 

among others, for tax purposes: an business entity organized under a federal or state statute 

when the statute indicates that the entity is incorporated or is a corporation; an association; 

a state joint-stock company or joint-stock association; an insurance company; a 

state-chartered depository company whose deposits are federally insured; and certain 

foreign entities. Nevertheless, certain LLCs may elect how they will be treated for tax 

purposes. See 26 C.F.R. §§ 301.7701-3 and 301.7701-2. Specifically, single owner LLCs may 

elect to be treated for tax purposes either as a sole proprietorship (referred to as an entity to 

be disregarded as separate from its owner) or as a corporation, and LLCs with two or more 

owners may elect to be treated for tax purposes either as a partnership or as a corporation. 

Moreover, there are certain defaults under the tax rules. Single owner LLCs are treated by 

default as an entity to be disregarded as separate from its owner, and LLCs with more than 

two owners are treated by default as partnerships unless an election is filed with IRS.

64For example, a single member LLC with no employees is not required to have a separate 

EIN.

65S corporations and LLCs that are taxed as a partnership do not pay taxes on their income 

but instead allocate the income to shareholders or members, who are required to report it 

annually to IRS with their individual tax returns. Allocated income is reported to IRS by the 

company with the company’s tax return on a corresponding Schedule K-1. Copies of the 

Schedule K-1 are provided to shareholders and members for use when filing their respective 

annual returns (examples of the appropriate forms include Schedule K-1 (Form 1065) for 

LLCs filing as partnerships and Schedule K-1 (Form 1120S) for S corporations. 

66The owner of a single member LLC reports the business activities of the LLC on the 

individual’s tax return. See, for example, Schedule C (Form 1040), which requests the name 

of the business. However, this information is not required, and the field asking for the 

information states that it may be left blank. If left blank, there is no way for the IRS to 

determine that the individual is the owner of an LLC.
Page 48 GAO-06-376 Company Formations

classified as corporations.67 Ownership information is available for LLCs 

that are classified as corporations and file as S corporations, but generally 

not for those that are taxed as C corporations.68

Second, IRS officials reported that the ownership information the agency 

collected may not be complete or up to date. As we have discussed, the 

agency does not have information on every company, because some 

companies do not request or need EINs. In addition, some EINs become 

inactive after a certain period, dropping off the IRS database. For example, 

Department of Justice officials told us that U.S. shell companies being used 

in foreign criminal activity are sometimes inactive in the United States. In 

addition, ownership information on LLCs owned by foreign individuals or 

entities would only be available if the LLC obtained an EIN for income that 

was subject to tax in the United States. Further, data gathered on IRS forms 

may not always be accurate. In a recent report, we found that data 

transcription errors made by IRS staff entering data into a database and 

invalid taxpayer identification numbers submitted by companies lowered 

the accuracy of these data.69 IRS officials also noted that the information 

collected might not always be useful in finding the ultimate beneficial 

owner of a company, because another entity could be listed as the owner, 

requiring further investigation to identify the true owner. Finally, IRS 

officials said that the information in the agency’s records might not be up to 

date because IRS was not always notified when ownership changed. 

Third, law enforcement officials could have difficulty accessing IRS 

taxpayer information. As part of the administration of federal tax laws, IRS 

investigators can use IRS data in their investigations of tax and related 

67Federal tax laws automatically classify and tax the following LLCs as corporations: a 

business formed under a federal or state statute or a federally recognized Indian tribe if the 

statute describes or refers to the entity as incorporated or as a corporation, body corporate, 

or body politic; an association or joint stock association; a state-chartered business 

conducting banking activities if any of its deposits are insured by the Federal Deposit 

Insurance Corporation; a business wholly owned by a state or foreign government; certain 

foreign entities; and insurance companies.

68C corporations file Form 1120, which asks if a controlling shareholder (or group of related 

persons) owns 50 percent of a stock. Therefore, in some limited instances, IRS may be able 

to identify the owners of an LLC that files as a C corporation. 

