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Before the Permanent Subcommittee on Investigations, Committee on 
Homeland Security and Governmental Affairs, U.S. Senate: 

United States Government Accountability Office: 


For Release on Delivery Expected at 2:30 p.m. EST: 

Tuesday, November 14, 2006: 

Company Formations: 

Minimal Ownership Information Is Collected and Available: 

Statement of Yvonne D. Jones, Director Financial Markets and Community 

Company Formations: 


GAO Highlights: 

Highlights of GAO-07-196T, a testimony to Permanent Subcommittee on 
Investigations, Committee on Homeland Security and Governmental 
Affairs, U.S. Senate 

Why GAO Did This Study: 

Companies, which are the basis of most commercial activities in market-
based economies, may be used for illicit as well as legitimate 
purposes. Because companies can be used to hide activities such as 
money laundering, some states have been criticized for requiring too 
little information about companies when they are formed, especially 
concerning owners. This testimony draws on GAO’s April 2006 report 
Company Formations: Minimal Ownership Information Is Collected and 
Available (GAO-06-376), which addressed (1) the information states and 
other parties collect on companies, (2) law enforcement concerns about 
the role of companies in illicit activities and the information 
available on owners, and (3) the implications of collecting more 
ownership information. GAO surveyed all 50 states and the District of 
Columbia, reviewed state laws, and interviewed a variety of industry, 
law enforcement, and other government officials. 

What GAO Found: 

Most states do not require ownership information at the time a company 
is formed or on the annual and biennial reports most corporations and 
limited liability companies (LLC) must file. Four of the 50 states and 
the District of Columbia require some information on members (owners) 
of LLCs (see figure). Some states require companies to list information 
on directors, officers, or managers, but these persons are not always 
owners. Nearly all states screen company filings for statutorily 
required information such as the company’s name and an address where 
official notices can be sent, but no states verify the identities of 
company officials. Third-party agents may submit formation documents 
for a company but usually collect only billing and statutorily required 
information and rarely verify it. 

Federal law enforcement officials are concerned that criminals are 
increasingly using U.S. “shell” companies—companies with generally no 
operations—to conceal their identities and illicit activities. Though 
the magnitude of the problem is hard to measure, officials said that 
such companies are increasingly involved in criminal investigations at 
home and abroad. The information states collect on companies has been 
helpful in some cases, as names on the documents can generate 
additional leads. But some officials said that available information 
was limited and that they had closed cases because the owners of a 
company under investigation could not be identified. 

State officials and agents said that collecting company ownership 
information could be problematic. Some noted that collecting such 
information could increase the cost and time involved in approving 
company formations. A few states and agents said that they might lose 
business to other states, countries, or agents that had less stringent 
requirements. Finally, officials and agents were concerned about 
compromising individuals’ privacy, as information on company filings 
that had historically been protected would become part of the public 

Figure: Information Collected on ownership and Management at Formation: 

[See PDF for Image] 

Source: GAO survey of state officials responsible for company 

[End of Figure] 

What GAO Recommends: 

While not making recommendations, GAO observes that any requirement to 
collect company ownership information must take into consideration (1) 
the conflicting concerns of states, law enforcement agencies, and other 
parties about collecting such information and (2) the need to uniformly 
apply any requirement in all states. 


To view the full product click on the link above. For more information, 
contact Yvonne Jones at (202) 512-8678 or 

[End of Section] 

Mr. Chairman and Members of the Subcommittee: 

I appreciate the opportunity to participate in today's hearing on 
company formation practices among the states. My testimony, which is 
based on our April 2006 report to this subcommittee, will provide an 
overview of the information about the owners of nonpublicly traded 
companies that is routinely collected and made available by the 50 
states and the District of Columbia.[Footnote 1] As you know, the 
majority of companies in the United States are legitimate businesses 
that carry out an array of vital activities and are the backbone of our 
economy. However, companies can also be used for illicit purposes, such 
as laundering money or shielding assets from creditors. For example, 
government and international reports have said that "shell" companies-
-companies with generally no operations--have become popular tools for 
facilitating criminal activity because the persons controlling the 
company are not easily identifiable.[Footnote 2] State statutes, which 
have historically governed the company formation process, generally 
provide for the privacy of the identities of company owners. This 
privacy may protect owners and their assets in the event of a lawsuit, 
but it can also be used to conceal the identity of the beneficial 
owners, or the persons who ultimately own and control a business 

In my statement today, I will address three main points. First, I will 
describe the ownership information that states collect on companies and 
their efforts to review and verify it. Next, I will discuss the 
concerns of law enforcement agencies about how companies can be used to 
hide illicit activity and how information on those companies, or the 
lack of it, can affect investigations. Finally, I will discuss the 
implications of requiring that states and others collect information on 
the owners of companies formed in each state. Our report, and this 
testimony, is based on extensive audit work that included a survey of 
officials from all of the states and the District of Columbia, a review 
of state statutes and company formation forms, and interviews with 
academics, third-party agents, law firms, financial institutions, law 
enforcement, and other state and federal officials.[Footnote 3] 

