United States Government Accountability Office

GAO Testimony 

Before the Permanent Subcommittee on 

Investigations, Committee on Homeland 

Security and Governmental Affairs, U.S. 

Senate

COMPANY FORMATIONS

Minimal Ownership 

Information Is Collected 

and Available 

Statement of Yvonne D. Jones, Director 

Financial Markets and Community Investment 

For Release on Delivery

Expected at 2:30 p.m. EST 

Tuesday, November 14, 2006

 

GAO-07-196T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 14, 2006

COMPANY FORMATIONS 

Minimal Ownership Information Is 

Highlights of GAO-07-196T, a testimony to Collected and Available 

Permanent Subcommittee on 

Investigations, Committee on Homeland 

Security and Governmental Affairs, U.S. 

Senate 

Companies, which are the basis of 

most commercial activities in 

market-based economies, may be

used for illicit as well as legitimate

purposes. Because companies can 

be used to hide activities such as 

money laundering, some states

have been criticized for requiring

too little information about

companies when they are formed, 

especially concerning owners. This

testimony draws on GAO’s April 

2006 report Company Formations: 

Minimal Ownership Information 

Is Collected and Available (GAO06-376), which addressed (1) the 

information states and other 

parties collect on companies, (2) 

law enforcement concerns about

the role of companies in illicit 

activities and the information 

available on owners, and (3) the 

implications of collecting more 

ownership information. GAO

surveyed all 50 states and the

District of Columbia, reviewed

state laws, and interviewed a

variety of industry, law 

enforcement, and other

government officials. 

What GAO Recommends

While not making 

recommendations, GAO observes

that any requirement to collect

company ownership information

must take into consideration (1) 

the conflicting concerns of states, 

law enforcement agencies, and

other parties about collecting such 

information and (2) the need to 

uniformly apply any requirement in 

all states. 

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

formed or on the annual and biennial reports most corporations and limited 

liability companies (LLC) must file. Four of the 50 states and the District of 

Columbia require some information on members (owners) of LLCs (see 

figure). Some states require companies to list information on directors, 

officers, or managers, but these persons are not always owners. Nearly all

states screen company filings for statutorily required information such as the

company’s name and an address where official notices can be sent, but no 

states verify the identities of company officials. Third-party agents may 

submit formation documents for a company but usually collect only billing 

and statutorily required information and rarely verify it. 

Federal law enforcement officials are concerned that criminals are 

increasingly using U.S. “shell” companies—companies with generally no 

operations—to conceal their identities and illicit activities. Though the 

magnitude of the problem is hard to measure, officials said that such 

companies are increasingly involved in criminal investigations at home and 

abroad. The information states collect on companies has been helpful in 

some cases, as names on the documents can generate additional leads. But 

some officials said that available information was limited and that they had 

closed cases because the owners of a company under investigation could not 

be identified. 

State officials and agents said that collecting company ownership 

information could be problematic. Some noted that collecting such 

information could increase the cost and time involved in approving company 

formations. A few states and agents said that they might lose business to 

other states, countries, or agents that had less stringent requirements. 

Finally, officials and agents were concerned about compromising 

individuals’ privacy, as information on company filings that had historically 

been protected would become part of the public record. 

Information Collected on Ownership and Management at Formation 

www.gao.gov/cgi-bin/getrpt?GAO-07-196T.

To view the full product click on the link 

above. For more information, contact Yvonne 

Jones at (202) 512-8678 or jonesy@gao.gov. 
Company Formations

Mr. Chairman and Members of the Subcommittee: 

I appreciate the opportunity to participate in today’s hearing on company 

formation practices among the states. My testimony, which is based on our 

April 2006 report to this subcommittee, will provide an overview of the 

information about the owners of nonpublicly traded companies that is 

routinely collected and made available by the 50 states and the District of 

Columbia.1

 As you know, the majority of companies in the United States 

are legitimate businesses that carry out an array of vital activities and are 

the backbone of our economy. However, companies can also be used for 

illicit purposes, such as laundering money or shielding assets from 

creditors. For example, government and international reports have said 

that “shell” companies—companies with generally no operations—have 

become popular tools for facilitating criminal activity because the persons 

controlling the company are not easily identifiable.