69The most frequent transcription errors dealt with names and addresses. IRS also found 

transcription errors in dollar amounts and taxpayer identification numbers. See GAO, Tax 

Administration: IRS Should Take Steps to Improve the Accuracy of Schedule K-1 Data, 

GAO-04-1040 (Washington, D.C.: Sept. 30, 2004).
Page 49 GAO-06-376 Company Formations

statutes, but access by other federal and state law enforcement is restricted 

by 26 U.S.C. § 6103.70 IRS officials said that federal law enforcement 

officials can access IRS information provided by taxpayers (or their 

representatives) when a federal court issues an ex parte order.71 Under 26 

U.S.C. § 6103(i)(1), the federal law enforcement agency requesting the 

information through an ex parte order must show that it is engaged in 

preparation for a judicial, administrative or grand jury proceeding to 

enforce a federal criminal statute or that the investigation may result in 

such a proceeding.72 Information IRS receives from a source other than 

taxpayers (or their representatives), such as taxpayers’ employers or 

banks, can be obtained without a court order.73 Moreover, in certain limited 

situations, there are additional provisions currently in the tax code 

providing for disclosure of such information relating to criminal or terrorist

70Tax administration is defined at 26 U.S.C. § 6103(b)(4) to mean “(A)(i) the administration, 

management, conduct, direction and supervision of the execution and application of the 

internal revenue laws or related statutes (or equivalent laws and statutes of a State) and tax 

conventions to which the United States is a party, and (ii) the development and formulation 

of Federal tax policy relating to existing or proposed internal revenue laws, related statutes, 

and tax conventions, and (B) includes assessment, collection, enforcement, litigation, 

publication, and statistical gathering functions under such laws, statutes, or conventions.” 

Whether a particular statute is “related” to the internal revenue laws depends on the nature 

and purpose of the statute and the facts and circumstances in which the statute is being 

enforced or administered. Typically, according to IRS, where violation of another statute is 

committed in contravention of the internal revenue laws, then the former may be 

considered a “related statute” and IRS’s investigation is considered tax administration. 26 

U.S.C. § 6103(a) sets up the general rule that returns and return information for use in 

federal criminal investigations shall be confidential and may not be disclosed except as 

authorized under the Internal Revenue Code.

7126 U.S.C. § 6103(i)(1) permits the disclosure of returns and return information upon the 

grant of an ex parte court order by a federal district court judge or magistrate upon 

application by certain high level Department of Justice officials. Because the proceeding is 

ex parte, the taxpayer will not know that the government has applied for an ex parte court 

order or that its application has been granted. 

72To grant an ex parte order, the court must determine that there is reasonable cause to 

believe, based upon information believed to be reliable, that a specific criminal act has been 

committed, there is reasonable cause to believe that the return or return information is or 

may be relevant to a matter relating to the commission of such act, and the return or return 

information is sought exclusively for use in a federal criminal investigation or proceeding 

concerning such act, and the information sought to be disclosed cannot reasonably be 

obtained, under the circumstances, from another source. 26 U.S.C. § 6103 (i)(1)(B).

73See e.g., 26 U.S.C. § 6103(i)(2).
Page 50 GAO-06-376 Company Formations

activities or emergency circumstances.74 State law enforcement officials 

can access IRS information for enforcement of state tax laws when IRS has 

sharing agreements with state taxing authorities.75 Law enforcement 

officials can also obtain IRS information with the taxpayer’s consent.76

Officials in one ICE field office told us that they have obtained IRS 

information; however, officials in another ICE field office said that 

obtaining this information was difficult. IRS officials commented that 

collecting additional ownership and control information on IRS documents 

would provide IRS investigators with more detail when conducting 

investigations but that the agency’s ability to collect and verify such 

information would depend on the availability of resources.

Observations States and agents collect a variety of information when individuals form 

companies, but most state statutes do not require that they collect or verify 

information on ownership. Therefore, minimal information is collected on 

the owners of these companies. During our review, we encountered a 

variety of legitimate concerns about the merits of collecting ownership 

information on companies formed in the United States. Many of these 

concerns reflected conflicting interests. On the one hand, federal law 

enforcement agencies were concerned about the lack of information, 

because criminals can easily use U.S. shell companies to mask the 

identities of those engaged in illegal activities. From a law enforcement 

perspective, having more information would make using U.S. shell 

companies for illicit activities harder and give investigators more 

information to use in pursuing the actual owners. In addition, since U.S. 

shell companies are used in criminal activity abroad because of their 

perceived legitimacy, collecting more information when a company is 

formed could improve the integrity of the company formation process in 

the United States. On the other hand, states and agents were concerned 

about increased costs, potential revenue losses, and privacy protection. 

