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Understanding Entity Disclosure Requirements Under DCRA’s Amended Entity Filing Law

March 13, 2020

By: Hunter M. Haines

Are you the owner of a business entity[1] in the District of Columbia (District), contemplating starting a business in the District or operating a foreign business under the District’s jurisdiction? If so, you are likely to encounter an unexpected change when filing your formation documents or your next Department of Consumer and Regulatory Affairs (DCRA) biennial report. As of January 1, 2020, new provisions to the DCRA’s Omnibus Amendment Act of  2018 (the Act) took effect requiring new entities, existing entities and foreign (non-District) entities doing business in the District to disclose the names and addresses of each “Person” who directly or indirectly has:

    • An ownership stake exceeding 10%;
    • The ability to control the financial or operational decisions of the entity; or
    • The ability to direct the day-to-day operations of such entity.

The original legislative intent of the Act was to stop landlords with deteriorating properties from hiding behind the District’s previous permissive disclosure law. The new version of the Act, however, has expanded the application of such disclosure requirements to cover all business entities, not just residential real estate companies. This change has raised significant concerns and questions amongst the District’s business community. Many business owners are fearful the Act abridges a touchstone feature and benefit of modern business corporations and limited liability companies: the shield of liability to protect a shareholder’s personal assets. To raise the concern level even higher, the newly required disclosures will be made publicly available through fee‑based Freedom of Information Act requests, although DCRA will not list such information directly on the DCRA website.[2]

It is hard to predict at this point how aggressively the District will interpret and enforce this new disclosure requirement. The broadest interpretation of the Act suggests one must disclose the “ownership” or “control” of a business entity back to the human beings who are the “top-level” shareholders and decision makers. On the other hand, consider that the term “Person” as used in the Act means an “individual, estate, business or nonprofit entity, public corporation, government or governmental subdivision, agency, or instrumentality, or any other legal entity.” As such, one could interpret the Act more narrowly as requiring disclosure only of the “Person” who has immediate and direct “ownership” or “control,” and that such “Person” could be another entity that is merely one level up.

 

There is no definitive answer to the question of whether the District—or any state—has the power to compel the disclosure of a foreign entity’s key owners and decision makers. The District, therefore, may not be able to compel a foreign entity to reveal the identity of its ultimate “top-level” shareholders and decision makers, when such disclosure is not required per se by the laws of that foreign jurisdiction. The District could, however, take the position that a company may not conduct business in the District unless that company first complies with the disclosure requirements under the new Act.

 

If you have no alternatives to conducting business in the District, then you will need to determine how best to comply with the Act. In the event you are not concerned with the potential breadth of the new disclosure requirements under the Act, you can choose to disclose the identity of every “Person” who falls within the criteria listed above up to the “top-level” shareholders and decision makers.  

 

On the other hand, in the more likely event that you do have concerns and would prefer to limit disclosure as much as possible without violating the Act, you will need to consult with your attorney about the advantages and risks of providing less disclosure than is described in the preceding sentence. One possible approach would be to hold all ownership and control of the filing entity through a foreign (non-District) entity (e.g., a Maryland limited liability company), and then disclose only the identity of that foreign entity in your filings. Given the lack of legislative guidance and judicial precedent on this point, it remains less than clear whether this approach fully satisfies the Act’s requirements. As such, the District could require later that the filing entity provide more extensive disclosure of the identity of the “Persons” having ultimate ownership and control within the three criteria listed above.

 

[1] “Entity” means: (i) A business corporation; (ii) A nonprofit corporation; (iii) A general partnership, including a limited liability partnership; (iv) A limited partnership, including a limited liability limited partnership; (v) A limited liability company; (vi) A general cooperative association; (vii) A limited cooperative association; (viii) An unincorporated nonprofit association; (ix) A statutory trust, business trust, or common-law business trust; or (x) Any other person that has a legal existence separate from any interest holder of that person or that has the power to acquire an interest in real property in its own name. DC ST § 29-101.02(10)(A). 

[2] Per comments from the DCRA on February 19, 2020.


DISCLAIMER: The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or a member of the Shulman Rogers Business and Financial Services Group.