Thursday, September 14, 2006

What Have I Wrought?

Beginning in the late 80's, I participated in efforts to promote LLCs. As part of that effort, I chaired the committee that drafted Maryland's LLC Act.

The Maryland LLC Act is among the most opaque in the nation with respect to the identities of the LLC's owners. There is no requirement that there be a public record in this state of the names of either the owners or actual operators of an LLC.

While I continue to favor the general principal of opacity with respect to LLCs, I also favor transparency in campaign contributions and campaign contribution limits. An article in The Annapolis Capital shows that these goals may be at war with each other. According to the article:
Developers are pouring tens of thousands of dollars into the county executive race by using a loophole in Maryland campaign law that allows them to avoid contribution limits while donating virtually anonymously, an analysis by The Capital shows. In a race that's been dominated by concerns about the scale and pace of growth, voters in Tuesday's primary election will have a hard time figuring out just who's been bankrolling many candidates.

The analysis of campaign finance reports filed with the state Board of Elections found at least 84 instances of developers using Limited Liability Companies to give more than $40,000 to county executive candidates.

A legal hybrid between a corporation and a partnership, LLCs are often formed by developers when starting a new project.

It's very hard to track their owners because the state doesn't require LLCs to disclose ownership. And many LLCs have vague names, such as Owings Mills III LLC and Sigma 45 LLC.

LLCs have to be registered with the state. But information on file with the state Department of Assessments and Taxation often contains few clues about LLC owners, instead listing a "resident agent" who may have littleor nothing to do with the ownership.

* * * * *

Under state law, political donors can give up to $4,000 to an individual candidate or $10,000 to all candidates or fund-raising entities - political action committees, for example - over a four-year election cycle.

Business accounts and LLCs are subject to the same limits. So business or LLC owners can give up to $10,000 over a four-year election cycle in their own names, plus another $10,000 in their companies' names.

As a result, a developer can give $10,000, then give another $10,000 through his LLC and not have it count against his limit. He can do the same with his second LLC, his third and so on.
The article mentions a bill, HB 585, that was introduced in last year's General Assembly session that passed the House but died in the Senate. The bill, if enacted, would have aggregated campaign contributions by affiliated entities.

Assuming that one is in favor of campaign finance limits, HB 585 makes sense. It is narrowly focused on the issue of campaign finance and does not unnecessarily destroy the default rule of the Maryland LLC Act that LLCs be able to conduct their affairs in private.

Lest there be any confusion, the Maryland LLC Act merely does not mandate automatic public disclosure. There is nothing in the statute that blocks disclosure where there is a compelling reason for disclosure. Thus, discovery in the course of litigation can be used to compel disclosure of an LLC's ownership structure. I believe that limiting campaign contributions provides another compelling reason to mandate disclosure, a goal that can be reached by the limited means suggested in last year's HB 585.

Hat Tip: Unincorporated Business Law Prof.

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