In summary: 

* Most states do not require companies or third-party agents that 
represent them to provide ownership information at formation or in 
periodic reports. Similarly, states usually do not require information 
on company management, such as corporate officers and directors and 
limited liability company (LLC) managers, in the company formation 
documents, but most states require this information on periodic 
reports. Third-party agents that submit formation documents to the 
state on a company's behalf usually collect only information they need 
to bill the company for their services and statutorily required 
information. The information they collect generally does not include 
information on company owners. States and agents are generally not 
required to verify any information on company ownership or management 
or to screen names against criminal watch lists, although almost all 
state officials reported that they screen filings for the presence of 
statutorily required information such as the company name and an 
address where official notices can be sent. With rare exceptions, the 
agents we spoke with did not request additional information on company 
owners or verify clients' identity. 

* Law enforcement officials we spoke with were concerned about the use 
of shell companies in the United States that enable individuals to 
conceal their identities and conduct criminal activity.[Footnote 4] 
These officials said that they have also had difficulty investigating 
U.S. shell companies that were being used for illicit purposes because 
they could not identify the owners. Quantifying the magnitude of the 
criminal use of shell companies is difficult, but law enforcement 
officials told us about investigations, both domestic and 
international, that have involved such companies and the movement of 
billions of dollars. The law enforcement officials we interviewed said 
that they had obtained some company information from company formation 
documents or periodic reports and occasionally from agents during 
investigations and that this information had generated additional 
leads. But some officials noted that the information available from the 
states often did not reveal who owned the company and that cases had 
been closed because owners could not be traced. 

* State officials, agents, and others we interviewed said that 
collecting company ownership information could be problematic, for 
several reasons. For example, state officials told us that the costs 
and time involved in approving company formations could increase, 
potentially slowing down or derailing business dealings. In addition, a 
few states and agents said they might lose business to other 
jurisdictions with less stringent requirements. State officials and 
agents also expressed concerns about maintaining the privacy of the 
owners of legitimate businesses that historically had been protected 
from public scrutiny. State officials, agents, and other experts in the 
field suggested that internal company records, financial institutions, 
and the Internal Revenue Service (IRS) could be alternative sources of 
ownership information for law enforcement investigations, but we found 
that using these sources could also be problematic. 


The company formation process is governed and executed at the state 
level. Formation documents are generally filed with a secretary of 
state's office and are commonly called articles of incorporation (for 
corporations) or articles of organization (for LLCs). These documents, 
which set out the basic terms governing the company's existence, are 
matters of public record. According to our survey results, in 2004, 
869,693 corporations and 1,068,989 LLCs were formed in the United 
States. See appendix I for information on the numbers of corporations 
and LLCs formed in each state. Appendix II includes information on 
states' company formation processing times and fees. 

Although specific requirements vary, states require minimal information 
on formation documents. Generally, the formation documents, or 
articles, must give the company's name, an address where official 
notices can be sent, share information (for corporations), and the 
names and signatures of the persons incorporating. States may also ask 
for a statement on the purpose of the company and a principal office 
address on the articles. Most states also require companies to file 
periodic reports to remain active. These reports are generally filed 
either annually or biennially. 

Although individuals may submit their own company filing documents, 
third-party agents may also play a role in the process. Third-party 
agents include both company formation agents, who file the required 
documents with a state on behalf of individuals or their 
representatives, and agents for service of process, who receive legal 
and tax documents on behalf of a company. Agents can be individuals or 
companies operating in one state or nationally. They may have only a 
few clients or thousands of clients. As a result, the incorporator or 
organizer listed on a company's formation documents may be the agent 
who is forming the company on behalf of the owners or an individual 
affiliated with the company being formed. 

Businesses may be incorporated or unincorporated. A corporation is a 
legal entity that exists independently of its shareholders--that is, 
its owners or investors--and that limits their liability for business 
debts and obligations and protects their personal assets. Management 
may include officers--chief executive officers, secretaries, and 
treasurers--who help direct a corporation's day-to-day operations. LLCs 
are unincorporated businesses whose members are considered the owners, 
and either members acting as managers or outside managers hired by the 
company take responsibility for making decisions. Beneficial owners of 
corporations or LLCs are the individuals who ultimately own and control 
the business entity. 

States and Agents Generally Do Not Collect or Verify Information on 
Company Ownership and Management: 

Our survey revealed that most states do not collect information on 
company ownership (see fig. 1). No state collects ownership information 
on formation documents for corporations, and only four--Alabama, 
Arizona, Connecticut, and New Hampshire--request some ownership 
information on LLCs.[Footnote 5] Most states require corporations and 
LLCs to file periodic reports, but these reports generally do not 
include ownership information. Three states (Alaska, Arizona, and 
Maine) require in certain cases the name of at least one owner on 
periodic reports from corporations, and five states require companies 
to list at least one member on periodic reports from LLCs.[Footnote 6] 
However, if an LLC has members that are acting as managers of the 
company (managing members), ownership information may be available on 
the formation documents or periodic reports in states that require 
manager information to be listed. 

