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. 1). 2). Two states require some information on officers on company formation  documents, and 10 require some information on directors. 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. 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. Nearly all of the states reported  that they review filings for the required information, fees, and availability  of the proposed company name. However, law enforcement  officials told us that information they had seen suggested that U.S. shell  companies were increasingly being used for illicit activities. In some cases, the actual owners  may include their personal information on official documents. This case was not  prosecuted because investigators could not identify critical 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. 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. 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. 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. Also, according to industry  experts, LLCs usually prepare and maintain operating agreements as well. 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. 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.
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. Some states require companies to list information on directors, officers, or managers, but these persons are not always owners. Nearly all states screen company filings for statutorily required information such as the company's name and an address where official notices can be sent, but no states verify the identities of company officials. Third-party agents may submit formation documents for a company but usually collect only billing and statutorily required information and rarely verify it. Federal law enforcement officials are concerned that criminals are increasingly using U.S. "shell" companies--companies with generally no operations--to conceal their identities and illicit activities. Though the magnitude of the problem is hard to measure, officials said that such companies are increasingly involved in criminal investigations at home and abroad. The information states collect on companies has been helpful in some cases, as names on the documents can generate additional leads. But some officials said that available information was limited and that they had closed cases because the owners of a company under investigation could not be identified. State officials and agents said that collecting company ownership information could be problematic. Some noted that collecting such information could increase the cost and time involved in approving company formations. A few states and agents said that they might lose business to other states, countries, or agents that had less stringent requirements. Finally, officials and agents were concerned about compromising individuals' privacy, as information on company filings that had historically been protected would become part of the public record.