2

 State statutes, which 

have historically governed the company formation process, generally

provide for the privacy of the identities of company owners. This privacy

may protect owners and their assets in the event of a lawsuit, but it can 

also be used to conceal the identity of the beneficial owners, or the 

persons who ultimately own and control a business entity. 

In my statement today, I will address three main points. First, I will 

describe the ownership information that states collect on companies and 

their efforts to review and verify it. Next, I will discuss the concerns of law 

enforcement agencies about how companies can be used to hide illicit 

activity and how information on those companies, or the lack of it, can 

affect investigations. Finally, I will discuss the implications of requiring 

that states and others collect information on the owners of companies 

formed in each state. Our report, and this testimony, is based on extensive

audit work that included a survey of officials from all of the states and the 

District of Columbia, a review of state statutes and company formation 

forms, and interviews with academics, third-party agents, law firms, 

 1

GAO, Company Formations: Minimal Information Is Collected and Available, 

GAO-06-376 (Washington, D.C.: April 7, 2006). 

2

See U.S. Departments of 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 Cooperation and Development (OECD), Behind the Corporate Veil: Using Corporate Entities 

for Illicit Purposes (Paris: 2001). 

Page 1 GAO-07-196T
Company Formations

financial institutions, law enforcement, and other state and federal 

officials.3

In summary: 

• Most states do not require companies or third-party agents that represent 

them to provide ownership information at formation or in periodic reports. 

Similarly, states usually do not require information on company 

management, such as corporate officers and directors and limited liability 

company (LLC) managers, in the company formation documents, but most 

states require this information on periodic reports. Third-party agents that 

submit formation documents to the state on a company’s behalf usually 

collect only information they need to bill the company for their services 

and statutorily required information. The information they collect 

generally does not include information on company owners. States and 

agents are generally not required to verify any information on company 

ownership or management or to screen names against criminal watch lists, 

although almost all state officials reported that they screen filings for the 

presence of statutorily required information such as the company name 

and an address where official notices can be sent. With rare exceptions, 

the agents we spoke with did not request additional information on 

company owners or verify clients’ identity. 

• Law enforcement officials we spoke with were concerned about the use of 

shell companies in the United States that enable individuals to conceal 

their identities and conduct criminal activity.

4

 These officials said that they

have also had difficulty investigating U.S. shell companies that were being

used for illicit purposes because they could not identify the owners. 

Quantifying the magnitude of the criminal use of shell companies is 

difficult, but law enforcement officials told us about investigations, both 

domestic and international, that have involved such companies and the 

movement of billions of dollars. The law enforcement officials we 

interviewed said that they had obtained some company information from 

 3

The survey and a complete tabulation of state-by-state and aggregated results can be

viewed at http://www.gao.gov/cgi-bin/getrpt? GAO-06-377SP. Third-party agents include

company formation agents who help individuals form companies and agents for service of 

process who receive legal and tax documents on behalf of a company. Agents can be

individuals or companies operating in one state or nationally with only a few clients to 

thousands of clients.

4

Creating a shell company is not a crime but rather can be a method for hiding criminal 

activity. When we refer to “shell companies” in this statement, we mean U.S. companies 

that do not conduct any legitimate activity. 

Page 2 GAO-07-196T
Company Formations

company formation documents or periodic reports and occasionally from 

agents during investigations and that this information had generated 

additional leads. But some officials noted that the information available 

from the states often did not reveal who owned the company and that 

cases had been closed because owners could not be traced. 

