Company Formations: Minimal Ownership Information Is Collected and Available
Published: 2006-04-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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.
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).
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. control a company. 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. 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. 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; 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. 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  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.
subsections: section_title: Background
paragraphs: 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 agency. 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. 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.
subsections: section_title: Types of Companies
paragraphs: 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  responsible for the corporation’s acts and obligations. 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.
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. 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.
section_title: Corporations and LLCs
paragraphs: 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  rapidly—by 92.3 percent—although the number of corporations formed  increased only 3.6 percent.
section_title: Most States Collect Limited Information on Company Ownership and Management
paragraphs: 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.
subsections: section_title: Information States Collect on Company Ownership
paragraphs: 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. 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.
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. 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. 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  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).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. 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. 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.
section_title: Information States Require on Company Management
paragraphs: 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. 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  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.
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. Also, managers may or may not be owners of the LLC.
section_title: States May Also Collect Other Information
paragraphs: 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  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. 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. 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. 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  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. 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  business in those states, the entity must provide proof of good standing or a  document certifying that the company existed in the original country.  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. An Alaska state  official said that this information was originally required to identify  offshore fisheries and their owners.
section_title: State Officials Reported That They Generally Reviewed Documents for Basic Information but Did Not Verify the Information
paragraphs: 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. 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  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. 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.
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 never received a response from law enforcement about issues that had  been forwarded.
section_title: Agents Facilitate Company Formation but Are Not Required to Collect Ownership Information or Verify Information on Clients
paragraphs: The roles of company formation agents and agents for service of process  differ, as do the state statutes that govern them. 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.
subsections: section_title: Company Formation Agents and Agents for Service of Process Play Different Roles
paragraphs: 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 documents.These 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. 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. 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.
section_title: Few States Verify Information from or Otherwise Oversee Agents
paragraphs: 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. 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.
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.
section_title: 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
paragraphs: 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  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.
section_title: Agents Are Not Required to Verify Information in Company Filings, but a Few Do
paragraphs: 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. One agent said  that her firm created a document to collect additional information from  clients from unfamiliar countries. This agent’s document was based in part  on federal standards for financial institutions from the USA PATRIOT  ACT. 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. 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.
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.
section_title: Law Enforcement Officials Can Obtain Some Company Information from States and Agents, but a Lack of Ownership Information Obstructs Some Investigations
paragraphs: 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.
subsections: section_title: Law Enforcement Officials Are Concerned about the Use of U.S. Shell Companies to Facilitate Criminal Activity
paragraphs: Law enforcement officials and other reports indicate that shell companies  have become popular tools for facilitating criminal activity, particularly  laundering money. 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. 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.
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 government agencies. 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  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  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.
section_title: Information from Company Filings and Agents Is Available and Useful to Law Enforcement, but Is Often Too Limited to Solve Cases
paragraphs: 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. 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  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.
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. 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.
section_title: More Company Ownership Information Could Be Useful to Law Enforcement, but Concerns Exist about Collecting It
paragraphs: 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  sources also has limitations because the information may not be up to date  or available.
subsections: section_title: States and Agents Acknowledged Benefits of Having Additional Information on Company Ownership but Raised Concerns about Collecting It
paragraphs: 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.
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. 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.
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. 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  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. 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.
section_title: State Officials and Others Were Concerned about Privacy Issues
paragraphs: 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  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.
section_title: Two Foreign Jurisdictions Have Had Mixed Experiences with Requiring the Collection of Company Ownership Information
paragraphs: 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). 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. 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  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.
Jerey, which lie abt 100 mile th of  minlnd Britin nd 14 mile from the coast  of Frnce, has re of 45 uare mile.  Ile of Mn i locted in the IriS nd has  re of 227 uare mile. The two ind  re elf-governing crown dependencie tht  do not elong to the United Kingdom nd re  not memer of the Eropen Union. Ech  has it own prliment nd l. In repone  to interntionl concern in the mid-1990  abt the role of compnie formed in  offhore jridiction such as thee two  ind in tx evasion cheme nd other  illicit ctivitie, Jerey nd Ile of Megn  regting compny ervice provider in 2001  nd 2000, repectively. The FinnciService Commission in Jerey nd the  FinnciSuperviion Commission in Ile of  Mn overee the regtion of the compny  ervice provider industry. Offici from oth  jridiction noted tht the regtion were  implemented to improve the legitimcy nd  reption of compnie formed there.
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.
section_title: Other Potential Sources of Company Information May Be Available, but Obtaining Information from These Sources May Also Be Challenging
paragraphs: 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.
subsections: section_title: Internal Company Documents
paragraphs: 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. Industry  experts told us that LLCs also usually prepare and maintain operating  agreements that generally name the members and outline their financial  interests. 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 beneficial owner. 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.  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.
section_title: Financial Institutions
paragraphs: 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. 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  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.
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. 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  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.  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.
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). 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 entity), such as a single member LLC. Disregarded entities owned by a  corporation enter the corporation’s name and EIN. However, not all LLCs  are required to have EINs. 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. 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. In addition, IRS classifies  certain LLCs as corporations for tax purposes, and others may choose to be classified as corporations. 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.
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. 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  statutes, but access by other federal and state law enforcement is restricted  by 26 U.S.C. § 6103. 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. 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. 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. 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 activities or emergency circumstances. State law enforcement officials  can access IRS information for enforcement of state tax laws when IRS has  sharing agreements with state taxing authorities. Law enforcement  officials can also obtain IRS information with the taxpayer’s consent.  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.
section_title: Observations
paragraphs: 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  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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
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.
section_title: Objectives, Scope, and Methodology
paragraphs: 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  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  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  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.
section_title: Company Formation and Reporting Documents Can Be Submitted in a Variety of Ways
paragraphs: 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). 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:   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  to our survey, 28 of the 36 states that offer electronic filing reported that  the benefits exceeded the costs.
subsections: section_title: Company Formation Fees
paragraphs: 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.
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.
section_title: Information on Company Formation Documents
paragraphs: 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.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.
section_title: Glossary
subsections: section_title: Agent for service of process
paragraphs: 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.
section_title: Articles of incorporation
paragraphs: 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.
section_title: Articles of association or articles of organization
paragraphs: 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.
section_title: Bearer security
paragraphs: 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.
section_title: Beneficial owner
paragraphs: 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.
section_title: Certificate of existence
paragraphs: 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  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.
section_title: Company formation agent
paragraphs: 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.
section_title: Corporate veil
paragraphs: 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.
subsections: section_title: Piercing the corporate veil
paragraphs: 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.
section_title: Corporation
paragraphs: 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.
subsections: section_title: S corporation
paragraphs: 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.
section_title: C corporation
paragraphs: A corporation that is not an S corporation.
section_title: Director
paragraphs: 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.
section_title: Dummy (or nominee) director
paragraphs: 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.
section_title: Limited liability
paragraphs: 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.
section_title: Limited liability company (LLC)
paragraphs: 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”).
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.
section_title: Member (LLC)
paragraphs: An owner of an LLC interest; similar to a shareholder in a corporation.
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.
section_title: Nominee
paragraphs: 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.
section_title: Officer
paragraphs: 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.
section_title: Partnership
paragraphs: 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.
subsections: section_title: Limited partnership
paragraphs: 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.
section_title: Limited liability partnership (LLP)
paragraphs: 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.
section_title: Limited liability limited partnership (LLLP)
paragraphs: A partnership where general and limited partners are not liable for the  partnership’s debts and obligations because of their status as a partner.
section_title: Service of process
paragraphs: 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.
section_title: Sole proprietorship
paragraphs: 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.