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

[See PDF for image] 

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

Note: Arkansas and New Mexico omitted responses to certain questions on 
our survey. Arkansas responded that LLC member information is not 
required on articles or reports. We found from our legal review that 
Arkansas does not require the address of a corporation's owner on 
articles or periodic reports. Our legal review also found that New 
Mexico does not require corporations to list the name or address of an 
owner on articles or periodic reports. For LLCs, we found that New 
Mexico does not require member names and addresses on formation 
documents or periodic reports. 

[End of figure] 

States usually do not require information on company management in the 
formation documents, but most states require this information on 
periodic reports (see fig. 2). Less than half of the states require the 
names and addresses of company management on company formation 
documents. Two states require some information on officers on company 
formation documents, and 10 require some information on directors. 
However, individuals named as directors may be nominee directors who 
act only as instructed by the beneficial owner.[Footnote 7] For LLCs, 
19 states require some information on the managers or managing members 
on formation documents.[Footnote 8] Most states require the names and 
addresses of corporate officers and directors and of managers of LLCs 
on periodic reports. For corporations, 47 states require some 
information about the corporate officers, and 38 states require some 
information on directors on periodic reports. For LLCs, 28 states 
require some information about managers or managing members on the 
periodic reports. 

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

[See PDF for image] 

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

Note: New Mexico responded on our survey that information on corporate 
officers is required on reports and information on directors is 
required for both articles and reports, but did not respond to the 
questions about the names and addresses of LLC managers/managing 
members. We found in our legal review that New Mexico does not require 
this information on LLC filings. 

[End of figure] 

In addition to states, third-party agents may also have an opportunity 
to collect ownership or management information when a company is 
formed. Third-party agents we spoke with generally said that beyond 
contact information for billing the company and for forwarding legal 
and tax documents, they collect only the information states require for 
company formation documents or periodic reports. Several agents told us 
that they rarely collected information on ownership because the states 
do not require it. Further, one agent said it was not necessary to 
doing the job. In general, agents said that they also collected only 
the management information that states required. However, if they were 
serving as the incorporator, agents would need to collect the names of 
managers in order to officially pass on the authority to conduct 
business to the new company principals. A few agents said that even 
when they collected information on company ownership and management, 
they might not keep records of it, in part because company documents 
filed with the state are part of the public record. One agent said that 
he did not need to bear the additional cost of storing such 

According to our survey, states do not verify the identities of the 
individuals listed on the formation documents or screen names using 
federal criminal records or watch lists. Nearly all of the states 
reported that they review filings for the required information, fees, 
and availability of the proposed company name. Many states also 
reported that they review filings to ensure compliance with state laws, 
and a few states reported that they direct staff to look for suspicious 
activity or fraud in company filings.[Footnote 9] However, most states 
reported they did not have the investigative authority to take action 
if they identified suspicious information. For example, if something 
appeared especially unusual, two state officials said that they 
referred the issue to state or local law enforcement or the Department 
of Homeland Security. While states do not verify the identities of 
individuals listed on company formation documents, 10 states reported 
having the authority to assess penalties for providing false 
information on their company formation documents. One state official 
provided an example of a case in which state law enforcement officials 
charged two individuals with, among other things, perjury for providing 
false information about an agent on articles of incorporation. 

In addition, our survey shows that states do not require agents to 
verify the information collected from their clients. Most states have 
basic requirements for agents for service of process, but overall 
states exercise limited oversight of agents. Most states indicated on 
our survey that agents for service of process must meet certain 
requirements, such as having a physical address in the state or being a 
state resident. However, a couple of states have registration 
requirements for agents operating within their boundaries. Under a law 
that was enacted after some agents gave false addresses for their 
offices, Wyoming requires agents serving more than five corporations to 
register with the state annually. California law requires any 
corporation serving as an agent for service of process to file a 
certificate with the Secretary of State's office and to list the 
California address where process can be served and the name of each 
employee authorized to accept process. Delaware has a contractual 
relationship with approximately 40 agents that allows them, for a fee 
and under set guidelines, access to the state's database to enter or 
find company information. 

Agents we interviewed said that since states do not require them to, 
they generally do not verify or screen names against watch lists or 
require picture identification of company officials. One agent said 
that his firm generally relied on the information that it received and 
in general did not feel a need to question the information. However, we 
found a few exceptions. One agent collected a federal tax 
identification number (TIN), company ownership information, and 
individual identification and citizenship status from clients from 
unfamiliar countries. Another agent we interviewed required detailed 
information on company principals, certified copies of their passports, 
proof of address, and a reference letter from a bank from certain 
international clients. A few agents said that they used the Office of 
Foreign Assets Control (OFAC) list to screen names on formation 
documents or on other documents required for other services provided by 
their company.[Footnote 10] 

The agents said they took these additional steps for different reasons. 
One agent wanted to protect the agency, while other agents said that 
the Delaware Secretary of State encouraged using the OFAC list to 
screen names. One agent felt the additional requirements were not 
burdensome. However, some agents found the OFAC list difficult to use 
and saw using it as a potentially costly endeavor. OFAC officials told 
us that they had also heard similar concerns from agents. 

