On the Frontier of an Incorporation Crackdown?

An article in the most recent issue of The Economist highlights concerns facing the incorporation-services industry and discusses potential regulatory changes some states may soon enact. Unlike many countries, in the United States, company incorporation is regulated by the states. In California, the Secretary of State’s office is the responsible agency. There is no federal registry, and thus requirements vary. As a general rule (and one potential cause for concern), the only requirements to incorporate a new entity are a unique business name, a registered agent’s contact information, and an incorporator. There is no need to provide any sort of financial data such as past earnings or bank account statements. There are some legitimate reasons for this simple, minimal process. States obviously have an incentive in creating a business-friendly environment (although in practice, this often doesn’t seem to be the case), and an easy, efficient incorporation process should result in higher job creation and tax revenue. Also, there are
good reasons why a “shell” entity might be useful, such as to park assets during complex merger negotiations. The downside is that it can be difficult or perhaps impossible to determine who, or what entity, is behind the corporate name. This increases the potential for fraud, and can make damages recovery difficult. In general, there are few requirements for either the agent or the incorporator. The agent need only have an address within the state (which also serves as the corporation’s initial contact address), and the incorporator need only be an adult resident of that state. The agent and incorporator can even be the same person. Some states are considering imposing a legal duty upon registered agents to report “suspicious activity” from their corporate clients, while others may require would-be corporations to provide some sort of financial data, such as the location of bank accounts. There are also efforts to limit incorporation agents to those pre-approved by the state (which itself creates new worries, such as a possible cartel situation and questions regarding licensing standards). Whatever new regulations this industry might face, corporate clients should conduct basic due diligence as far as registered agent selection (as an aside, Simas & Associates, Ltd. serves many clients in this capacity). Also, get an early start. The current wait-time in California is a whopping 39 business days (not surprisingly, this process can be expedited by paying an equally whopping $350 convenience fee).