• State officials, agents, and others we interviewed said that collecting 

company ownership information could be problematic, for several 

reasons. For example, state officials told us that the costs and time 

involved in approving company formations could increase, potentially 

slowing down or derailing business dealings. In addition, a few states and 

agents said they might lose business to other jurisdictions with less 

stringent requirements. State officials and agents also expressed concerns 

about maintaining the privacy of the owners of legitimate businesses that 

historically had been protected from public scrutiny. State officials, 

agents, and other experts in the field suggested that internal company 

records, financial institutions, and the Internal Revenue Service (IRS) 

could be alternative sources of ownership information for law 

enforcement investigations, but we found that using these sources could 

also be problematic. 

The company formation process is governed and executed at the state 

level. Formation documents are generally filed with a secretary of state’s 

office and are commonly called articles of incorporation (for 

corporations) or articles of organization (for LLCs). These documents, 

which set out the basic terms governing the company’s existence, are

matters of public record. According to our survey results, in 2004, 869,693

corporations and 1,068,989 LLCs were formed in the United States. See 

appendix I for information on the numbers of corporations and LLCs 

formed in each state. Appendix II includes information on states’ company

formation processing times and fees.

Although specific requirements vary, states require minimal information 

on formation documents. Generally, the formation documents, or articles, 

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

sent, share information (for corporations), and the names and signatures 

of the persons incorporating. States may also ask for a statement on the 

purpose of the company and a principal office address on the articles. 

Most states also require companies to file periodic reports to remain 

active. These reports are generally filed either annually or biennially. 

Background 

Page 3 GAO-07-196T
Company Formations

Although individuals may submit their own company filing documents, 

third-party agents may also play a role in the process. Third-party agents 

include both company formation agents, who file the required documents 

with a state on behalf of individuals or their representatives, and agents 

for service of process, who receive legal and tax documents on behalf of a 

company. Agents can be individuals or companies operating in one state 

or nationally. They may have only a few clients or thousands of clients. As 

a result, the incorporator or organizer listed on a company’s formation 

documents may be the agent who is forming the company on behalf of the 

owners or an individual affiliated with the company being formed. 

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. Management may include 

officers—chief executive officers, secretaries, and treasurers—who help 

direct a corporation’s day-to-day operations. LLCs are unincorporated 

businesses whose members are considered the owners, and either 

members acting as managers or outside managers hired by the company 

take responsibility for making decisions. Beneficial owners of 

corporations or LLCs are the individuals who ultimately own and control 

the business entity. 

Our survey revealed that most states do not collect information on 

company ownership (see fig. 1). No state collects ownership information 

on formation documents for corporations, and only four—Alabama, 

Arizona, Connecticut, and New Hampshire—request some ownership 

information on LLCs.5

 Most states require corporations and LLCs to file 

periodic reports, but these reports generally do not include ownership 

information. Three states (Alaska, Arizona, and Maine) require in certain 

cases the name of at least one owner on periodic reports from 

corporations, and five states require companies to list at least one member 

on periodic reports from LLCs.6

 However, if an LLC has members that are 

States and Agents 

Generally Do Not 

Collect or Verify 

Information on 

Company Ownership 

and Management 

 5

In response to a question on requirements for LLC member information, a Connecticut

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

incorporation. In New Hampshire, a member or manager is required to sign the articles of

organization. One 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. 

6

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

not respond to this survey question. 

Page 4 GAO-07-196T
Company Formations

acting as managers of the company (managing members), ownership 

information may be available on the formation documents or periodic 

reports in states that require manager information to be listed. 

Figure 1: States Requiring Ownership Information in Articles and Periodic Reports 

Not required

LLCs only

Corporations only

Both corporations and LLCS

Sources: GAO survey of state officials responsible for company formation (data); Art Explosion (map).

Articles Reports

No response

Note: Arkansas and New Mexico omitted responses to certain questions on our survey. Arkansas 

responded that LLC member information is not required on articles or reports. We found from our 

legal review that Arkansas does not require the address of a corporation’s owner on articles or

periodic reports. Our legal review also 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. 

