In this Article

NEW DEVELOPMENT
Overview of the Corporate Transparency Act
What kinds of companies are reporting companies?
What information must be reported?
Who are “beneficial owners”?
Are there any exceptions?
Is there only one filing required?
What are the penalties?
What should you do now?
How can we assist you?
Resources

NEW DEVELOPMENT: HR 5119 passed December 12, 2023; Awaiting Senate action

The U.S. House of Representatives passed HR 5119, the Protect Small Business and Prevent Illicit Financial Activity Act, by an overwhelming vote of 420-1 on December 12, 2023. If taken up in the Senate and passed as is, the bill would make certain important changes to the current reporting deadlines.

• For businesses existing before January 1, 2024, the deadline for making an initial report would be extended to January 1, 2026.
• For businesses created on or after January 1, 2024, the deadline for making an initial report would be extended to 90 days from formation. This 90-day deadline would also apply to businesses created on or after January 1, 2025. (An announcement from FinCEN on November 29, 2023 extended the deadline for companies created in 2024 to 90 days but had left the original 30-day deadline in place for companies created after 2024.)
• The deadline for updated reports and changes would be extended to 90 days from the date of the change, instead of 30 days.

In addition, the bill contains a provision that, while somewhat unclear, may be aimed at preventing FinCEN from acting to allow reports “relating to the inability of the reporting company to obtain or identify information in the alternative to filing a report required under this subsection.” This proposed new section 31 USC 5336(b)(1)(H) may prevent FinCEN from providing any relief to reporting companies who in good faith attempt to obtain the required information from beneficial owners. Additional clarity as to the government’s intent would be welcome; however, for attorneys advising clients about the Corporate Transparency Act, careful consideration may be required to determine how the company will force compliance with its reporting requirements amongst its members, partners and associates if there will be no relief available to a reporting company that attempts but is unsuccessful at gathering information regarding beneficial owners.

Overview of the Corporate Transparency Act

The Corporate Transparency Act (the “CTA”), set to go into effect on January 1, 2024, will impose significant new reporting requirements on many small businesses. It has a broad reach and raises the potential for significant civil and criminal penalties. Immediate action may be required before the end of 2023 to lessen or delay the impact of the Corporate Transparency should it apply to you.

The Corporate Transparency Act was enacted by Congress as part of its on-going effort to combat terrorism, organized crime, and money-laundering. The United States is joining other nations that have already adopted similar reporting requirements to make it more difficult to hide criminal activity from law enforcement by creating shell companies. The CTA requires certain entities (called “reporting companies”) to report information about the companies themselves, their beneficial owners (more on who these persons are below), and company applicants (the persons who signed the formation documents for the entity). It is vital to understand that the law is quite broad and will apply to a vast number of companies created for legitimate purposes, with severe penalties for not accurately and timely reporting required information to the government through an online reporting system created by Financial Crimes Enforcement Network (“FinCEN”), a department of the United States Treasury.

The reporting requirements for entities existing as of December 31, 2023 are delayed until January 1, 2025; however, entities formed on or after January 1, 2024 will be subject to these rules and required to report under a tighter deadline. Under a revised rule issued November 29, 2023, FinCEN extended the deadline for entities created in 2024 ONLY to no later than 90 days after the entity is formed, instead of the original 30 days after the entity is formed. Even with an extension in 2024, this may be a very short time to gather all the required information, so it will be important for those who are forming entities beginning in 2024 to start gathering the required information well before the entity is formed. (In fact, consideration should be given to forming entities otherwise planned for early 2024 in 2023 in order to delay reporting until January 1, 2025.) While we note that several professional organizations have petitioned Congress to delay implementation of the CTA, no one should defer preparation for the CTA in hopes of a delay being granted.

What kinds of companies are reporting companies?

While there are both domestic and foreign reporting companies, this letter will focus on domestic reporting companies. Domestic reporting companies include corporations (including Subchapter S corporations), limited liability companies, and other types of entities that are required to file with the state’s secretary of state (or an American tribal jurisdiction) in order to be formed (e.g., limited partnerships). Many people own interests in such entities, whether they are active businesses or they were specially created to hold particular assets or for particular estate planning purposes. It is common for interests in these entities to be held through trusts, or even other entities that are themselves reporting companies. All reporting companies in the chain of ownership or control must individually comply with the reporting requirements.

What information must be reported?

Each reporting company must file its initial report online with FinCEN on the form that will be accessible from the FinCEN website and which the reporting company must certify to be true, accurate and complete. The initial report must include the full legal name and any trade or “doing business as name” for the reporting company, a complete address of the reporting company, including street address of the principal place of business (no P.O. Box or the address of the attorney who formed the entity), state of formation, and the Taxpayer Identification Number for the reporting company. In addition, the report must include the following information for each beneficial owner and each company applicant: full legal name, date of birth, complete current residential address, a unique identifying number from certain official governmental identification documents (e.g., non-expired passport or government issued driver’s license), and a copy the document used.

