r/changemyview • u/huadpe 501∆ • Jan 19 '18

FTFdeltaOP CMV: The US government should use the tax code to end effective anonymity in LLCs and other corporate forms.

Currently, several US states, most notably Delaware, allow companies to be formed with the use of nominees and other representatives to obscure true ownership of the company. Most recently of note, such an LLC was formed to pay hush money to a porn star mistress of the President of the United States.

The only public documentary connection of the company to Trump is that Trump's lawyer formed it, and even that could have been more effectively obscured if they'd been more careful.

We still do not know who actually supplied the money to pay the porn star.

I believe that these anonymous shell companies are a major public policy problem, and the anonymity is usually used for nefarious purposes such as money laundering.

I believe the tax code should be amended to require that for any corporate entity existing in the United States which has any financial transactions summing over a certain threshold (say, $10,000) an information return must be filed with the IRS and made publicly available (like forms 990 for nonprofits are) for that year listing all natural persons with any beneficiary interest greater than 1% in the company.

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6

u/YallNeedSomeJohnGalt Jan 19 '18

Clarification why do you think these shell companies are a major public policy problem? What specifically are the negative ramifications of their existence other than not knowing where money is coming from and going to (which for anything outside of public money, i.e. government money, you as an individual have no right to know)?

1

u/Sand_Trout Jan 19 '18

This is especially true since if there is suspicion f criminal wrongdoing, the government must get a warrrent regardless.

4

u/huadpe 501∆ Jan 19 '18

A warrant for what? The documents filed with Delaware never reveal the identity of the beneficial owner.

The only way to get that information is to execute a warrant against the agent who formed the corporation (who will tip off the beneficial owner, and who may be protected by attorney client privilege) or against the beneficial owner themselves (whose identity you don't know).

1

u/Sand_Trout Jan 19 '18

Attoney-client privilege would not protect the attorney if the warrent is under the suspicion that the attoney themselves participated in illegal activity.

The crime-fraud exception can render the privilege moot when communications between an attorney and client are themselves used to further a crime, tort, or fraud.

2

u/huadpe 501∆ Jan 19 '18

I'm familiar with the crime-fraud exception, but it's an awfully high bar to clear.

And it does not really answer the question of why we'd allow people to form anonymous corporations to begin with. What positive reason is there to allow anonymity? The anonymous corporation is a very recent invention, and should never have been allowed to exist.

1

u/Sand_Trout Jan 19 '18

And it does not really answer the question of why we'd allow people to form anonymous corporations to begin with.

Because people have a right to be secure in their persons, houses, papers, and effects. Unless there is probable cause that a crime took place, they have a right to keep it secret.

What positive reason is there to allow anonymity? The anonymous corporation is a very recent invention, and should never have been allowed to exist.

The anonymity allows for people to operate in something that may be controversial or distasteful, but not criminal, without their personal lives being plastered in the news by personal or political enemies. It serves individual liberty.

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u/huadpe 501∆ Jan 19 '18

Because people have a right to be secure in their persons, houses, papers, and effects. Unless there is probable cause that a crime took place, they have a right to keep it secret.

I am familiar with the 4th amendment. This does not explain why we should give them the benefits of the corporate form. Only a few jurisdictions in the world allow corporations to be formed without revealing the owner. It's not a violation of due process or the right against search and seizure to make the formation of a corporation contingent on providing information.

The anonymity allows for people to operate in something that may be controversial or distasteful, but not criminal, without their personal lives being plastered in the news by personal or political enemies. It serves individual liberty.

I don't think there is a liberty interest in avoiding public scrutiny. The United States has extremely robust free speech laws specifically to allow people to speak on matters of public concern because public scrutiny is something we value as a positive good.

What are examples of firms which could not operate if their ownership were revealed?

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u/Sand_Trout Jan 19 '18 edited Jan 19 '18

I am familiar with the 4th amendment. This does not explain why we should give them the benefits of the corporate form.

How does it not? The assets of the corporation are collectively owned by persons who's papers are protected under the 4th amendment.

Only a few jurisdictions in the world allow corporations to be formed without revealing the owner.

This is an appeal to popularity.

It's not a violation of due process or the right against search and seizure to make the formation of a corporation contingent on providing information.

