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Banking Government

Proposed U.S. Corporate Transparency Act being watched by LLC community

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By Roger Morris
Contributing Writer

When the Corporate Transparency Act of 2019, sponsored by Rep. Carolyn Maloney (D-N.Y.), was reported out of committee on June 11 for consideration by the full U.S. House of Representatives, nowhere was its progress more closely monitored than in Delaware.

The state is well-known for its corporate-friendly environment, with two-thirds of Fortune 500 companies legally located here and about 80 percent of initial public offerings (IPOs) taking place here. Less well-known is that Delaware is also home to a huge number of American and foreign limited liability companies (LLCs). Of the 198,457 new business entities registered in the state during 2017, 143,996 or 73% were LLCs. In total, the state takes in more than $1.1 billion annually from the business of incorporations.

The issues raised by the Transparency Act are whether LLCs are too frequently serving as havens for international fraud and illicit activities such as illegal drug activities, terrorism, and human trafficking. Opposition to the bill boils down to whether it would significantly reduce those problems and whether it would create an undue reporting and paperwork burden for many thousands of small businesses, including mom-and-pop operations. Of course, the proverbial elephant in the room in all these discussions is actually a golden goose – Delaware’s incorporation business – and whether the Transparency Act might cook the state’s bird.

Now, the Delaware Coalition for Open Government (DelCOG) is leading the charge to pressure the state’s congressional delegation to endorse the legislation. Along with eight other state groups, including the NAACP, Delaware Press Association and the League of Women Voters, DelCOG in a resolution complains that “laws governing the disclosure of beneficial ownership, business addresses, countries of origin, as well as rules and documents necessary for registration of legal business entities vary from state to state,” and Delaware, Nevada, Wyoming and South Dakota – all popular incorporation venues – “have been tarnished by news reports about crimes committed through anonymous shell companies.”

“Whenever these illegal activities are reported, the finger is pointed at states like Delaware and Nevada,” says DelCOG president Nick Wasileski, adding, “A national data base would not be accessible by the general public, but only by law enforcement officials.”

John Williams, president of the business incorporation service IncNow, says that most people wanting to incorporate in the state not to hide their identities and activities but because of the state’s business-friendly environment, including its court system where most business disputes are litigated. Most modern U.S. corporation case law has been written by Delaware’s Court of Chancery.

Williams says his firm already runs LLC data checks at two points – when an LLC is registered, plus an annual check of all clients. He also points out that Europe and the U.S. have different approaches to thwarting illegal activities. “In Europe, it’s very difficult and time- consuming to incorporate, but it’s easy to open bank accounts,” he says. “In the U.S., we are the opposite. It’s hard to open a bank account, but we’re more business-friendly to incorporate.”

Williams also serves on a committee of the American Bar Association, which has traditionally opposed LLC transparency legislation, to come up with possible national solutions. “We don’t want to hurt the mom-and-pop businesses who could face penalties if they fail to file reporting forms with the U.S. government.” Pro-business groups and privacy-advocacy organizations generally oppose formation of such data bases, as well as their reporting requirements.

Last year, the Delaware Legislature enacted into law two bills that addressed LLC issues. One requires cross-checking of Delaware’s corporations and LLC’s against the Office of Foreign Assets Controls’ sanctions list, while the other allows the Chancery Court to dissolve certificates of formation for sanctioned firms and those found to be conducting illegal activities.

Past efforts to pass national transparency legislation have failed, and GovTrack.US, which monitors the progress of legislative activities, reports that Skopos Lab, a company that uses artificial intelligence and other means to predict success or failure of such measures, gives the Transparency Act only a 33% chance of being passed into law. 

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1 Comment

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    John Williams July 16, 2019

    Nice article. Delaware is the Bergdorf Goodman of LLCs. Why? Because Delaware law treats business owners as adults, with an enabling law, rather than prescriptive law. Delaware LLC “privacy” is not really that unique among states. Many states do not require the member or manager to be disclosed in public filings. That is why any “solution” should be federal to unify the approach among states.

    Delaware’s LLCs have more requirements than most states, although those requirements are at the registered agent level, not company level. Therefore investigators who subpoena the registered agent get much information about who to contact who has a list of members.

    I know the article says IncNow checks its list of customers annually, but that’s actually monthly. The Secretary of State registered agent regulations requires it to be done no less frequently than quarterly.


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