Collecting more information would require more time and resources and 

could reduce the number of start-ups. Approving applications could take 

longer, potentially creating obstacles for those forming companies for 

7426 U.S.C. § 6103((i)(3) and (7). The authority for disclosures to combat terrorism expires 

on December 31, 2006. 

7526 U.S.C. § 6103(d).

7626 U.S.C. § 6103(c).
Page 51 GAO-06-376 Company Formations

legitimate business purposes. And importantly, because information on 

companies is currently part of the public record, requiring certain 

information on ownership could be considered a threat to the current 

system, which values the protection of privacy and individuals’ personal 

assets. 

Any requirement that states, agents, or both collect more ownership 

information on certain types of companies would need to balance these 

conflicting concerns. Further, such a requirement would need to be 

uniformly applied in all U.S. jurisdictions. If it were not, those wanting to 

set up shell companies for illicit activities would simply move to the 

jurisdiction that presented the fewest obstacles, undermining the intent of 

the requirement.

Agency Comments and 

Our Evaluation

We provided a draft of this report to the Departments of Justice, Homeland 

Security, and the Treasury. Justice and Treasury provided technical 

comments that were incorporated into the report, where appropriate.

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from the 

report date. At that time, we will send copies to the Departments of Justice, 

Homeland Security, and the Treasury; and interested congressional 

committees. We will also make copies available to others on request. In 

addition, the report will be available at no charge on GAO’s Web site at 

http://www.gao.gov. The survey and a more complete tabulation of 

state-by-state and aggregated results can be viewed at

http://www.gao.gov/cgi-bin/getrpt?GAO-06-377SP.
Page 52 GAO-06-376 Company Formations

If you or your staff have any questions regarding this report, please contact 

me at (202) 512-8678 or jonesy@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix IV.

Yvonne D. Jones

Director, Financial Markets 

 and Community Investment
Page 53 GAO-06-376 Company Formations

Appendix I

Objectives, Scope, and Methodology AAppenednxidexiIs

This report describes states’ company formation and reporting 

requirements and the information that is routinely obtained and made 

available to the public and law enforcement officials regarding ownership 

of nonpublicly traded corporations and limited liability companies (LLC) 

formed in each state given concerns about the potential for using 

companies for illicit purposes. Specifically, this report discusses

1. the kinds of information—including ownership information—that the 

50 states and the District of Columbia collect during company 

formation and the states’ efforts to review and verify it;

2. the roles of third-party agents, such as company formation agents, and 

the kinds of information they collect on company ownership;

3. the role of shell companies in facilitating criminal activity, the 

availability of company ownership information to law enforcement, and 

the usefulness of such information in investigating shell companies; 

and

4. the potential effects of requiring states, agents, or both to collect 

company ownership information.

To respond to the first objective and describe the ways company formation 

and periodic reporting documents can be filed, we conducted a Web-based 

survey of the 50 states and the District of Columbia on formation and 

reporting practices. We worked to develop the questionnaire with social 

science survey specialists. Because these were not sample surveys, there 

are no sampling errors. However, the practical difficulties of conducting 

any survey may introduce errors, commonly referred to as nonsampling 

errors. For example, differences in how a particular question is interpreted, 

in the sources of information that are available to respondents, or in how 

the data are entered into a database can introduce unwanted variability 

into the survey results. We took steps in the development of the 

questionnaires, the data collection, and data analysis to minimize these 

nonsampling errors. For example, prior to administering the survey, we 

pretested the content and format of the questionnaires with state officials 

in Florida, Maine, Maryland, Virginia, and Washington, D.C., to determine 

whether (1) the survey questions were clear, (2) the terms used were 

precise, (3) respondents were able to provide the information we were 

seeking, and (4) the questions were unbiased. An official from the 

International Association of Commercial Administrators (IACA) also 

reviewed a draft of the survey. We made changes to the content and format 
Appendix I

Objectives, Scope, and Methodology

Page 54 GAO-06-376 Company Formations

of the final questionnaires based on pretest results. We sent the finalized 

survey to contacts responsible for company filings in secretary of state 

offices (or their equivalents) in all 50 states and the District of Columbia. 