States usually do not require information on company management in the 

formation documents, but most states require this information on periodic 

reports (see fig. 2). Less than half of the states require the names and 

addresses of company management on company formation documents. 

Two states require some information on officers on company formation 

documents, and 10 require some information on directors. However, 

individuals named as directors may be nominee directors who act only as

Page 5 GAO-07-196T
Company Formations

instructed by the beneficial owner.7 For LLCs, 19 states require some 

information on the managers or managing members on formation 

documents.8

 Most states require the names and addresses of corporate 

officers and directors and of managers of LLCs on periodic reports. For 

corporations, 47 states require some information about the corporate 

officers, and 38 states require some information on directors on periodic 

reports. For LLCs, 28 states require some information about managers or 

managing members on the periodic reports. 

 7

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

and may sign official documents 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. 

8

One state did not respond to this survey question. 

Page 6 GAO-07-196T
Company Formations

Figure 2: States Requiring Management Names or Addresses in Articles and Periodic Reports 

Not required

LLCs only

Corporations only

Both corporations and LLCs

Sources: GAO survey of state officials responsible for company formation (data); Art Explosion (map).

Articles Reports

No response

Note: New Mexico responded on our survey that information on corporate officers is required on 

reports and information on directors is required for both articles and reports, but did not respond to 

the questions about the names and addresses of LLC managers/managing members. We found in 

our legal review that New Mexico does not require this information on LLC filings. 

In addition to states, third-party agents may also have an opportunity to 

collect ownership or management information when a company is formed. 

Third-party agents we spoke with generally said that beyond contact 

information for billing the company and for forwarding legal and tax 

documents, they collect only the information states require for company 

formation documents or periodic reports. Several agents told us that they 

rarely collected information on ownership because the states do not 

require it. Further, one agent said it was not necessary to doing the job. In

general, agents said that they also collected only the management 

information that states required. However, if they were serving as the 

incorporator, agents would need to collect the names of managers in order 

to officially pass on the authority to conduct business to the new company 

principals. A few agents said that even when they collected information on 

company ownership and management, they might not keep records of it, in 

part because company documents filed with the state are part of the public 

Page 7 GAO-07-196T
Company Formations

record. One agent said that he did not need to bear the additional cost of 

storing such information. 

According to our survey, states do not verify the identities of the 

individuals listed on the formation documents or screen names using 

federal criminal records or watch lists. Nearly all of the states reported 

that they review filings for the required information, fees, and availability 

of the proposed company name. Many states also reported that they 

review filings to ensure compliance with state laws, and a few states 

reported that they direct staff to look for suspicious activity or fraud in 

company filings.9

 However, most states reported they did not have the 

investigative authority to take action if they identified suspicious 

information. For example, if something appeared especially unusual, two 

state officials said that they referred the issue to state or local law 

enforcement or the Department of Homeland Security. While states do not 

verify the identities of individuals listed on company formation 

documents, 10 states reported having the authority to assess 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. 

In addition, our survey shows that states do not require agents to verify the 

information collected from their clients. Most states have basic 

requirements for agents for service of process, but overall states exercise

limited oversight of agents. Most states indicated on our survey that agents

for service of process must meet certain requirements, such as having a 

physical address in the state or being a state resident. However, a couple 

of states have registration requirements for agents operating within their 

boundaries. Under a law that was enacted after some agents gave false 

addresses for their offices, Wyoming requires agents serving more than 

five corporations to register with the state annually. 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. Delaware has a contractual relationship with 

approximately 40 agents that allows them, for a fee and under set 

 9

We 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 8 GAO-07-196T
Company Formations

guidelines, access to the state’s database to enter or find company 

information. 

