Congress Prepares to Interfere With New Business Formation

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law.

Senator Levin has pressed S.569 which would in part require disclosure of the legal and beneficial owners of private business entities. The Levin bill would require a human person resident in the US have in his or her possession personal information about the legal and beneficial owners of US domiciled business entities, other than publicly traded entities. The definition of “beneficial owner” is much more broad than necessary and the mechanics of the system, including a requirement of notarized documents signed by all beneficial owners, will make quick business formations, such as we have become accustomed to, a thing of the past.

Levin put forward S. 569 as a “homeland security” measure. The Senator has expressed concern that US business entities are being used by criminals and terrorists to shield their activities. The Senator’s claim may be correct. The difficulty posed by his proposal  is that it should not surprise anyone that crooks and terrorists will not tell the truth and will not disclose their true identity and will not identify all beneficial owners. It is unlikely that the bill if enacted would enhance homeland security, but as with many “homeland security” measures will only serve to inconvenience and annoy law abiding individuals.

Treasury is now putting forward its substitute for S. 569 Treasury Beneficial Owner Legislation . The Treasury bill will apply to all newly formed entities (other than publicly held entities) and all existing entities formed prior to the enactment of the legislation must comply within two years after enactment. It is my judgment that the Treasury is looking for a vehicle to discover “tax cheats” and is using the Levin bill as that vehicle. In the past the Treasury has sent subpoenas to states looking for the same information.

For the purposes of the Treasury legislation, the entities, referred to as “Covered Legal Entity”, which will be subject to the legislation are corporations, LLC’s, LP’s, LLP’s and any “non-U.S. entity qualified to do business in any State.” (Sec 3(a0(7)). Trusts will not initially be subject to the legislation.

Section 3(a)(2) [all references to Sections will be to the Treasury substitute] contains the definition of “Beneficial Owner” which is in my opinion,  extremely broad and includes persons exercising  indirect control through third parties. Each Beneficial Owner, under Section 3(b)(4) is required to provide specified information as well as a copy of a government issued identification to either a “Documentation Agent” or a “Licensed Documentation Agent”. The Licensed Documentation Agent will be a person who is licensed by the state to provide that function. In most cases that person will be a commercial service provider who also serves as the entity’s registered or statutory agent in that state. The “Documentation Agent” lacks the state license.

The states will be required to amend their business laws to comply with the legislation or risk loosing some un-specified type of federal funding.

“To protect the security of the United States, each State that receives funding from the [XX] shall, not later than the Effective Date, amend its laws to adopt a legal entity formation system that meets the following requirements: …”

The legislations requires that “(B) Each Beneficial Owner of a Covered Legal Entity shall provide to such Covered Legal Entity a legible and credible copy of a government-issued photo identification document of such Beneficial Owner, to be provided to and maintained by the Documentation Agent or Licensed Documentation Agent at all times. In the case of any Beneficial Owner that is neither a citizen nor lawful permanent resident of the United States, such document shall be a legible and credible copy of the page(s) of the government-issued passport bearing a photograph and unique identifying information of such Beneficial Owner.”

If the legislation is enacted you will likely be doing business with a “Licensed Documentation Agent”. That term is defined as: “The term ‘Licensed Documentation Agent’ means, in any State, an individual or an entity that acts on behalf of a Legal Entity to fulfill the obligations set forth in Section 3(b)(2) of this Act, and that is licensed by such State pursuant to a State law or regulation that subjects the Licensed Documentation Agent to (i) registration, (ii) “fit and proper” licensing requirements of the managers and beneficial owners (including at a minimum identification, verification and physical presence requirements, absence of convictions for crimes of dishonesty or fraud, or regulatory proceedings that raise honesty or integrity concerns), (iii) effective and regular monitoring for compliance, and (iv) sanctions for noncompliance.” (Sec. 3(a)(8))

Once the legislation is enacted the process of business formation will change radically, as provided in the following section, detailed information must be provided to the the Licensed Documentation Agent who must preserve the information and make it available to law enforcement and must certify to the state on an “information statement” filed with the formation documents that the Agent has the information and documentation to meet the requirements of the law. At the time the entity is formed the enity must provide the state with:

“(1) OBLIGATIONS OF LEGAL ENTITIES
‘‘(B) Each applicant that designates a Licensed Documentation Agent in forming a Legal Entity under the laws of a State shall provide to the State at the time of formation of the entity, either— ‘‘(i) in the case of Covered Legal Entities, a licensed documentation agent information statement that:
(1) identifies the Licensed Documentation Agent by name and business or residential street address and contains his or her notarized signature; and (2) contains a statement, signed by the Licensed Documentation Agent, certifying that the obligations of Section 3(b)(1)(C) of this Act have been met; or ‘‘(ii) in the case of Exempt Legal Entities, an exempt entity statement that:
(1) identifies the Licensed Documentation Agent by name and business or residential street address; and (2) contains the signature of the Licensed Documentation Agent, stating that the certification and documentation required in section 3(b)(1)(D) have been obtained.

Covered Legal Entities formed after the enactment of the legislation will be required to continue to comply with the following:
‘‘(C) Each Covered Legal Entity formed under the laws of a State after the Effective Date shall:
‘‘(i) have a Documentation Agent or Licensed Documentation Agent located within the United States at all times; and
‘‘(ii) provide to the Documentation Agent or Licensed Documentation Agent at the time of formation, a statement of beneficial ownership signed by each Beneficial Owner (in the case of an Licensed Documentation Agent), and a legible and credible copy of a government-issued photo identification document of each Beneficial Owner, to be maintained by the Documentation Agent or Licensed Documentation Agent at all times. In the case of any Beneficial Owner that is neither a citizen nor lawful permanent resident of the United States, the Documentation Agent or Licensed Documentation Agent shall obtain and maintain a legible and credible copy of the page(s) of the government-issued passport bearing a photograph and unique identifying information of such Beneficial Owner

The legislation provides for a two year window after adoption for existing entities to come into compliance.
“(E) Each Legal Entity formed under the laws of a State before the Effective Date shall comply with the requirements of subsections (A) through (D) above, as appropriate, by the date that is two years after the Effective Date.

Upon the occurrence of any change in the beneficial ownership, the company must update the beneficial ownership information within 60 days:
‘‘(F) Except as provided in subsection (G) below, each Covered Legal Entity formed under the laws of a State is required to update its beneficial ownership information statement within 60 days of the date of any change in either beneficial ownership or beneficial ownership information by providing an amended beneficial ownership information statement either to the State (signed by the Documentation Agent), or to the Licensed Documentation Agent, as applicable, and by providing corresponding updated identification documentation to the Documentation Agent or to the Licensed Documentation Agent.