Lack of Ownership Information Can Obstruct Law Enforcement 

Law enforcement officials and others have indicated that shell 
companies have become popular tools for facilitating criminal activity, 
particularly laundering money. A December 2005 report issued by several 
federal agencies, including the Departments of Homeland Security, 
Justice, and the Treasury, analyzed the role shell companies may play 
in laundering money in the United States. Shell companies can aid 
criminals in conducting illegal activities by providing an appearance 
of legitimacy and may provide access to the U.S. financial system 
through correspondent bank accounts.[Footnote 11] For example, the 
Financial Crimes Enforcement Network (FinCEN) found in a December 2005 
enforcement action that the New York branch of ABM AMRO, a banking 
institution, did not have an adequate anti-money laundering program and 
had failed to monitor approximately 20,000 funds transfers--with an 
aggregate value of approximately $3.2 billion--involving the accounts 
of U.S. shell companies and institutions in Russia or other former 
republics of the Soviet Union. But determining the extent of the 
criminal use of U.S. shell companies is difficult. Shell companies are 
not tracked by law enforcement agencies because simply forming them is 
not a crime. However, law enforcement officials told us that 
information they had seen suggested that U.S. shell companies were 
increasingly being used for illicit activities. For example, FinCEN 
officials told us they had seen many suspicious activity reports (SAR) 
filed by financial institutions that potentially implicated U.S. shell 
companies. One report cited hundreds of SARs filed between April 1996 
and January 2006 that involved shell companies and resulted in almost 
$4 billion in activity.[Footnote 12] 

During investigations of suspicious activity, law enforcement officials 
may obtain some company information from agents or states, either from 
state's Internet sites or by requesting copies of filings. According to 
some law enforcement officials we spoke with, information on the forms, 
such as the names and addresses of officers and directors, might 
provide productive leads, even without explicit ownership information. 
Law enforcement officials also sometimes obtain additional company 
information, such as contact addresses and methods of payment, from 
agents, although one state law enforcement official said the agents 
might tell their clients about the investigation. In some cases, the 
actual owners may include their personal information on official 
documents. For example, in an IRS case a man in Texas used numerous 
identities and corporations formed in Delaware, Nevada, and Texas to 
sell or license a new software program to investment groups. He 
received about $12.5 million from investors but never delivered the 
product to any of the groups. The man used the corporations to hide his 
identity, provide a legitimate face to his fraudulent activities, and 
open bank accounts to launder the investors' money. IRS investigators 
found from state documents that he had incorporated the companies 
himself and often included his coconspirators as officers or directors. 
The man was sentenced to 40 years in prison. 

In other cases, law enforcement officials may have evidence of a crime 
but may not be able to connect an individual to the criminal action 
without ownership information. For example, an Arizona law enforcement 
official who was helping to investigate an environmental spill that 
caused $800,000 in damage said that investigators could not prove who 
was responsible for the damage because the suspect had created a 
complicated corporate structure involving multiple company 
formations.[Footnote 13] This case was not prosecuted because 
investigators could not identify critical ownership information. Most 
of the officials we interviewed said they had also worked on cases that 
reached dead ends because of the lack of ownership information. 

More Company Ownership Information Could Be Useful to Law Enforcement, 
but Concerns Exist about Collecting It: 

States and agents recognized the positive impacts of collecting 
ownership information when companies are formed. As previously noted, 
law enforcement investigations could benefit by knowing who owns and 
controls a company. In addition, a few state officials said that they 
could be more responsive to consumer demands for this information if it 
were on file. One agent suggested that requiring agents to collect more 
ownership information could discourage dishonest individuals from using 
agents and could reduce the number of unscrupulous individuals in the 

However, state officials and agents we surveyed and interviewed 
indicated that collecting and verifying ownership information could 
have negative effects. These could include: 

* Increased time, costs, and workloads for state offices and agents: 
Many states reported that the time needed to review and approve company 
formations would increase and said that states would incur costs for 
modifying forms and data systems. Further, officials said that states 
did not have the resources and staff did not have the skills to verify 
the information submitted on formation documents.[Footnote 14] 

* Derailed business dealings: A few state and some private sector 
officials noted that an increase in the time and costs involved in 
forming a company might reduce the number of companies formed, 
particularly small businesses. One state official commented that such 
requirements would create a burden for honest business people but would 
not deter criminals. 

