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According to this article:

“In every state in the US, you can incorporate an LLC – [a limited liability company] – or another legal entity and you don’t have to disclose who the beneficiary on it is.

It seems that this type of company allows the beneficiaries to hide some assets or even commit crimes:

Shell companies, whether created abroad or at home, make it easy for people to hide assets and commit crimes, said Shah. For example, in the mid-2000s, former Louisiana congressman William Jefferson had created eight different shell companies to hide hundreds of thousands of dollars of bribes. Viktor Bout, an infamous arms trafficker known as the Merchant of Death, had at least a dozen shell companies incorporated in Delaware, Texas and Florida to cover up his weapons trafficking operation.

Question: Why does US allow creating legal entities without real beneficiary disclosure?

  • The short answer is, to a great extent the people with the money control the legislative process. Rich people hate paying taxes, so they make it easy to hide money. Most citizens either don't care or don't understand why it's a problem. – Ralph Crown Aug 10 '17 at 20:46
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Unlike the other answers, which aren't false but don't capture the entire story, I would explain what we observe mostly in terms of politics rather than policy.

Disclosure At The State Level

In the U.S. system of federalism, the laws related to the formation and organization of business entities and trusts is governed primarily by state law, rather than federal law.

Also, under the full faith and credit clause of the United States constitution, an entity formed in one state must be recognized in other U.S. states as well. For example, even if your business is located entirely in Ohio, you can incorporate in Nevada or Delaware and be subject to that state's laws regarding the internal affairs and ownership rules for an entity rather than the laws of Ohio.

This has given rise to what is known as the "race to the bottom" in which states fall over themselves to have organizational statutes that are friendly to the whims of would be incorporators. And, one thing that would be incorporators often like is a lack of public disclosure of who owns the business.

As part of the race to the bottom, disclosure of ownership requirement have almost completely vanished (or was never imposed in the first place) for both business entities and trusts.

Notably, in areas where "race to the bottom" approaches aren't available, such as in regulated industries like law firms, licensed real estate companies, companies with liquor licenses, and companies that participate in state regulated marijuana sales, state distaste for disclosure of beneficial ownership disappears and states routinely require full disclosure of an entity's owners (and sometimes their debt investors as well) in publicly available filings.

Disclosure At The Federal Level

Notably, this trend is not seen at the federal level, which regulates all entities for the limited purpose of tax law, and regulates disclosure requirements pertinent to publicly held companies and disclosure requirements for entities that file lawsuits in federal courts.

Disclosures Of Ownership For Federal Tax Purposes

For federal income tax purposes, (1) all owners of entities organized as single member LLCs, (2) all entities taxed as partnerships under Subchapter K of Title 26 (the Internal Revenue Code) such as general partnerships, limited partnerships, and if they do not elect to be taxed as corporations: limited liability partnerships, limited liability limited partnerships, limited liability companies, and limited partnership associations, (3) all entities taxed as corporations which make elections under Subchapter S of the Internal Revenue Code, (4) all grantor trusts, (5) all simple trusts, (6) all complex trusts that make distributions to beneficiaries, (7) all private foundations, (8) all REITs, (9) all mutual funds, and (10) a C-corporations that pay dividends in a given year, must disclose their owners/beneficiaries to the IRS in connection with their annual information tax return requirements.

These disclosures are not available beyond the IRS and other people who can subpoena a tax return or who have a right to review a tax return as a co-owner of a closely held business, but they also mean that beneficial ownership isn't unknown to the government in these cases.

Pretty much the only entities that do not have to report their owners to the IRS are (1) complex trusts that distribute nothing to beneficiaries in the current year, and (2) C-corporations that do not pay dividends in a given year.

It is really even more pervasive than that, because there are significant tax disincentives to create C-corporations except in cases of foreign ownership or publicly held companies, where C-corporations are the only permitted tax regime. For example, there are strong tax reasons for C-corporations not to own real estate, where the tax treatment of pass through entities who disclose their ownership to the IRS is much more favorable.

From an economic perspective, the lion's share (perhaps 90%+) of C corporations measured by revenues, income, assets, employees, or corporate taxes paid are publicly held companies that have to disclose their ownership structure in any case to a great extent under the securities laws (although disclosing the ownership structure of C-corporations that don't pay dividends isn't that important from a tax collection perspective because those corporations pay income tax at the entity level rather than the ownership level).