See Survey of State Officials Responsible for Company Formation, 

GAO-06-377SP, for the final version of the survey and state-by-state results. 

We received survey responses from each of the 50 states and the District of 

Columbia. In that these were Web-based surveys whereby respondents 

entered their responses directly into our database, the possibility of data 

entry error was minimized. We also performed computer analyses to 

identify inconsistencies in responses and other indications of error. We 

contacted survey respondents as needed to correct errors and verify 

responses. In addition, a second independent analyst verified that the 

computer programs used to analyze the data were written correctly.

To test the reliability of survey data, we compared state responses on our 

survey with data states provided to IACA in its 2005 annual report of 

jurisdictions for four key variables—the number of LLCs and corporations 

filed in 2004 and the total number on file. The data were markedly the 

same, with very high correlations and no significant differences in mean 

values. Based on this testing, we believe our reporting of the trends based 

on the number of corporations and LLCs to be reliable. We also 

corroborated the survey results with information we collected from a 

systematic review of state Web sites and state statutes. Where we found a 

discrepancy on key variables, we contacted the relevant state official for 

clarification of the state’s requirement. Our review of the state corporation 

statutes included analysis of provisions regarding company formation, 

registered agents, shareholder identification, requirements for record 

keeping, and periodic reporting. In addition, we reviewed provisions in 

state LLC statutes relating to company formation, periodic reporting, and 

registered agents. We also reviewed the content of company formation 

forms and other information available on state Web sites. The data 

collected from our review of state statutes and Web sites is as of October 

2005. We also visited Arizona, Delaware, Florida, Nevada, and Oregon to 

conduct in-depth interviews with state officials about practices in these 

states. We selected these states because of the number of companies 

formed there or unique practices we identified from the statutes, forms, or 

survey responses.

To respond to the second objective and describe the roles of third-party 

agents, we interviewed academics with expertise in corporate and LLC law, 

selected professional agents, and state officials. In selecting agents to 

interview, we interviewed only companies that act as agents for service of 
Appendix I

Objectives, Scope, and Methodology

Page 55 GAO-06-376 Company Formations

process for more than one client. We chose a range of large national 

companies (three) as well as midsize or small companies (nine). We 

interviewed selected agents about the information they collect on 

companies and analyzed survey results on states’ requirements regarding 

oversight of these agents. We also interviewed officials from the National 

Public Records Research Association, an association that represents 

companies providing corporate services and public records research, and 

the Nevada Resident Agent Association, which represents a number of 

resident agents in Nevada. In addition, we reviewed state statutes for 

requirements regarding becoming an agent for service of process. 

To respond to the third objective and determine what information states 

and agents make available to law enforcement and the public, we reviewed 

company formation and periodic reporting forms on state Web sites and 

reviewed state Web sites for the type of information made available online 

and other methods individuals may use to obtain information. In addition, 

we interviewed selected state officials and agents about the methods they 

use to provide information. We also interviewed selected state and federal 

law enforcement officials about their experiences in obtaining company 

information from states to aid their investigations, including officials from 

the following state and federal agencies: the Arizona Attorney General, 

Drug Enforcement Agency, Federal Bureau of Investigation, the Florida 

Attorney General, Immigration and Customs Enforcement, Internal 

Revenue Service/Criminal Investigations, Financial Crimes Enforcement 

Network, U.S. Attorneys Office, and Office of Foreign Assets Control.

To respond to the fourth objective and determine the implications of 

requiring states or agents to collect company ownership information, we 

analyzed survey results and interviewed selected state officials and a range 

of professional agents. To determine how other jurisdictions have 

implemented regimes requiring collection of ownership information, we 

interviewed officials from Jersey and Isle of Man, which require the 

collection of this information, about the implications of implementing 

these requirements. Jersey and Isle of Man are two of a small number of 

jurisdictions that require disclosure of beneficial ownership information 

when a company is formed. We also reviewed an Organization for 

Economic Co-operation and Development report describing requirements 

in one of the jurisdictions. To determine other potential sources of 

company information, we asked academics, agents, state officials, law 

enforcement officials, and representatives of professional associations 

their perspectives on where this information could be obtained. We also 

reviewed state statutes on requirements for company record keeping. In 
Appendix I

Objectives, Scope, and Methodology

Page 56 GAO-06-376 Company Formations

addition, we interviewed representatives of selected financial institutions 

and the IRS about the company information they typically collect. 