Agents we interviewed said that since states do not require them to, they

generally do not verify or screen names against watch lists or require 

picture identification of company officials. One agent said that his firm 

generally relied on the information that it received and in general did not 

feel a need to question the information. However, we found a few 

exceptions. One agent collected a federal tax identification number (TIN), 

company ownership information, and individual identification and 

citizenship status from clients from unfamiliar countries. Another agent 

we interviewed required detailed information on company principals, 

certified copies of their passports, proof of address, and a reference letter

from a bank from certain international clients. A few agents said that they

used the Office of Foreign Assets Control (OFAC) list to screen names on

formation documents or on other documents required for other services 

provided by their company.10

The agents said they took these additional steps for different reasons. One 

agent wanted to protect the agency, while other agents said that the 

Delaware Secretary of State encouraged using the OFAC list to screen 

names. One agent felt the additional requirements were not burdensome. 

However, some agents found the OFAC list difficult to use and saw using it 

as a potentially costly endeavor. OFAC officials told us that they had also 

heard similar concerns from agents. 

 10OFAC 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. 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 9 GAO-07-196T
Law enforcement officials and others have indicated that shell companies 

have become popular tools for facilitating criminal activity, particularly 

laundering money. A December 2005 report issued by several federal 

agencies, including the Departments of Homeland Security, Justice, and 

the Treasury, analyzed the role shell companies may play in laundering 

money in the United States. Shell companies can aid criminals in 

conducting illegal activities by providing an appearance of legitimacy and 

may provide access to the U.S. financial system through correspondent 

bank accounts.11 For example, the Financial Crimes Enforcement Network 

(FinCEN) found in a December 2005 enforcement action 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. 

But determining the extent of the criminal use of U.S. shell companies is 

difficult. Shell companies are not tracked by law enforcement agencies 

because simply forming them is not a crime. However, law enforcement 

officials told us that information they had seen suggested that U.S. shell 

companies were increasingly being used for illicit activities. For example, 

FinCEN officials told us they had seen many suspicious activity reports 

(SAR) filed by financial institutions that potentially implicated U.S. shell 

companies. One report cited hundreds of SARs filed between April 1996 

and January 2006 that involved shell companies and resulted in almost $4 

billion in activity.12

Lack of Ownership 

Information Can 

Obstruct Law 

Enforcement 

Investigations 

During investigations of suspicious activity, law enforcement officials may

obtain some company information from agents or states, either from 

state’s Internet sites or by requesting copies of filings. According to some 

law enforcement officials we spoke with, information on the forms, such 

as the names and addresses of officers and directors, might provide 

productive leads, even without explicit ownership information. Law 

enforcement officials also sometimes obtain additional company 

information, such as contact addresses and methods of payment, from 

 11A 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.

12See U.S. Departments of 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). 

Page 10 GAO-07-196T Company Formations
Company Formations

agents, although one state law enforcement official said the agents might 

tell their clients about the investigation. In some cases, the actual owners 

may include their personal information on official documents. For 

example, in an 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, provide a 

legitimate face to his fraudulent activities, and open bank accounts to 

launder the investors’ money. IRS investigators found from state 

documents that he had incorporated the companies himself and often 

included his coconspirators as officers or directors. The man was 

sentenced to 40 years in prison. 

In other cases, law enforcement officials may have evidence of a crime but 

may not be able to connect an individual to the criminal action without 

ownership information. For example, an Arizona law enforcement official

who was helping to investigate an environmental spill that caused $800,000 

in damage said that investigators could not prove who was responsible for 

the damage because the suspect had created a complicated corporate 

structure involving multiple company formations.13 This case was not 

prosecuted because investigators could not identify critical ownership 

information. Most of the officials we interviewed said they had also 

worked on cases that reached dead ends because of the lack of ownership 

information. 

 13Dispersing 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 11 GAO-07-196T
States and agents recognized the positive impacts of collecting ownership 

information when companies are formed. As previously noted, law 

enforcement investigations could benefit by knowing who owns and 

controls a company. In addition, a few state officials said that they could 

be more responsive to consumer demands for this information if it were 

on file. 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. 

