Notice of Beneficial Ownership Information Reporting Requirements

• The Corporate Transparency Act (“CTA”)^[1]  will require certain U.S. legal entities as well as foreign entities registered to do business in the U.S. to report information about the entity itself, its beneficial owners, and the applicant who formed it.

• The reporting requirements of the CTA will begin January 1, 2024.  If your entity was created before January 1, 2024, you will have until January 1, 2025 to report the required information on the FinCEN registry. If you form an entity during calendar year 2024, you will have 90 days to report.  From and after January 1, 2025, you must report within 30 days of formation.

• FinCEN recently published a Small Entity Compliance Guide that is helpful in understanding who must report information as a beneficial owner. 

On January 1, 2021, Congress passed the National Defense Authorization Act (“NDAA”) which included the Corporate Transparency Act (“CTA”).  Through the CTA, the US Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) was tasked with establishing a registry of beneficial owners for entities defined as “reporting companies.” 

On September 29, 2022, FinCEN issued its final rule (the “Rule”) implementing the CTA’s beneficial ownership reporting provisions.  The goal of the CTA and the Rule is to help prevent bad actors from forming entities in the U.S. for the purposes of money laundering, terrorist financing, corruption, tax fraud, drug and sex trafficking, and other illicit activities. In principle, this sounds like a goal we should all support.  In practice, it will mean more work for the many of us who have or participate in any kind of entity that is created by filing a document with a state secretary of state’s office.

A few definitions first:

“Reporting companies” include limited partnerships, limited liability companies, corporations, or any other type of entity that is created by filing a document with the Secretary of State. This includes foreign companies doing business in the U.S. There are 23 entity types that are exempt from reporting under the CTA. Generally, companies that are already subject to reporting requirements are exempt. This would include public companies registered with the Securities and Exchange Commission, public utilities, investment companies and advisors, banks, insurance companies, state licensed insurance producers, and tax-exempt entities, among others. Also exempt from meeting the requirements of the CTA are “large operating companies” and “inactive entities.” For a full list of exempt entities, see 31 C.F.R. § 1010.380(c)(2).

“Beneficial owners” means 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 a reporting company. 

“Substantial control” includes any individual authorized to make important decisions on the entity’s behalf. This includes the board of directors, board of managers, officers, etc. For a trust who may be a member or owner of a reporting company, the CTA identifies the following as potential beneficial owners of the trust: (i) a trustee, or any other individual, with authority to dispose of the trust assets; (ii) a beneficiary who is the sole permissible recipient of income from the trust or who has the right to demand distribution or withdraw substantially all of the assets from the trust; and (iii) a grantor or settlor who has the right to revoke the trust or withdraw the assets from the trust.

Effective January 1, 2024, all “reporting companies” created prior to January 1, 2024 will have until January 1, 2025 to file their beneficial ownership information with the FinCEN registry.  On November 29, 2023, FinCEN issued its final rule extending the deadline for reporting companies created between January 1, 2024 and December 31, 2024 to file their beneficial ownership information with the FinCEN registry from 30 days to 90 days from the date of filing with the Secretary of State. Reporting companies formed from and after January 1, 2025 will have 30 days to file the beneficial ownership information with FinCEN.

Reporting companies have 30 days to report changes to information previously filed and must correct inaccurate information within 30 days of becoming aware of the inaccuracy. 

For companies created after January 1, 2024, in addition to the beneficial owners, the “applicant” will be required to submit its information to FinCEN.  The “applicant” is the person that does the filing or who directs and/or controls the filing.  The “applicant” may very well be the lawyer performing the filing. 

A reporting company must register with FinCEN providing the following information:

1. Full legal name;
2. Trade name, if any;
3. Business street address;
4. State of formation;
5. IRS Tax ID or Employer Identification Number.

For each of the reporting company’s beneficial owners (and the applicant, as applicable), the following information must be provided to FinCEN:^[2] 

1. Full Legal Name;
2. Date of Birth;
3. Street Address (no P.O. Boxes);
4. A unique identifying number from an unexpired passport, state driver’s license, or other identification issued by a state, local government, or Indian Tribe; and
5. A copy of the document showing the unique identifying number.

FinCEN will be required to store the collected information in a secure database and the information will only be available by request from (i) a federal law enforcement agency; (ii) a state, local, or tribal law enforcement agency (with a court order); (iii) a federal agency on behalf of a foreign country (under an international agreement); (iv) financial institutions for customer due diligence purposes (with the consent of the reporting company).

If a company fails to comply with the reporting requirements of the CTA, such company will be subject to civil penalties of $500 for each day that a violation continues, fines of up to $10,000, and imprisonment for up to two years for willful or fraudulent violations.  If a beneficial owner becomes aware of a mistake in the information provided to the reporting company and reported to FinCEN, the CTA contains a safe harbor allowing a reporting company to correct the beneficial ownership information within 14 calendar days after the date the reporting company becomes aware of the inaccuracy if the beneficial owner (i) was not trying to evade the reporting requirement; (ii) had no knowledge of the inaccuracy; and (iii) corrects the inaccuracy within 90 calendar days after the report is submitted.

At this time, we advise you to begin developing a full list of entities in which you either own an interest of 25% or more (individually, through a revocable trust, or through another LLC) or have substantial control by serving as a board member, manager, officer, or some contractual arrangement.  You should also begin assembling a list of all beneficial owners of each entity and contact each such beneficial owner to begin gathering the information required to be provided to FinCEN.  This could include requesting a copy of a valid driver’s license, passport or state identification.  If any such documentation expires before January 1, 2024, it will need to be renewed before reporting to FinCEN.  Additionally, since the information required to be reported may constitute personal information protected by various and ever-changing state and federal privacy laws, you should consider, at a minimum: (i) obtaining and documenting consent from beneficial owners for using and processing their information; and (ii) implementing and maintaining reasonable technical, administrative, and physical security measures to protect information (especially the copies of the identifying documents) from unauthorized access.

FinCEN released a Small Business Compliance Guide and answers frequently asked questions at: https://www.fincen.gov/boi/small-business-resources.

You can find more information about the requirements of the CTA at https://www.fincen.gov/boi.

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[1] “Corporate Transparency Act” or “CTA” means the law appearing at 31 U.S.C. § 5336 and the rules and regulations implementing the reporting provisions thereof at 31 C.F.R. § 1010.380.

[2] For those clients who are beneficial owners of many “reporting companies,” you will be able to obtain a FinCen Identifier to comply with the reporting requirements under the CTA.