In 2014, in the U.S., there were 303,000 complex trusts that didn't have to report their beneficiaries to the IRS because they made no distributions in the current year out of 3,171,000 trusts and estate in all (rounding to the nearest 1000) and some of those had to report beneficiaries in prior years when distributions were made by those trusts to beneficiaries.

There were 3,613,000 entities taxed under subchapter K who had to report their partners to the IRS.

There were 4,257,909 S corporations who had to report their shareholders to the IRS.

There were 24,631,831 non-farm sole proprietorships, a category that includes LLCs with a single owner that had to report their ownership to the IRS.

There were about 1.6 million C corporations in the U.S., a category that does not have to report beneficial ownership to the IRS unless dividends are paid in the current year. About 1% of these are publicly held companies that make of the predominant economic share of the total. Only 819,000 of them have any taxable income (most of those without taxable income pay their taxable income to a shareholder-employee as a bonus each year which is reported to the IRS as wage and salary income), and all but about 200,000 either have no income tax due as a consequence of tax credits (with the balance paid as compensation to shareholder-employees in most cases), or have income that is due only in lower tax brackets for small corporations that are lower than the tax brackets for publicly held companies and individual income earners.

For example, 82.2% of corporations that owed any corporate income taxes owed just 0.6% of corporate income taxes owed, and 93.5% of corporations that owed any corporate income taxes owed less than 2% of all corporate income taxes. Meanwhile, fewer than 40,000 corporations (at least a third of which, if not more, are publicly held) owe 98.8% of all corporate income taxes, despite being just 0.6% of all corporations.

Bottom line:

There are about 37.3 million businesses and trusts in the United States. All but about 303,000 trusts and about 1.6 million C corporations don't have to report their beneficial ownership to the IRS in years when they make no distributions to their beneficial owners, the lion's share of the C corporations economically are publicly held companies that have to make disclosures anyway, and the lion's share of the privately held C corporations aren't making distributions to shareholders because they are making distributions to employee-shareholders who are disclosed to the IRS in their capacity as employees.

Only about 2% of business entities or trusts in the U.S. have economically significant beneficial owners who are not known to the IRS as persons economically affiliated with the business either as owners or as employees. These are mostly concentrated in about 303,000 complex trusts that make up about 10% of all trusts in existence, and about 200,000 medium sized privately held C-corporations that don't distribute dividends to shareholders on a regular basis and collectively aren't very economically important in the context of all outstanding business activity in the U.S.

Privately held C-corporations are required to have less than 300 shareholders, but the median number of shareholders in a privately held C-corporation is less than 4, and something on the order of 95-98% have ten or fewer shareholders.

There is a huge hole in the U.S. economy of companies with more than a dozen but less than several hundred owners, with the primary exception of limited partnerships that own either oil and gas interests or other kinds of real estate investments, which are usually organized as Subchapter K limited liability entities that must disclose their owners to the IRS each year.

Federal ownership disclosures requirements for publicly held companies.

Furthermore, publicly held corporations must disclose all owners of at least 5% of the outstanding shares in the public record and can be compelled to make ownership records available to someone seeking to bring a proxy fight which in entities with thousands of shareholders each and the ability for anyone to buy shares without approval from anyone else, amounts to de facto public disclosures of beneficial ownership (at least of the people or entities who directly own shares). Again, these requirements are imposed by the Securities and Exchange Commission, which is a federal agency.

Disclosure of the ownership of federal litigants

As a third example, any entity that enters an appearance in a federal court case must disclose its beneficial ownership, but few state court systems have an ownership disclosure requirement.

Conclusion

The bottom line is that at the federal level, where a "race to the bottom" isn't possible, there are rather pervasive requirements for entities to disclose beneficial ownership to someone or other, usually for either tax purposes or securities market regulation purposes.

But, at the state level, where a "race to the bottom" has been the rule almost as long as it has been possible to create entities without express legislative permission (something that happened in most states sometime in the 19th century), there have not been ownership disclosure requirements, even though disclosure is required at the state level in circumstances where the "race to the bottom" is not applicable.

Given the fact that the federal and state governments are regulating the very same entities in parallel, have the same constituents, and often are governed in the federal case by former state government office holders whose campaigns are managed by the same political party organizations, it is much more plausible that disclosure requirements are a product of federalism and the "race to the bottom" mechanism of business entity and trust law which is made at the state level, rather than mostly as a consequence of bona fide policy considerations as the other answers to this question suggest.