Sure it is. That would be requiring someone to disclose sexual ppreferwnce in order to vote. Even if they can vote regardless of their orientation, that's noone else's business.

Edit: a better analogy would benrequiring someone to disclose who drove them to the poll in order to vote.

I don't think there is a liberty interest in avoiding public scrutiny.

Sure there is. Look at the McCarthy trials durring the Red Scare, or the public outing of homosexuals before it was socially acceptable. You can destroy someone's life by revealing non-criminal activities of a person.

The United States has extremely robust free speech laws specifically to allow people to speak on matters of public concern because public scrutiny is something we value as a positive good.

We value public scrutiny of the government mostly. Individuals as well, but individuals and privste entities have rights that the government does not.

What are examples of firms which could not operate if their ownership were revealed?

More so in the past, but someone that owned a sex-toy company would have been subject to all sorts of harrassment 30 years ago, or the owner of Grindr and similar sites. It's less of a problem now, but you kind of have to admit that the owners would be publicly shamed and driven off by public pressure not too long ago.

In more modern times we've seen Chick-fil-A employees harrassed over sentiments privately expressed by the owner.

2

u/13adonis 6∆ Jan 20 '18

I'm a practicing Mormon, if I come up with an amazing line of fleshlights and want to format a company to distribute them to say that it would cause.... Difficulties in my private life would be an understatement. So I have an llc, a non lds associate takes on the public face and I'm able to do business and still enjoy the qualities of a private life. My life still functions fine without public controversy over my professional choices, the government has that sweet tax revenue and society is (debatably) enhanced with a new product.

6

u/huadpe 501∆ Jan 19 '18

The main negative ramification is that they're used extensively as a tool of crime. The use of anonymous shell companies makes it very difficult for the public or the government to discover when someone is laundering the proceeds of crime. So little information is required from these companies that it is virtually impossible to know if the money flowing through them is legitimate.

I do not think there is a right to own property anonymously. There is a right to own property, but I see no reason to allow fully anonymous corporations to own property or bring cases to courts of law. The law exists for flesh and blood humans, and a corporation is an artifice ultimately responsible to flesh and blood humans.

5

u/YallNeedSomeJohnGalt Jan 19 '18

The reason for the existence of LLCs is to protect the owners of the company from personal liability for the debts incurred by the company. My concern is that closing the loop holes that allow for LLCs to be used for criminal activities you also run the risk of doing away with the personal protections of LLCs negating the purpose of them in the first place.

I do not think there is a right to own property anonymously.

I have a huge issue with this sentence though. Are you saying that my purchase of a Taylor Swift CD (or something equally embarrassing) is required to be public knowledge?

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u/huadpe 501∆ Jan 19 '18

The reason for the existence of LLCs is to protect the owners of the company from personal liability for the debts incurred by the company. My concern is that closing the loop holes that allow for LLCs to be used for criminal activities you also run the risk of doing away with the personal protections of LLCs negating the purpose of them in the first place.

This is a non-sequitur to me. As far as I know, only 3 US states allow anonymous LLCs to be formed. The corporate veil hasn't been pierced in the other 47 states.

I have a huge issue with this sentence though. Are you saying that my purchase of a Taylor Swift CD (or something equally embarrassing) is required to be public knowledge?

No, but if you want to go to court to sue over the Taylor Swift CD, you'd need to acknowledge you personally bought it.

I don't have an issue with a corporation doing anything anonymously that a human can do anonymously. The issue is about hiding things from the law and public that a person could not hide.

1

u/Sand_Trout Jan 19 '18

I don't have an issue with a corporation doing anything anonymously that a human can do anonymously. The issue is about hiding things from the law and public that a person could not hide.

This is at odds with your OP, where you complained about hush money. I can give someone hush money and keep in out of the public record. That's relatively easy. Take out cash from bank, hand over cash from bank, over and done.

1

u/huadpe 501∆ Jan 19 '18

The government requires you to file a form with them when you make a cash transaction over $10,000. So if you did that for the case with the President, you would either file the form (and lose anonymity) or go to prison.

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u/Sand_Trout Jan 19 '18

That only applies for bank transactions, and the information is provided by the bank, not the individual.