Who are “beneficial owners”?

For purposes of the CTA, beneficial owners are not just the persons many would consider to be owners of an entity. A beneficial owner includes any individual who, directly or indirectly, either (i) exercises “substantial control” over a reporting company or (ii) owns or controls at least 25 percent of the ownership interests of such reporting company. There are a lot of key phrases in this definition, including “directly or indirectly,” “substantial control,” “owns or controls,” and “ownership interests.” Each of them is defined in the final FinCEN rule for Beneficial Ownership Information Reporting Requirements (the “FinCEN rule”) and generally results in a very broad series of rules intended to catch as many people as possible who could potentially influence the operation of the entity.

“Substantial control” over a reporting company can include a wide range of things, including (i) serving as a senior officer of the reporting company; (ii) having authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); and (iii) having substantial influence over important decisions made by the reporting company (which is further defined in the FinCEN rule).

In addition to direct control over the reporting company, an individual can exercise substantial control indirectly through a number of arrangements and relationships set forth in the FinCEN rule. It is important to note that a person acting as trustee of a trust may have direct or indirect control of an entity owned by the trust.

Thus, you can see that there are a number of ways in which a person might have direct or indirect control over substantial decisions and operations of a reporting company, and that person would then be required to report as a beneficial owner.

“Ownership interests” include not only equity and stock instruments (and other similar arrangements), regardless of whether they are transferable or confer voting rights, but also a broad array of other interests, rights, and other arrangements set forth in the FinCEN rule.

As with direct and indirect methods of having substantial control over a reporting company, an individual can have direct or indirect ownership of a reporting company. Direct ownership of an interest in 25% or more of a reporting company is fairly easily understood. However, beneficial owners also include those who “control” ownership interests in a wide manner of ways, including holding the interest as a joint owner, through an individual who acts as agent or nominee of the beneficial owner, through ownership or control of intermediary entities, or through a trust.

If a trust holds an ownership interest, the FinCEN rule provides that the beneficial owner is the trustee of the trust or other individual “with the authority to dispose of trust assets,” which may include a power of appointment. The trustee of a trust that holds a 25% ownership interest in a reporting company seems an obvious beneficial owner. But in addition to the trustee, the term also includes (a) a beneficiary who (i) is the sole permissible recipient of income and principal from the trust or (ii) has the right to withdraw or to demand a distribution of substantially all of the assets from the trust; and (b) a grantor who has the right to revoke the trust or otherwise withdraw the assets of the trust. These provisions could implicate a number of individuals who hold beneficial interests in the trust, and also include others associated with the trust, such as a trust protector, depending on the powers granted to these individuals under the trust agreement or applicable law. For example, a common planning technique for irrevocable trusts is to give the grantor (i.e., the person who created the trust) the power to substitute assets. Although not clear, this might mean that a grantor with such a power has the power to “withdraw” the assets of the trust and is therefore a beneficial owner. Other beneficiaries of trusts may have the power to withdraw assets via what are commonly known as “Crummey” powers or powers of appointment and, depending on the circumstances of the trust, they too may be deemed to be beneficial owners. Given the wide array of powers that may spread throughout a trust instrument to achieve specific estate and gift tax planning goals, a reporting company that has trusts in the ownership or control structure will need to plan ahead to first determine which individuals might be deemed to be beneficial owners of the entity as a result of their interests in or powers over the trust, and second to gather all the information which may need to be reported on those individuals.

Are there any exceptions?

There are exceptions to the reporting requirements of the CTA, notably for non-profits (but not including an entity owned by the non-profit), banks, and large companies with more than 20 employees and gross receipts in excess of $5 million as shown on an income tax return filed with the Internal Revenue Service the prior year. These types of entities are generally subject to sufficient regulation that Congress exempted them from the new CTA requirements. In addition, if a minor is a beneficial owner, the minor’s parents’ information may be reported instead of the minor child’s information.

Is there only one filing required?

For reporting companies in existence prior to January 1, 2024, an initial filing is required no later than January 1, 2025. However, for any reporting company created on or after January 1, 2024 and through December 31, 2024, the initial filing is due no later than 90 days after the company’s formation; companies formed thereafter have initial filings due no later than 30 days after the company’s formation. Updated reports are required within 30 days of any change in the reportable information of any of the beneficial owners or the identities of the beneficial owners. For instance, if a reporting company is wholly owned by A and A moves, then the reporting company must file an updated report within 30 days of A’s move. If A marries (or divorces) resulting in a name change, then an updated report must be filed within 30 days of the name change. There are special rules regarding when updated reports must be filed if A dies and A’s interest in or control over the reporting company is transferable at death.