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Nominee companies are occasionally useful for legit purposes. Picture yourself in Tim Cook's shoes while shopping around for a new domain name or a company. The mere utterance of Apple in the discussion would likely add a zero or more to the price you'd end up being offered. By operating through a proxy, negotiations end up more level headed.

IMHO this is the main reason they're still a thing in spite of their potential use to hide assets. But there certainly are a few head winds working against banning them.

At the political level, consider the number of (savvy voter) jobs at stake and the people who you'd expect to form nominee companies (aka potential political donors), and it's easy enough to imagine that getting rid of them probably isn't high on any politician's agenda.

At the voter level, US citizens tend to value their freedom to be able to do things irrespective of the occasional negatives tied to them (such as owning assault rifles). Politicians that try to take steps to reduce freedom tend to face stiff resistance by vocal groups.

And at the legal level, as already noted in user4012's answer, nominee companies aren't that big a problem when the court system wants to know a beneficiary's identity.

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  • In a lot of countries there isn't an equivalent to a U.S. Secretary of State's office or a clerk and recorder's office, in which corporate and property records are stored in a central repository and available to anyone. Instead, notary offices (several of which would have licenses to operate in any given notary district) serve as transactional lawyers and official authenticators and custodians of key legal documents like deeds, wills and documents evidencing ownership of entities. Even when they aren't available to the general public, a third party has them and a proper party can access them. – ohwilleke Aug 11 '17 at 18:57
  • Continued . . . in contrast, in the U.S. entities control their own records of ownership so if officers of the business can't be located or don't cooperate with someone seeking info, the information can't be had (apart from tax records, court filings and for publicly held companies). – ohwilleke Aug 11 '17 at 19:10
  • Finally, I'd just note that you don't need non-disclosure of ownership to do asset assembly. It is possible to have commercial firms owned by third parties that are hired to assemble assets for the benefit of others on a contractual basis (perhaps with a commission involved) without having an entity of unknown ownership do it. – ohwilleke Aug 11 '17 at 19:12
  • @ohwilleke: it's unclear what point you're trying to make. – Denis de Bernardy Aug 11 '17 at 19:14
  • I'm first pointing out that there are global standards of private and then there are U.S. standards of private so that there are middle ground options which balance the concerns. Secondly, I'm pointing out this the legit purpose for nominee companies doesn't really strongly justify non-disclosure of owners because there are alternative ways to achieve the legit objectives that don't implicate the asset hiding/crime facilitating concerns. – ohwilleke Aug 11 '17 at 19:20
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Side #1: because there's no sufficient reason to disallow it without committing a Faulty generalization fallacy

You can commit crimes by driving a car into people (and it has been done). That's not a reason to disallow cars - not everyone driving a car does this. You disallow vehicular manslaughter, not cars. Or, for a more direct analogy, you don't even require public disclosure of either car title/ownership, or even car registration information (except to insurance company).

You can use an asset management fund to defraud people (Hello Bernie Madoff!), but you don't disallow private asset management funds, you disallow fraud. Or again, for closer analogy, you don't prohibit non-disclosure of who invests in the funds.

In general, merely "I can find examples of X leading to be abused in bad causes", is not a sufficient reason to disallow X unless the abuse is pervasive[1] - even in and out of itself, never mind if we look into Side #3: comparing pros and cons of X.

[1] - for example, Napster was prohibited because it was pervasively used for IP piracy even if they could have been used in benign way.

Side #2: Would disallowing it help significantly?

Not really. First off, law enforcement can subpoena registration documents and find the applicant, as long as the company is registered in US (and, if it's a foreign shell corporation, obviously US can't choose whether the disclosure is required). Just as with car registration, the information is available to the justice system if following due process procedures.

Second of all, there's no indication that bad actors would provide accurate honest disclosure - most likely, either William Jefferson nor Viktor Bout would have used a cutout person, not himself, if disclosure was required.

Side #3: What about the pros of not requiring disclosure?

First of all, this dovetails with the whole idea of what LLC (limited liability) is for - you are removing the liability for what happens in the company from falling on company owners, thus allowing them to take on operating risk they would be hesitant to do so otherwise, thus improving commerce.

While typically, this is reflected in limiting the liability as far as legal/financial side, anonymity of beneficiary also removes social liability - which is vital. You don't want someone's business targeted just because the owner is a Mormon, or voted for Hamilton, or publicly supported repeal of Prohibition.