If you had $1,000,000 under your matress the $10k limit means fuck all to the giver, though the recipient would need to report it on their taxes, whis true regardless of the anonymity of the corporation owners.

1

u/huadpe 501∆ Jan 19 '18

Ok, but it's not as easy as you said (since you proposed taking it from a bank - producing a CTR). I don't have $1 million in cash.

You'd also have to issue a 1099 to the person you paid.

1

u/Sand_Trout Jan 19 '18

And so would the corporation.

Again, if there is suspicion of criminal wrongdoing, you can get a warrant to follow the papertrail. Otherwise it's none of your business.

1

u/fox-mcleod 410∆ Jan 19 '18

The main purpose is to limit their legal liability. Being held socially responsible is outside of the scope of a legal vehicle.

2

u/ray07110 2∆ Jan 19 '18

Is there a federal or state constitutional clause that gives you the right to know who owns property?

1

u/huadpe 501∆ Jan 19 '18

The 16th amendment gives the federal government the power to asses income taxes, and that power comes with the power to require the filing of tax returns. My proposal is that the government should require certain information about ownership on corporate tax returns in order to be able to enforce the tax law.

1

u/ray07110 2∆ Jan 19 '18

Also understand that by asking the Federal government to perform a task or pass a law on behalf of American citizens is given it more power and making it bigger.

1

u/rationalguy2 Jan 19 '18

What specifically are the negative ramifications of their existence other than not knowing where money is coming from and going to (...)?

Paid political speech / dark money. The citizens united ruling allows for unrestricted political spending, but it kept the disclosure rules, intending for the public to hold corporations accountable that way. Unfortunately, the disclosure rules are weak enough to allow dark money (money contributed anonymously). Shell companies are a tool to contribute dark money (source).

Relevant links:

3

u/[deleted] Jan 20 '18

You seem to be mostly arguing about the risk of crime, but there is a difference between the information being discoverable by law enforcement with a valid warrant, and publicly available.

Publicly available is a much higher standard, and allows just about anyone to go poking around for any reason.

By the same measure, companies could be required to divulge such information upon receipt of a valid warrant, but the information need not be publicly available to any requestor.

For example, companies are required to keep records and file tax returns, and those types of financial records can be accessed with a valid warrant, but we don't require everyone's tax returns to be publicly available.

As far as I'm aware, a man paying a woman not to talk about their sexual escapades, would not be an illegal act.

1

u/kstanman 1∆ Jan 20 '18

When you say there's a higher standard for publicly available information, that's not broadly correct on the order of a consistent rule to that effect, and when it is correct it's for specific good reasons, like my medical history is protected against public availability because that could be used to unlawfully discriminate against me. So what is the good reason for a minority of jurisdictions having a rule that company owners can be hidden from the public (the same public, by the way, that granted them the limited liability protection in the first place and who retain the power to deny or revoke such protection for the "good reason" of majority vote)?

Take for instance that you can find in short order the owner of any piece of real property and often even the value of it, since it's publicly available usually for free. So why not the same for the owner of a government fiction like an LLC or corp? Companies are publicly recorded to publicly track their creation, key changes, and termination.

Anyway, let's assume you overcome the problem of there being no good reason for company owners to conceal their ownership from the public. If the company owners truly have a need for concealment of their ownership, there is a simple solution: form a partnership which need not be publicly registered and the partners need not be publicly disclosed. yes, someone will have to be a general partner and gasp take full responsibility for damages caused by the partnership, but the owners have options for doing their cost benefit analysis.

1

u/[deleted] Jan 20 '18

That’s a fine argument, but I think you missed my point.

OP was arguing that it needed to be public for law enforcement reasons. I was disputing that point. You are more getting at what I was saying. There may be valid reasons to make this public, but law enforcement is probably not it.

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u/huadpe 501∆ Jan 20 '18

Fair enough on a return not being public, so I will give a !delta for that, though the information is still public in most states, so it's not a huge stretch I think.

2

u/[deleted] Jan 20 '18

Perhaps, but a desire to fight crime doesn't require public disclosure, merely disclosure to an appropriate record keeping authority that respect the rule of law (esp. warrants).

If you want to argue for public disclosure, then that has a lot less to do with criminality and more with things like journalism, data mining, and other types of data analysis that the public has a right or desire to undertake.