There are many unanswered questions as to what other events may constitute a change that triggers a requirement to file an updated report. For instance, what if the passport used for the unique identifying number of a beneficial owner expires and a new one is not issued? Does a new unique identifying number from a different source, such as a driver’s license, and a copy of such license, now need to be filed? Be aware that the revised reporting rule does NOT extend the filing deadlines for changes – the extension is only available for the initial report.

For individuals who are beneficial owners, it is possible to obtain a FinCEN Identifier (a confidential number similar to a social security number) that can be given to the reporting company. The reporting company would then file its report using the beneficial owner’s FinCEN Identifier. To obtain a FinCEN Identifier, an individual provides FinCEN with the information required to be collected under the CTA and then the individual can supply this FinCEN Identifier to any reporting company requesting information for CTA reporting compliance purposes. However, the individual will be responsible for updating FinCEN with any reportable changes within 30 days of any such change. As companies begin to grapple with their reporting requirements under the CTA, it may not be unusual for them to require that each beneficial owner obtain a FinCEN Identifier because then the responsibility for reporting changes falls on the individual who experiences the change rather than on the reporting company, which may not know that a change has occurred.

What are the penalties?

The penalties for willfully failing to report complete or updated beneficial ownership information to FinCEN or willfully providing or attempting to provide false or fraudulent beneficial ownership information are substantial. There are civil and criminal penalties for violations of up to $500 for each day that the violation continues or has not been remedied, fines up to $10,000, and up to 2 years imprisonment.

What should you do now?

There are steps you should take now to minimize or delay any potential CTA filing requirements.

First, if you own interests in old entities that still are in existence but no longer serve a purpose, serious consideration should be given to unwinding those entities prior to December 31, 2023. We would be happy to assist you with this and to discuss with you the pros and cons of unwinding any particular entity. If the entity is no longer in existence as of January 1, 2024, there will be no reporting requirements for it under the CTA.

Second, if you are considering creating a new entity and can reasonably do so, you should consider creating that entity prior to December 31, 2023. This step will allow you additional time to complete the necessary due diligence for CTA reporting compliance because the initial report will not be due until January 1, 2025.

In addition, you can take steps to ensure that to the extent that you may be a beneficial owner, or a person responsible for making sure a reporting company is in compliance with this new law, you have all the information necessary for timely compliance. For example:

• If you have ownership interests in any company that may be subject to the CTA reporting requirements, inquire with the company what steps they will be taking to ensure timely compliance with the law.
• If you are the trustee of a trust that holds an interest in a reporting company, and if the trust may hold a 25% interest in or control over the reporting company, you should consider having an advisor review the trust instrument to determine who may hold powers that could make them a beneficial owner and begin to gather the necessary information.
• If you believe that you may be a beneficial owner of one or more reporting companies, whether you are considered a beneficial owner because of direct ownership or control of the company or via an indirect interest, you may wish to apply to FinCEN for a FinCEN Identifier.
• It is uncertain what should be reported if a reporting company has no Tax Identification number (such as a single member LLC) because it uses an individual’s social security number. Because of this uncertainty, it may make sense to apply for Tax ID now.

How can we assist you?

If you would like to engage us to work with you on any CTA compliance issues, please let us know. We are not working on CTA compliance for clients unless we are specifically engaged to do so.

Related to the new reporting requirements is a new wave of scams attempting to get the sensitive information that you may be required to report to FinCEN under the new law. FinCEN does NOT send unsolicited requests for information, and instead uses the portal system for reporting. Do not respond to fraudulent messages and do not click on any links or scan any QR codes within such messages.

This Article is based upon resources from Interactive Legal Services.

RESOURCES

Financial Crimes Enforcement Network: (FinCEN): https://www.fincen.gov/

Beneficial Ownership Information: https://www.fincen.gov/boi

Corporate Transparency Act: https://www.congress.gov/116/bills/hr6395/BILLS-116hr6395enr.pdf

Beneficial Ownership Reporting Requirements: https://www.govinfo.gov/app/details/USCODE-2022-title31/USCODE-2022-title31-subtitleIV-chap53-subchapII-sec5336/context

Beneficial Ownership Reporting Rule Fact Sheet: https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet

Beneficial Ownership Information Reporting Requirements: https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements

Use of FinCEN Identifiers for Reporting Beneficial Ownership: https://www.federalregister.gov/documents/2023/11/08/2023-24559/use-of-fincen-identifiers-for-reporting-beneficial-ownership-information-of-entities

FinCEN Small Entity Compliance Guide: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf

FinCEN Beneficial Ownership Information Reporting Frequently Asked Questions: https://www.fincen.gov/boi-faqs#B_3