* Lost state revenue: Some state officials and others we interviewed 
felt that if all state information requirements were not uniform, the 
states with the most stringent requirements could lose business to 
other states or even countries, reducing state revenues. 

* Lost business for agents: Individuals might be more likely to form 
their own companies and serve as their own agents. Agents also 
indicated that it might be difficult to collect and verify information 
on company owners because they often were in contact only with law 
firms and not company officials during the formation process. 

In addition, some state officials noted that any change in requirements 
for obtaining or verifying information, or the fees charged for company 
formation, would require state legislatures to pass new legislation and 
grant company formation offices new authority. Further, state and 
private sector officials pointed out that ownership information 
collected at formation or on periodic reports might not be complete or 
up to date because it could change frequently. Finally, as noted, some 
states do not require periodic reports, and law enforcement officials 
noted that a shell company being used for illicit purposes might not 
file required periodic reports in any case.[Footnote 15] Law 
enforcement officials told us that many companies under investigation 
for suspected criminal activities had been dissolved by the states in 
which they were formed for failing to submit periodic reports. In 
addition, since a company can be owned by another company, the name 
provided may not be that of an individual, but another company. 

We also found that state officials, agents, and other industry experts 
felt that the need to access information on companies must be weighed 
against privacy issues. Company owners may want to maintain their 
privacy, in part because state statutes have traditionally permitted 
this privacy in part to avoid lawsuits against them in their personal 
capacity. Some business owners may also seek to protect personal assets 
through corporations and LLCs. One state law enforcement official also 
noted that if more information were easily available, criminals and con 
artists could take advantage of it and target companies for scams. 
Although business owners might be more willing to provide ownership 
information if it would not be disclosed in the public record, some 
state officials we interviewed said that since all information filed 
with their office is a matter of public record, keeping some 
information private would require new legislative authority. The 
officials added that storing new information would be a challenge 
because their data systems were not set up to maintain confidential 
information. However, a few states described procedures in which 
certain information could be redacted from the public record or from 
online databases. 

In our review, state officials, agents, and other experts in the field 
identified three other potential sources of company ownership 
information, but each of these sources also has drawbacks. 

First, company ownership information may be available in internal 
company documents. According to our review of state statutes, internal 
company documents, such as lists of shareholders for corporations, are 
required in all states for corporations.[Footnote 16] Also, according 
to industry experts, LLCs usually prepare and maintain operating 
agreements as well.[Footnote 17] These documents are generally not 
public records, but law enforcement officials can subpoena them to 
obtain ownership information. However, accessing these lists may be 
problematic, and the documents themselves might not be accurate and 
might not reveal the true beneficial owners of a company. In some 
cases, the documents may not even exist. For example, law enforcement 
officials said that shell companies may not prepare these documents and 
that U.S. officials may not have access to them if the company is 
located in another country. In addition, the shareholder list could 
include nominee shareholders and may not reflect any changes in 
shareholders.[Footnote 18] In states that allow bearer shares, 
companies may not even list the names of the shareholders.[Footnote 19] 
Finally, law enforcement officials may not want to request these 
documents in order to avoid tipping off a company about an 

Second, we were told that financial institutions may have ownership 
information on some companies. The Uniting and Strengthening America by 
Providing Appropriate Tools Required to Intercept and Obstruct 
Terrorism (USA PATRIOT ACT) Act of 2001 established minimum standards 
for financial institutions to follow when verifying the identity of 
their customers. For customers that are companies, this information 
includes the name of the company, its physical address (for instance, 
its principal place of business), and an identifying number such as the 
tax identification number.[Footnote 20] In addition, financial 
institutions must also develop risk-based procedures for verifying the 
identity of each customer.[Footnote 21] However, according to financial 
services industry representatives, conducting due diligence on a 
company absorbs time and resources, could be an added burden to an 
industry that is already subject to numerous regulations, and may 
result in losing a customer. Industry representatives also noted that 
ownership information might change after the account was opened and 
that not all companies open bank or brokerage accounts. Finally, 
correspondent accounts could create opportunities to hide the 
identities of the account holders from the banks themselves. 

Finally, the Internal Revenue Service was mentioned as another 
potential source of company ownership information for law enforcement, 
but IRS officials pointed to several limitations with their agency's 
data. First, IRS may not have information on all companies formed. For 
example, not all companies are required to submit tax forms that 
include company ownership information. Second, IRS officials reported 
that the ownership information the agency collects might not be 
complete or up to date and the owner listed could be another company. 
Third, law enforcement officials could have difficulty accessing IRS 
taxpayer information, since access by federal and state law enforcement 
agencies outside of IRS investigations is restricted by law. IRS 
officials commented that collecting additional ownership and management 
information on IRS documents would provide IRS investigators with more 
detail, but their ability to collect and verify such information would 
depend on the availability of resources. 