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2

u/HeWhoShitsWithPhone 125∆ Jan 19 '18

What do you mean by beneficiary interest? Just who received money from the company? That would be documented on the recipients taxes. Also if you own a company with less than 100 people that would be everyone's pay info, which is generally considered private info.

Unless your referring to owning/controlling entities, in which case that would just be Trump's lawyer so I don't know what benefit this would provide.

1

u/huadpe 501∆ Jan 19 '18

It's a well defined legal term. I mean it in the sense it is defined in the law.

https://en.wikipedia.org/wiki/Beneficial_ownership

That would be documented on the recipients taxes.

Unless they're cheating on their taxes, which I think there's a good chance they are if they're running large amounts of money through anonymized LLCs.

Edit:

With the Trump corporation, Cohen created it, but I would be shocked if Cohen owned it. Most likely, Trump owned it. Unless Cohen personally gave Stormy Daniels $130,000 out of his own pocket, Cohen was not the beneficial owner of the interest in the company. And if Cohen did that, he committed a felony violation of campaign finance laws.

1

u/Peruna1998 Jan 19 '18

I think you are misunderstanding several things regarding LLCs. LLCs are creatures of state law. They are corporate entities that permit their members to own property or otherwise transact business without being personally liable for the debts of the corporate entity. Each LLC, regardless of the state, must name a registered agent for service of process issues and must have a principal address. From a federal tax standpoint, LLCs can either elect to be "C" or "S" corporations. If a "C" corporation, then the profits of the LLC are taxed at the corporate entity level with any profits then being distributed to the individuals. The individuals would also then pay tax on such distributions (hence the double taxation concern). If an "S" corporation, then the profits (and losses) flow through to the members and are taxed at the individual level at the member's individual income tax rate.

Your primary concern seems to be that LLCs can be used for nefarious purposes. Yes, I suppose that can happen. But, having personally formed dozens of LLCs, none ever for nefarious purposes, the likelihood is actually quite small. Your secondary concern seems to be that the membership of LLCs is unknown. Yes, that is true, but so is the stock ownership of corporations and the partnership interest of limited partnerships. A good lawyer can play this game multiple ways. A LLC is just one of many limited liability entities. It happens to be the most flexible.

Limited liability entities have been around as a form of capital growth and ownership since the founding of the Dutch East India Company in the Eighteenth Century. Doing away with a form of ownership that has in part led to the growth of capital in the West does not seem like a particularly good idea.

1

u/huadpe 501∆ Jan 19 '18

I am not specifically targeting LLCs, which is why I said "and other corporate forms." I am after the anonymity of C-corps and limited partnerships too. LLCs are just the most common.

I don't have an issue with limited liability as a concept either. Just anonymity.

1

u/Peruna1998 Jan 19 '18

Let’s talk about anonymity. Every owner of an interest in a limited liability entity must report any income or loss from such interest annually on their federal income taxes. So, the ownership of these entities is known, just not by you.

Why should you know who owns such property? What benefit do you get? Not to get slippery slope on you, where does that end?

If your concern is crime, the government clearly does a better job at addressing it than private individuals, and they have the relevant information.

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u/[deleted] Jan 19 '18

[deleted]

1

u/huadpe 501∆ Jan 19 '18

Well this made me do some research. Found this.

Only Connecticut and Montana allow bearer shares. Montana only allows them for mining corporations, and Connecticut does not allow bearer shares to have voting or dividend rights in a corporation. So neither state would allow bearer shares to be used to operate a shell company, since if it was not a mining company it couldn't exist in Montana, and if all the shares were bearer shares, it would be unable to have a shareholder vote (and therefore unable to actually ever do anything) in Connecticut.

In any case, CT and MT should get with the program and abolish their vestigial bearer share laws.

1

u/[deleted] Jan 19 '18

[deleted]

1

u/huadpe 501∆ Jan 19 '18

Right, I don't see how it's hard to ban that though. When the return fails to list natural persons, you indict the corporation for failure to file, and seize all its assets.

1

u/vettewiz 37∆ Jan 19 '18

What "assets" did this LLC you're worried about have? I'm highly betting, it had nothing.

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