From the unincorporated business blog comes a report on the Incorporation Transparency and Law Enforcement Assistance Act (S569). The motivation for this piece of legislative detritus seems to be that since a tiny percentage of LLCs are being used for criminal activity let’s wreck LLCs for all firms. Hey, sounds sensible to me.
The bill requires all state-law corporations and LLCs to make disclosures about their beneficial owners, defined as “an individual who has a level of control over, or entitlement to, the funds or assets of a corporation or limited liability company that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the corporation or limited liability company.”
There is no definition of “control, manage, or direct,” but who cares, given “as a practical matter” and “directly or indirectly”? Does this mean voting power? Financial leverage? Family ties? There are civil and criminal penalties for false beneficial ownership information. State laws are not preempted if they require additional information or impose additional limits on public access to the provided information. Someday the courts will decide how much of the rest of state business association law is preempted.
Note that the law only applies to corporations and LLCs. No doubt this will lead to a boom in limited partnerships, etc., and end the LLC era. But never fear: the act calls for study of whether we need to be worried about other business entities.
Not to be outdone by Congress, the National Conference of Commissioners on Uniform State Laws has a draft of a "uniform" law (which means it's uniform if all of the states are silly enough to adopt it): The Uniform Law Enforcement Access to Entity Information Act (pronounced “youleeay”). The theory here seems to be that any state law beats any federal law.
Youleeay fills the gaps left by the federal bill by applying generally to state business entities that require filings. Youleeay requires disclosure of holders of various types of “governance” and “interest” holders, including shareholders, members, limited and general partners, LLCs members, etc. A “material” non-compliance with the statute warrants judicial dissolution in an action brought by the state attorney general as well as administrative dissolution, but no other penalties, including piercing the veil.
If this law is passed in your state, whether you need to worry depends on whether you’re a criminal. If you’re a criminal, no problem: you just form a general partnership or a non-profit entity, which the law effectively doesn’t reach. Of course you can’t earn a profit or get limited liability, but if you’re a criminal using the entity to hide ownership of property, do you care? Also, keep in mind that the penalty for non-compliance is dissolution. So you have to form another of these things. Big deal.
On the other hand, if you’re not a criminal, alas, you’re in trouble if this statute applies in your state. You might find your firm blowing up unexpectedly if, like many (most?) small business owners you make a mistake or fail to update a filing. Then who knows whether the liability shield will apply (the statute protects against veil-piercing, but not necessarily if the business has been dissolved and wound up). Your partner or co-member might welcome dissolution in some situations and so might whisper in the AG’s ear that there’s a problem with the ownership disclosures.
Remember: if business associations are illegal, only criminals will have business associations.
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(Minor revisions 7/13/09)
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