Concluding Remarks: 

In preparing our April 2006 report, we encountered a variety of 
legitimate concerns about the merits of collecting ownership 
information on companies formed in the United States. On the one hand, 
federal law enforcement agencies were concerned about the existing lack 
of information, because criminals can easily use shell companies to 
mask the identities of those engaged in illegal activities. From a law 
enforcement perspective, having more information on company ownership 
would make using shell companies for illicit activities harder, give 
investigators more information to use in pursuing the actual owners, 
and could improve the integrity of the company formation process in the 
United States. On the other hand, states and agents were concerned 
about increased costs, potential revenue losses, and owners' privacy if 
information requirements were increased. Collecting more information 
and approving applications would require more time and resources, 
possibly reducing the number of business startups and could be 
considered a threat to the current system, which values the protection 
of privacy and individuals' personal assets. Any requirement that 
states, agents, or both collect more ownership information would need 
to balance these conflicting concerns and be uniformly applied in all 
U.S. jurisdictions. Otherwise, those wanting to set up shell companies 
for illicit activities could simply move to the jurisdiction that 
presented the fewest obstacles, undermining the intent of the 

Mr. Chairman, this concludes my prepared statement. I would be happy to 
respond to any questions that you or other members of the committee may 
have at this time. 

Staff Contacts and Acknowledgments: 

For further information regarding this testimony, please contact me at 
(202) 512-8678 or Individuals making contributions to 
this testimony include Kay Kuhlman, Assistant Director; Emily Chalmers; 
Jennifer DuBord; Marc Molino; Jill Naamane; and Linda Rego. 

[End of section] 

Appendix I: The Number of Corporations and LLCs Formed in the United 

Historically, the corporation has been the dominant business form, but 
recently the limited liability company (LLC) has become increasingly 
popular. According to our survey, 8,908,519 corporations and 3,781,875 
LLCs were on file nationwide in 2004. That same year, a total of 
869,693 corporations and 1,068,989 LLCs were formed. Figure 3 shows the 
number of corporations and LLCs formed in each state in 2004. Five 
states--California, Delaware, Florida, New York, and Texas--were 
responsible for 415,011 (47.7 percent) of the corporations and 310,904 
(29.1 percent) of the LLCs. Florida was the top formation state for 
both corporations (170,207 formed) and LLCs (100,070) in 2004. New York 
had the largest number of corporations on file in 2004 (862,647) and 
Delaware the largest number of LLCs (273,252). Data from the 
International Association of Commercial Administrators (IACA) show that 
from 2001 to 2004, the number of LLCs formed increased rapidly--by 92.3 
percent--although the number of corporations formed increased only 3.6 
percent.[Footnote 22] 

Figure 3: Domestic Corporations and LLCs Formed in U.S. States in 2004: 

[See PDF for image] 

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

[End of figure] 

[End of section] 

Appendix II: Company Formation and Reporting Documents Can Be Submitted 
in a Variety of Ways: 

Company formation and reporting documents can be submitted in person or 
by mail, and many states also accept filings by fax. Review and 
approval times can depend on how documents are submitted. For example, 
a District of Columbia official told us that a formation document 
submitted in person could be approved in 15 minutes, but a document 
that was mailed might not be approved for 10 to 15 days. Most states 
reported that documents submitted in person or by mail were approved 
within 1 to 5 business days, although a few reported that the process 
took more than 10 days. Officials in Arizona, for example, told us that 
it typically took the office 60 days to approve formation documents 
because of the volume of filings the office received. 

In 36 states, company formation documents, reporting documents, or both 
can be submitted through electronic filing (fig. 4 shows the states 
that provide a Web site for filing formation documents or periodic 
reports).[Footnote 23] In addition, some officials indicated that they 
would like or were planning to offer electronic filing in the future. 

Figure 4: States That Provide a Web Site for Filing Formation or 
Periodic Report Filings: 

[See PDF for image] 

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

[End of figure] 

As shown in table 1, in many cases states charge the same or nearly the 
same fee for forming a corporation or an LLC. In others, such as 
Illinois, the fee is substantially different for the two business 
forms. We found that in two states, Nebraska and New Mexico, the fee 
for forming a corporation may fall into a range. In these cases, the 
actual fee charged depends on the number of shares the new corporation 
will have. The median company formation fee is $95, and fees for filing 
periodic reports range from $5 to $500. 

Table 1: State Company Formation Fees as of November 2005: 

State: Alabama; 
LLCs: $75; 
Corporations: $40. 

State: Alaska; 
LLCs: 250; 
Corporations: 250. 

State: Arizona; 
LLCs: 50; 
Corporations: 60. 

State: Arkansas; 
LLCs: 50; 
Corporations: 50. 

State: California; 
LLCs: 70; 
Corporations: 100. 

State: Colorado; 
LLCs: 125; 
Corporations: 125. 

State: Connecticut; 
LLCs: 60; 
Corporations: 150. 

State: Delaware; 
LLCs: 90; 
Corporations: 50. 