However, state officials and agents we surveyed and interviewed indicated 

that collecting and verifying ownership information could have negative 

effects. These could include: 

More Company 

Ownership 

Information Could Be 

Useful to Law 

Enforcement, but 

Concerns Exist about 

Collecting It 

• Increased time, costs, and workloads for state offices and agents: Many 

states reported that the time needed to review and approve company 

formations would increase and said that states would incur costs for 

modifying forms and data systems. Further, officials said that states did 

not have the resources and staff did not have the skills to verify the 

information submitted on formation documents.14

• Derailed business dealings: 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, particularly 

small businesses. One state official commented that such requirements 

would create a burden for honest business people but would not deter 

criminals. 

• Lost state revenue: Some state officials and others we interviewed felt that

if all state information requirements were not uniform, the states with the 

most stringent requirements could lose business to other states or even 

countries, reducing state revenues. 

• Lost business for agents: Individuals might be more likely to form their 

own companies and serve as their own agents. Agents also indicated that it 

might be difficult to collect and verify information on company owners 

because they often were in contact only with law firms and not company 

officials during the formation process. 

 14State officials and others also noted that individuals could easily provide false names if 

ownership information were required without being verified.

Page 12 GAO-07-196T Company Formations
Company Formations

In addition, some state officials noted that any change in requirements for 

obtaining or verifying information, or the fees charged for company 

formation, would require state legislatures to pass new legislation and 

grant company formation offices new authority. Further, 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 

because it could change frequently. Finally, as noted, some states do not 

require periodic reports, and law enforcement officials noted that a shell 

company being used for illicit purposes might not file required periodic 

reports in any case.15 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. In addition, since a company can be owned by another 

company, the name provided may not be that of an individual, but another

company. 

We also found that state officials, agents, and other industry experts felt 

that the need to access information on companies must be weighed 

against privacy issues. Company owners may want to maintain their 

privacy, in part because state statutes have traditionally permitted this 

privacy 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 and target companies for scams. Although business 

owners might be more willing to provide ownership information if it would 

not be 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 were not set up to maintain 

confidential information. However, a few states described procedures in 

which certain information could be redacted from the public record or 

from online databases. 

 15Our review of state statutes indicated that 14 states do not require periodic reports for 

LLCs and that 3 did not require them for corporations. In 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 13 GAO-07-196T
Company Formations

In our review, state officials, agents, and other experts in the field 

identified three other potential sources of company ownership 

information, but each of these sources also has drawbacks. 

First, company ownership information may be available in internal 

company documents. According to our review of state statutes, internal 

company documents, such as lists of shareholders for corporations, are 

required in all states for corporations.16 Also, according to industry 

experts, LLCs usually prepare and maintain operating agreements as well.17

These documents are generally not public records, but law enforcement 

officials can subpoena them to obtain ownership information. However, 

accessing these lists may be problematic, and the documents themselves 

might not be accurate and might not reveal the true beneficial owners of a 

company. In some cases, the documents may not 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, the shareholder list 

could include nominee shareholders and may not reflect any changes in

shareholders.18 In states that allow bearer shares, companies may not even 

list the names of the shareholders.19 Finally, law enforcement officials may 

not want to request these documents in order to avoid tipping off a 

company about an investigation. 

Second, we were told that financial institutions may have ownership 

information on some companies. The Uniting and Strengthening America 

by Providing Appropriate Tools Required to Intercept and Obstruct 

Terrorism (USA PATRIOT ACT) Act of 2001 established minimum 

standards for financial institutions to follow when verifying the identity of 

 16Delaware, 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. 

17Some 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. 

18With 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. 

19According 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. 