We conducted our work from May 2005 through March 2006 in Arizona, 

Delaware, Florida, Maryland, Nevada, New York, Oregon, Virginia, and 

Washington, D.C. We performed our work in accordance with generally 

accepted government auditing standards. 
Page 57 GAO-06-376 Company Formations

Appendix II

Company Formation and Reporting 

Documents Can Be Submitted in a Variety of 

Ways ApendxiI

Company formation and reporting documents can be submitted in person 

or by mail, and many states also accept filings by fax. Review and approval 

times can depend on how documents are submitted. For example, a 

District of Columbia official told us that a formation document submitted 

in person could be approved in 15 minutes, but a document that was mailed 

might not be approved for 10 to 15 days. Most states reported that 

documents submitted in person or by mail were approved within 1 to 5 

business days, although a few reported that the process took more than 10 

days. Officials in Arizona, for example, told us that it typically took the 

office 60 days to approve formation documents because of the volume of 

filings the office received. 

In 36 states, company formation documents, reporting documents, or both 

can be submitted through electronic filing (fig. 7 shows the states that 

provide a Web site for filing formation documents or periodic reports).1

 In 

addition, some officials indicated that they would like or were planning to 

offer electronic filing in the future. Of the 36 states that allow electronic 

filing, 23 or more reported a moderate or greater benefit in the following 

areas as a result of electronic filing: 

• less paperwork; 

• reduced staff time for recording and processing filings; 

• less need to store paper records; 

• electronic transfer of filing fees; and 

• built-in edit and data reliability checks. 

State officials also commented that they had seen their error or rejection 

rates fall, and had been able to improve their customer service with 

electronic filing. States said that there were some or moderate costs 

associated with electronic filing, such as increased expenses for 

technology (hardware and software) and staff training. Overall, according 

1

Electronic filing includes the ability to file a document through a Web site, e-mail, or fax. 

Five states reported that they offer e-mail filing for company formation documents, and four 

states reported that they offer e-mail filing for periodic reports. In addition, 27 states 

reported that they accept formation or periodic report filings by fax.
Appendix II

Company Formation and Reporting 

Documents Can Be Submitted in a Variety of 

Ways

Page 58 GAO-06-376 Company Formations

to our survey, 28 of the 36 states that offer electronic filing reported that 

the benefits exceeded the costs. 

Figure 7: States That Provide a Web Site for Filing Formation or Periodic Report Filings 

Sources: GAO survey of state officials responsible for company formation (data); Art Explosion (map).

States accepting online formation filings for domestic companies (3)

States accepting online periodic report filings (15)

States accepting both (14)
Appendix II

Company Formation and Reporting 

Documents Can Be Submitted in a Variety of 

Ways

Page 59 GAO-06-376 Company Formations

Company Formation Fees As shown in table 3, in many cases states charge the same or nearly the 

same fee for forming a corporation or an LLC. In others, such as Illinois, the 

fee is substantially different for the two business forms. We found that in 

two states, Nebraska and New Mexico, the fee for forming a corporation 

may fall into a range. In these cases, the actual fee charged depends on the 

number of shares the new corporation will have. As stated earlier, the 

median company formation fee is $95, and fees for filing periodic reports 

range from $5 to $500.

Table 3: State Company Formation Fees as of November 2005

State LLCs Corporations

Alabama $75 $40

Alaska 250 250

Arizona 50 60

Arkansas 50 50

California 70 100

Colorado 125 125

Connecticut 60 150

Delaware 90 50

District of Columbia 150 89

Florida 125 79

Georgia 100 100

Hawaii 50 50

Idaho 100 100

Illinois 500 150

Indiana 90 90

Iowa 50 50

Kansas 165 90

Kentucky 40 40

Louisiana 75 60

Maine 175 145

Maryland 100 100

Massachusetts 500 275

Michigan 50 60

Minnesota 135 135

Mississippi 50 50

Missouri 105 58
Appendix II

Company Formation and Reporting 

Documents Can Be Submitted in a Variety of 

Ways

Page 60 GAO-06-376 Company Formations

Source: GAO analysis of state Web sites.