State: District of Columbia; 
LLCs: 150; 
Corporations: 89. 

State: Florida; 
LLCs: 125; 
Corporations: 79. 

State: Georgia; 
LLCs: 100; 
Corporations: 100. 

State: Hawaii; 
LLCs: 50; 
Corporations: 50. 

State: Idaho; 
LLCs: 100; 
Corporations: 100. 

State: Illinois; 
LLCs: 500; 
Corporations: 150. 

State: Indiana; 
LLCs: 90; 
Corporations: 90. 

State: Iowa; 
LLCs: 50; 
Corporations: 50. 

State: Kansas; 
LLCs: 165; 
Corporations: 90. 

State: Kentucky; 
LLCs: 40; 
Corporations: 40. 

State: Louisiana; 
LLCs: 75; 
Corporations: 60. 

State: Maine; 
LLCs: 175; 
Corporations: 145. 

State: Maryland; 
LLCs: 100; 
Corporations: 100. 

State: Massachusetts; 
LLCs: 500; 
Corporations: 275. 

State: Michigan; 
LLCs: 50; 
Corporations: 60. 

State: Minnesota; 
LLCs: 135; 
Corporations: 135. 

State: Mississippi; 
LLCs: 50; 
Corporations: 50. 

State: Missouri; 
LLCs: 105; 
Corporations: 58. 

State: Montana; 
LLCs: 70; 
Corporations: 70. 

State: Nebraska; 
LLCs: 100; 
Corporations: 60-300. 

State: Nevada; 
LLCs: 75; 
Corporations: 75. 

State: New Hampshire; 
LLCs: 100; 
Corporations: 50. 

State: New Jersey; 
LLCs: 125; 
Corporations: 125. 

State: New Mexico; 
LLCs: 50; 
Corporations: 100-1,000. 

State: New York; 
LLCs: 200; 
Corporations: 125. 

State: North Carolina; 
LLCs: 125; 
Corporations: 125. 

State: North Dakota; 
LLCs: 125; 
Corporations: 80. 

State: Ohio; 
LLCs: 125; 
Corporations: 125. 

State: Oklahoma; 
LLCs: 100; 
Corporations: 50. 

State: Oregon; 
LLCs: 50; 
Corporations: 50. 

State: Pennsylvania; 
LLCs: 125; 
Corporations: 125. 

State: Rhode Island; 
LLCs: 150; 
Corporations: 230. 

State: South Carolina; 
LLCs: 110; 
Corporations: 135. 

State: South Dakota; 
LLCs: 125; 
Corporations: 125. 

State: Tennessee; 
LLCs: 300; 
Corporations: 100. 

State: Texas; 
LLCs: 200; 
Corporations: 300. 

State: Utah; 
LLCs: 52; 
Corporations: 52. 

State: Vermont; 
LLCs: 75; 
Corporations: 75. 

State: Virginia; 
LLCs: 100; 
Corporations: 25. 

State: Washington; 
LLCs: 175; 
Corporations: 175. 

State: West Virginia; 
LLCs: 100; 
Corporations: 50. 

State: Wisconsin; 
LLCs: 170; 
Corporations: 100. 

State: Wyoming; 
LLCs: 100; 
Corporations: 100. 

Source: GAO analysis of state Web sites. 

[End of table] 

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. 


[1] GAO, Company Formations: Minimal Information Is Collected and 
Available, GAO-06-376 (Washington, D.C.: April 7, 2006). 

[2] See U.S. Departments of Treasury, Justice, Homeland Security, et 
al, U.S. Money Laundering Threat Assessment Working Group, U.S. Money 
Laundering Threat Assessment (Washington, D.C.: December 2005); and 
Organization for Economic Co-operation and Development (OECD), Behind 
the Corporate Veil: Using Corporate Entities for Illicit Purposes 
(Paris: 2001). 

[3] The survey and a complete tabulation of state-by-state and 
aggregated results can be viewed at 
GAO-06-377SP. Third-party agents include company formation agents who 
help individuals form companies and agents for service of process who 
receive legal and tax documents on behalf of a company. Agents can be 
individuals or companies operating in one state or nationally with only 
a few clients to thousands of clients. 

[4] Creating a shell company is not a crime but rather can be a method 
for hiding criminal activity. When we refer to "shell companies" in 
this statement, we mean U.S. companies that do not conduct any 
legitimate activity. 

[5] In response to a question on requirements for LLC member 
information, a Connecticut official said that either a member's or a 
manager's name was required on the articles of incorporation. In New 
Hampshire, a member or manager is required to sign the articles of 
organization. One state did not respond to the survey question on 
providing names of owners of corporations, and two states did not 
respond to the question on the addresses of owners. 

[6] The five states are Alaska, Connecticut, Kansas, Maine, and New 
Hampshire. One state did not respond to this survey question. 