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  • I don't get your ban analogies, are you equating requiring beneficiary disclosure with outright banning LLCs? – yannis Aug 10 '17 at 14:04
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    I'm talking about #1. No one is calling for LLCs to be banned. – yannis Aug 10 '17 at 14:35
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    Try not disclosing car ownership/registration when pulled over, or when selling the car. – yannis Aug 10 '17 at 15:01
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    @PoloHoleSet - "banning" does have stronger connotatoins - I changed to "disallow". – user4012 Aug 10 '17 at 16:49
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    @indigo to the best of my knowledge the actual reason is that nobody passed a law disallowing. That'd make foe for an awfully useless answer though, even if accirate – user4012 Aug 11 '17 at 0:04
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It seems that this type of company allows the beneficiaries to hide some assets

The United States has the same or higher taxes on LLCs (Limited Liability Companies) as they have on individuals.

The entire purpose of the corporate forms is to encourage people to gather together and invest in businesses. In particular, the LLC exists as a simpler alternative to a Subchapter S-corp or Subchapter C-corp with greater protections than a partnership.

What would it mean to disclose "beneficiaries" of an LLC? The owners? Then what would happen with other corporate forms? For example, what is the "beneficiary" of GM? GM is owned by a number of entities, e.g. mutual funds, which are themselves owned by a number of people.

If the US required the disclosure of beneficiaries of an LLC but did not do so for subchapter-C corporations (e.g. GM). Then those who cared would just move from LLCs to C-corporations. That requires additional forms and processing (e.g. regular board meetings), but it is not actually expensive or difficult to accomplish. Except in that C-corporations pay higher taxes than LLCs or S-corporations.

The whole purpose of an LLC is to be simpler than the other two corporate forms. It's supposed to be the easy one. Adding a new "beneficiary" requirement that the others don't have wouldn't serve that.

It also may be worth reading the original report which this article links (indirectly). Among the fifteen most financially secretive countries are some of the world's most successful:

    1. Switzerland.
    1. United States.
    1. Germany.
    1. Japan.
    1. United Kingdom.

Also note that it says that if crown territories and overseas territories were included, the UK would move from fifteenth to first. This seems to be largely the result of the Cayman Islands, which are fifth when counted separately.

Shell companies, whether created abroad or at home, make it easy for people to hide assets and commit crimes, said Shah.

I remain unconvinced that the primary reason for this is the LLC type. One wouldn't normally use an LLC as a shell company. You can just create a regular C-corporation for that. The purpose of the LLC is like an S-corporation. It allows you to report your corporate income as individual income on your tax return. The tradeoff for that is that you have to report the entire corporate income as personal income each year.

Note that in either an LLC or an S-corporation, income has to be reported to the Internal Revenue Service (IRS) every year. It doesn't have to be reported publicly, but it does have to report it on the "beneficiary's" tax return. It's for this reason that I suspect that most shell companies are C-corporations rather than LLCs. A C-corporation, like GM, reports its own income. It doesn't just pass it to an individual or individuals.

There is no reason, said Shah, why creating such shell companies should be easier than obtaining a library card.

Except that making "shell" company creation more difficult also makes it more difficult to create regular companies. So take away the "shell" portion of it. What she is saying is that there is no reason why it should be easier to obtain a library card, which entitles you to borrow property, than to register a company, which obligates you to pay taxes on your income. The only thing that a registered company allows you to do is to use the corporate name. And to pay the taxes through the company rather than personally. So you don't have to disclose your own private tax identification (Social Security) number to everyone with whom you are doing $600 or more in business.

In general, the US wants to make it easy to form companies, do business, and hire people. This group wants to make that more complex, with more review. They have not established that this would prevent the corruption that they find problematic (they don't even establish that it involves it).

From the article:

Elson remains skeptical as to whether such a law would actually work.

“I don’t know how fixing the beneficial ownership rule would fix this. If someone is devious enough to game the system in this way, they would work their way around any single regulatory change. These are very clever people,” he said.

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  • It is worth noting that four of the five nations mentioned (Switzerland, Germany, U.S., and U.K.) handle corporate entities to a great extent at the sub-national level. In Japan, lack of transparency has a very different motive, which is to facilitate its "keiretsu" system and similar arrangements. – ohwilleke Aug 11 '17 at 19:16
  • Also GM actually does have to disclose its beneficial ownership because it is publicly held. – ohwilleke Aug 11 '17 at 19:28

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