Thirty states reported offering expedited service for an additional fee. Of 

those, most responded that with expedited service, filings were approved 

either the same day or the day after an application was filed. Two states 

reported having several expedited service options. Nevada offers 24-hour 

expedited service for an additional $125 above the normal filing fees, 2-

hour service for an extra $500, and 1-hour, or “while you wait,” service for 

an extra $1,000. Delaware offers same day service for $100, next day 

service for $50, 2-hour service for $500, and 1-hour service for $1,000.

State LLCs Corporations

Montana 70 70

Nebraska 100 60-300

Nevada 75 75

New Hampshire 100 50

New Jersey 125 125

New Mexico 50 100-1,000

New York 200 125

North Carolina 125 125

North Dakota 125 80

Ohio 125 125

Oklahoma 100 50

Oregon 50 50

Pennsylvania 125 125

Rhode Island 150 230

South Carolina 110 135

South Dakota 125 125

Tennessee 300 100

Texas 200 300

Utah 52 52

Vermont 75 75

Virginia 100 25

Washington 175 175

West Virginia 100 50

Wisconsin 170 100

Wyoming 100 100

(Continued From Previous Page)
Page 61 GAO-06-376 Company Formations

Appendix III

Information on Company Formation 

Documents ApendxiI

This appendix includes a table of the information states require in their 

company formation documents for corporations and LLCs. As shown in 

figure 8, states collect different information on their company formation 

documents. Most states require the company name, agent name and 

address, and the name and signature of the incorporator or organizer, and 

for corporations, information about the number and types of shares the 

corporation will issue. The requirements for the company’s purpose, 

principal address, and names and addresses of owners and management 

are not as consistent across the states.

Figures 9 and 10 are examples of company formation documents from two 

states that have different information requirements.
Appendix III

Information on Company Formation 

Documents

Page 62 GAO-06-376 Company Formations

Figure 8: Key Information Required on Articles of Incorporation/Organization 

Sources: GAO survey of state statutes and company formation documents; GAO survey of state officials responsible for 

company formation.

AlabamaAlaska

ArizonaArkansas

CaliforniaColoradoConnecticutDelawareDistrict of ColumbiaFloridaGeorgia

HawaiiIdahoIllinoisIndianaIowaKansas

KentuckyLouisianaMaineMarylandMassachusetts

MichiganMinnesotaMississippi

Missouri

MontanaNebraskaNevadaNew HampshireNew JerseyNew MexicoNew YorkNorth CarolinaNorth DakotaOhioOklahomaOregon

PennsylvaniaRhode IslandSouth CarolinaSouth DakotaTennessee

TexasUtahVermontVirginiaWashington

West Virginia

Wisconsin

Wyoming

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

District of Columbia

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virginia

Wisconsin

Wyoming

Company name

Purposea

Principal

office addressa

Agent: Name

Address

Number/ 

type of sharesb

Address

Incorporator/ Name

organizer:a

Signature

Beneficial Name

owner/

member: Address

Address

Director/ Name manager/

managing

member:

Address

Officer: Name b

Both corporations and LLCs

Corporations only

LLCs only No response

c
Appendix III

Information on Company Formation 

Documents

Page 63 GAO-06-376 Company Formations

a

Although state statutes may not require this information, some states request or require this 

information be included on the company formation documents.

b

Information on number and type of shares and officer names and addresses applies only to 

corporations.

c

New Mexico and Arkansas did not respond to some of our survey questions. However, we found from 

our legal review that Arkansas does not require the address of a beneficial owner on articles or 

periodic reports. Our legal review also found that New Mexico does require corporations to list the 

names and addresses of directors, but not officers or beneficial owners on articles of incorporation. For 

LLCs, we found that New Mexico does not require the names and addresses of members or managers 

on formation documents. 