[7] A nominee director may be an individual who is located where the 
business was formed and may sign official documents for the business on 
behalf of the beneficial owner. Typically, the nominee director will 
have no knowledge of the business affairs or accounts, cannot control 
or influence the business, and will not act unless instructed to by the 
beneficial owner. 

[8] One state did not respond to this survey question. 

[9] We do not have information on the extent of this legal review in 
all of the states that responded that they conduct such a review. 

[10] OFAC is an office within the U.S. Department of the Treasury that 
administers and enforces economic and trade sanctions based on U.S. 
foreign policy and national security goals, as well as a master list of 
"Specially Designated Nationals and Blocked Persons" (SDN) that 
includes numerous foreign agents and front organizations, terrorists, 
terrorist organizations, and narcotics traffickers. All U.S. persons, 
both individuals and entities, are responsible for ensuring they do not 
do business with a person or entity listed on the SDN list. Undertaking 
any type of business or financial transaction with a person or entity 
on this list is illegal under federal law. 

[11] A correspondent account is an account that a foreign bank opens at 
a U.S. bank to gain access to the U.S. financial system and to avoid 
bearing the costs of licensing, staffing, and operating its own offices 
in the United States. Many of the largest international banks serve as 
correspondents for thousands of other banks. 

[12] See U.S. Departments of Treasury, Justice, Homeland Security, et 
al, U.S. Money Laundering Threat Assessment Working Group, U.S. Money 
Laundering Threat Assessment (Washington, D.C.: December 2005). 

[13] Dispersing assets among as many different types of entities and 
jurisdictions as possible is also a way to protect assets. The goal of 
this approach is to create complex structures that, in effect, provide 
multiple protective trenches around assets, making it challenging and 
burdensome to pursue. See GAO, Environmental Liabilities: EPA Should Do 
More to Ensure That Liable Parties Meet Their Cleanup Obligations, GAO-
05-658 (Washington, D.C.: Aug. 17, 2005). 

[14] State officials and others also noted that individuals could 
easily provide false names if ownership information were required 
without being verified. 

[15] Our review of state statutes indicated that 14 states do not 
require periodic reports for LLCs and that 3 did not require them for 
corporations. In 3 states (Alabama, New Jersey, and Oklahoma), the 
annual report is submitted to a different office, such as the 
department of revenue, than the office that handles formation filings. 
In addition, biennial reports were required to be filed by corporations 
in 7 states and by LLCs in 5 states. 

[16] Delaware, Kansas, and Oklahoma statutes do not expressly state 
that a corporation is required to maintain a list of shareholders, but 
shareholders must be able to extract information on shareholders from 
corporate documents maintained by the corporation. 

[17] Some states may not require written operating agreements. If there 
is no operating agreement, the LLC follows default provisions of the 
LLC act of the state where the company was formed. 

[18] With publicly traded shares, nominees (e.g., shares registered in 
the names of stockbrokers) are commonly and legitimately used to 
facilitate the clearance and settlement of trades. Nominee shareholders 
can also be used in privately held companies to shield beneficial 
ownership information. 

[19] According to the U.S. Money Laundering Threat Assessment, Nevada 
and Wyoming allow the use of bearer shares, which accord ownership of a 
company to the person who possesses the share certificate. 

[20] Pub. L. No. 107-56, 115 Stat. 272 (Oct. 26, 2001). Section 326 of 
the USA PATRIOT ACT directs Treasury and the federal financial 
regulators to adopt customer identification program requirements for 
all "financial institutions," which is defined broadly to encompass a 
variety of entities, including, among others, (1) banks that are 
subject to regulation by one of the federal banking regulators, as well 
as credit unions that are not federally insured, private banks, and 
trust companies; (2) securities broker dealers; (3) futures commission 
merchants and introducing brokers; and (4) mutual funds. See 31 U.S.C. 
§ 5312; 31 C.F.R. part 103. 

[21] See GAO, USA PATRIOT ACT: Additional Guidance Could Improve 
Implementation of Regulations Related to Customer Identification and 
Information Sharing Procedures, GAO-05-412 (Washington, D.C.: May 6, 

[22] IACA is a professional association for government administrators 
of business organization and secured transaction record systems at the 
state, provincial, and national level in any jurisdiction. The IACA 
data include domestic, foreign, and professional companies. Domestic 
companies are those doing business in the same state in which they are 
incorporated or formed. Foreign companies do business in a state, but 
they are incorporated or formed in another jurisdiction, either in 
another U.S. state or a foreign country. Professional corporations may 
include professional services, such as those performed by doctors, 
dentists and attorneys. Combining figures for these different types of 
companies overestimates the number of companies formed under the state 
statutes examined in this report, which covers only domestic companies. 
Some states did not report data to IACA. 

[23] Electronic filing includes the ability to file a document through 
a Web site, e-mail, or fax. Five states reported that they offer e-mail 
filing for company formation documents, and 4 states reported that they 
offer e-mail filing for periodic reports. In addition, 27 states 
reported that they accept formation or periodic report filings by fax. 

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