Page 14 GAO-07-196T
Company Formations

their customers. For customers that are companies, this information 

includes the name of the company, its physical address (for instance, its 

principal place of business), and an identifying number such as the tax 

identification number.20 In addition, financial institutions must also 

develop risk-based procedures for verifying the identity of each 

customer.21 However, according to financial services industry 

representatives, conducting due diligence on a company absorbs time and 

resources, could be an added burden to an industry that is already subject

to numerous regulations, and may result in losing a customer. Industry 

representatives also noted that ownership information might change after 

the account was opened and that not all companies open bank or 

brokerage accounts. Finally, correspondent accounts could create 

opportunities to hide the identities of the account holders from the banks 

themselves. 

Finally, the Internal Revenue Service was mentioned as another potential 

source of company ownership information for law enforcement, but IRS 

officials pointed to several limitations with their agency’s data. First, IRS 

may not have information on all companies formed. For example, not all

companies are required to submit tax forms that include company 

ownership information. Second, IRS officials reported that the ownership 

information the agency collects might not be complete or up to date and 

the owner listed could be another company. Third, law enforcement 

officials could have difficulty accessing IRS taxpayer information, since 

access by federal and state law enforcement agencies outside of IRS 

investigations is restricted by law. IRS officials commented that collecting 

additional ownership and management information on IRS documents 

would provide IRS investigators with more detail, but their ability to 

collect and verify such information would depend on the availability of 

resources. 

 20Pub. L. No. 107-56, 115 Stat. 272 (Oct. 26, 2001). Section 326 of the USA PATRIOT ACT 

directs Treasury and the federal financial regulators to adopt customer identification 

program 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. 

21See 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). 

Page 15 GAO-07-196T
Company Formations

In preparing our April 2006 report, we encountered a variety of legitimate 

concerns about the merits of collecting ownership information on 

companies formed in the United States. On the one hand, federal law 

enforcement agencies were concerned about the existing lack of 

information, because criminals can easily use shell companies to mask the 

identities of those engaged in illegal activities. From a law enforcement 

perspective, having more information on company ownership would make 

using shell companies for illicit activities harder, give investigators more 

information to use in pursuing the actual owners, and 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 owners’ privacy if information requirements 

were increased. Collecting more information and approving applications 

would require more time and resources, possibly reducing the number of 

business startups and 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 would need to balance these conflicting concerns and be 

uniformly applied in all U.S. jurisdictions. Otherwise, those wanting to set 

up shell companies for illicit activities could simply move to the 

jurisdiction that presented the fewest obstacles, undermining the intent of

the requirement. 

Mr. Chairman, this concludes my prepared statement. I would be happy to

respond to any questions that you or other members of the committee may 

have at this time. 

For further information regarding this testimony, please contact me at 

(202) 512-8678 or jonesy@gao.gov. Individuals making contributions to this 

testimony include Kay Kuhlman, Assistant Director; Emily Chalmers; 

Jennifer DuBord; Marc Molino; Jill Naamane; and Linda Rego. 

Concluding Remarks 

Staff Contacts and 

Acknowledgments 

Page 16 GAO-07-196T
Appendix I: The Number of Corporations and 

LLCs Formed in the United States 

Historically, the corporation has been the dominant business form, but 

recently the limited liability company (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 3 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. 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) show that from 2001 to 2004, the

number of LLCs formed increased rapidly—by 92.3 percent—although the 

number of corporations formed increased only 3.6 percent.1

 1

IACA 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 17 GAO-07-196T Company Formations
Company Formations

Figure 3: Domestic Corporations and LLCs Formed in U.S. 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 18 GAO-07-196T
Appendix II: Company Formation and 

Reporting Documents Can Be Submitted in a 

Variety of Ways 

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. 4 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. 

 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 4

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. 

Page 19 GAO-07-196T Company Formations
Company Formations

Figure 4: 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)

As shown in table 1, 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. The median company 

formation fee is $95, and fees for filing periodic reports range from $5 to 

$500. 

Page 20 GAO-07-196T
Company Formations

Table 1: 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

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

Page 21 GAO-07-196T
Company Formations

State LLCs Corporations

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

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. 

(250325) Page 22 GAO-07-196T
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