0 10 20 30 40 50

Number of states requiring key information

0 10 20 30 40 50

Number of states requiring key information

Company name

Purposea

Principal

office addressa

Agent:

Address

Address

Incorporator/

organizer:a

Signature

Beneficial

owner/

member: Address

Address

Director/

manager/

managing

member:

Address

Officer:b

Name

Name

Name

Name

Name

Company name

Purposea

Principal

office addressa

Agent:

Address

Address

Incorporator/

organizer:a

Signature

Beneficial

owner/

member: Address

Address

Director/

manager/

managing

member:

Address

Officer:b

Name

Name

Name

Name

Name

Number/ 

type of sharesb Number/ 

type of sharesb
Appendix III

Information on Company Formation 

Documents

Page 64 GAO-06-376 Company Formations

Figure 9: Sample Articles of Incorporation Form for a Corporation

Source: Delaware Division of Corporations.
Appendix III

Information on Company Formation 

Documents

Page 65 GAO-06-376 Company Formations

Figure 10: Sample Articles of Organization Form for an LLC

Source: Arizona Corporation Commission.
Page 66 GAO-06-376 Company Formations

Appendix IV

GAO Contact and Staff Acknowledgments ApendxiIV

GAO Contact Yvonne D. Jones, (202) 512-8678 or jonesy@gao.gov

Staff 

Acknowledgments

In addition to the contact named above, Kay Kuhlman (Assistant Director), 

LaKeshia Allen, Todd M. Anderson, Carolyn Boyce, Emily Chalmers, 

William R. Chatlos, Jennifer DuBord, Marc Molino, Jill M. Naamane, and 

Linda Rego made key contributions to this report. 
Page 67 GAO-06-376 Company Formations

Glossary

Agent for service of process A person or entity authorized to accept service of process or other 

important tax and legal documents on behalf of a business. Agents for 

service of process may be known as registered agents, resident agents, 

statutory agents, or clerks in different states.

Articles of incorporation A corporate formation document setting forth basic terms governing the 

corporation’s existence. The articles are filed in most states with the 

secretary of state during the formation process. This document is called a 

“certificate of incorporation” for corporations formed in Connecticut, 

Delaware, New Jersey, New York and Oklahoma; “articles of organization” 

for corporations formed in Massachusetts; and a “charter” for corporations 

formed in Tennessee. 

Articles of association or 

articles of organization

A governing document legally creating a nonstock organization, similar to 

“articles of incorporation” described above for incorporated entities. This 

document is called a “certificate of formation” for limited liability 

companies formed in Mississippi, New Hampshire, New Jersey, and 

Washington, and a “certificate of organization” for limited liability 

companies formed in Pennsylvania. 

Bearer security An unregistered security payable to the holder. For instance, a bearer stock 

certificate is owned by the person legally holding (in possession of) the 

certificate even when no one else knows who holds the certificate. Bearer 

shares may be bought, sold, or exchanged in complete privacy. 

Beneficial owner Shareholders with the power to buy or sell their shares in the company, but 

who are not registered or reflected in the company’s records as the owners. 

A beneficial owner is the natural person who ultimately owns or exercises 

effective control over a legal entity, transaction, or arrangement. 

Certificate of existence A certificate issued by a state official as conclusive evidence that a 

corporation is in existence or authorized to transact business in that state. 

The certificate generally sets forth the corporation’s name, and that it is 

duly incorporated under the law of that state or authorized to transact 

business in that state; that all fees, taxes and penalties owed to that state 
Glossary

Page 68 GAO-06-376 Company Formations

have been paid; and that the corporation’s most recent annual report has 

been filed, and articles of dissolution have not been filed. Also may be 

known as a certificate of good standing or certificate of authorization.

Company formation agent A person or business that acts as an agent for others by filing documents 

with officials of the selected jurisdiction for the formation of legal business 

entities. Such agents may also act, or arrange for another person to act, as a 

director or secretary of a company, a partner of a partnership, or a nominee 

shareholder for another person. Other business services may also be 

provided, such as providing a registered office, or a business, 

correspondence, or administrative address for a company. 

Corporate veil The legal doctrine of separating the acts of a corporation from the acts of 

its shareholders, which prevents the shareholders from being held 

personally liable for the acts of the corporation. 

Piercing the corporate veil An equitable doctrine where the separate existence of a corporation is 

disregarded by the law and the shareholders are held responsible for the 

acts and obligations of the corporation. This doctrine has also been used in 

certain circumstances to impose liability on corporate officers and 

directors. Piercing the corporate veil is justified only in extraordinary 

circumstances where a court finds that a unity of interest and ownership 

between an individual and a corporation exists to such an extent that 

recognizing a separate existence between the two would result in an 

injustice. In such cases, a court may disregard the corporate entity and 

impose personal liability on the individual. 

Corporation An artificial being (usually a business entity) created by law that provides 

authority for the entity to act as a separate and distinct legal person apart 

from its owners and provides other legal rights, such as the right to exist 

indefinitely and to issue stock. 

Federal law classifies corporations created by state law into S corporations 

and C corporations for purposes of federal income taxes as follows: 
Glossary

Page 69 GAO-06-376 Company Formations

S corporation A small business corporation that elects to be taxed as an S corporation 

under the federal tax code.1 The taxable income of an S corporation is 

passed through to the shareholders and taxed at the shareholder level. 

C corporation A corporation that is not an S corporation. 

Director A person elected or appointed to serve as a member of the board of 

directors for a corporation, which generally manages the corporation and 

its officers. 

Dummy (or nominee) 

director

A member of a corporation’s board of directors who is a mere figurehead 

and who has no true control over the corporation. Typically, a nominee 

director may have no knowledge of the business affairs or accounts, may 

not exercise independent control of or influence over the business, and 

may not act unless instructed to act by the beneficial owner.

Limited liability Liability restricted by law or contract, such as the liability of the owners of 

a business entity for only the capital invested in the business.

Limited liability company 

(LLC)

A company whose owners (members) have limited liability (see “limited 

liability”) and that is managed either by managers or its members. An LLC 

consists of one or more members (see “member”).

Manager-managed company A limited liability company that designates in its articles of organization 

that it is a manager-managed company. In this type of LLC, each member is 

not generally an agent of the LLC solely because of being a member of the 

LLC. Rather, each manager is such an agent. 

Member (LLC) An owner of an LLC interest; similar to a shareholder in a corporation. 

1

A small business corporation may have no more than one class of stock and may not have 

more than 100 shareholders, all of whom must be individuals, estates, certain trusts, or 

certain exempt organizations and may not be nonresident aliens. 
Glossary

Page 70 GAO-06-376 Company Formations

Member-managed company A limited liability company that does not designate in its articles of 

organization that it is a manager-managed company. In this type of LLC, 

each member is an agent of the LLC and may generally act on behalf of the 

LLC for the purpose of the LLC’s business. 

Nominee An individual or entity designated to act on behalf of another, such as a 

nominee director acting on behalf of a beneficial owner (see “beneficial 

owner”). Most often in offshore tax avoidance schemes, the nominee may 

pretend to be the owner of an entity, asset, or transaction to provide a veil 

of secrecy as to the beneficial owner’s involvement. 

Officer A person elected or appointed by a corporation’s board of directors to 

manage and oversee the day-to-day operations of the organization, such as 

a chief executive officer, chief financial officer, chief administrative officer, 

and secretary. 

Partnership An association of two or more persons jointly owning and conducting a 

business together where the individuals agree to share the profits and 

losses of the business.

Limited partnership A partnership consisting of one or more limited partners who contribute 

capital to and share in the profits of the partnership, but whose liability for 

partnership debts is limited to the amount of their contribution and one or 

more general partners who control the business and are personally liable 

for the debts of the partnership. 

Limited liability partnership 

(LLP)

A partnership where a partner is not liable for the negligent acts committed 

by other partners or by employees not under the partner’s supervision. 

Certain businesses (typically law firms or accounting firms) are allowed to 

register under state statutes as this type of partnership. 

Limited liability limited 

partnership (LLLP)

A partnership where general and limited partners are not liable for the 

partnership’s debts and obligations because of their status as a partner. 

Service of process The delivery of legal process or other legal notice, such as a writ, citation, 

summons, or a complaint or other pleading filed in a civil court matter. 
Glossary

Page 71 GAO-06-376 Company Formations

Sole proprietorship A business where one person owns all of the business assets, operates the 

business, and is responsible for all of the liabilities of the business in a 

personal capacity. 

(250242)
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

Obtaining Copies of 

GAO Reports and 

Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost 

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To 

have GAO e-mail you a list of newly posted products every afternoon, go to 

www.gao.gov and select “Subscribe to Updates.”

Order by Mail or Phone The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to:

U.S. Government Accountability Office

441 G Street NW, Room LM

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional 

Relations

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548

Public Affairs Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548