New Federal Reporting Requirements of Company Ownership

Read part one of this article series here.

Historically, information about small to mid-sized businesses has been within the exclusive province of state governments. As such, business entities have been able to maintain complete or some degree of privacy regarding the ownership and control of their corporations, limited liability companies, and limited partnerships.[1] However, this cherished degree of privacy is about to change, as the Corporate Transparency Act’s (CTA) implementing regulations require both old and new businesses to disclose information about persons forming new entities, owners of businesses, and those in control of businesses to the U.S. Government.[2]

On January 1, 2021, Congress enacted the CTA as part of the National Defense Authorization Act.  The intended effect of the CTA is to require certain types of domestic and foreign entities, called “Reporting Companies” to file certain beneficial ownership information (“BOI”) with the Financial Crimes Enforcement Network of the Treasury Department (“FinCEN”)[3].  On September 30, 2022, FinCEN promulgated the final regulations implementing the CTA.  The regulations specifically establish who must file reports with FinCEN, when they must file, and what information is to be included in the reports.

In summary, the CTA and its regulations require all “Reporting Companies” to report information on (i) the Reporting Company, (ii) all “Beneficial Owners” of the Reporting Company, and (iii) the “Company Applicant” who filed the document creating the Domestic Reporting Company or the document registering the Foreign Reporting Company.  The effective date of the regulations, including the reporting requirements, is January 1, 2024.

Reporting Companies and Exempt Entities

A Reporting Company is any corporation, limited liability company or “other similar entity” (including, but not limited to, limited partnerships, limited liability partnerships, and business trusts) (i) created by a filing with a federal, state or tribal governmental entity (a “Domestic Reporting Company”) and (ii) any such entity formed in a foreign country that is registered to do business in the U.S. by a filing with a secretary of state or similar office under the law of a state or an Indian Tribe (a “Foreign Reporting Company”).

The CTA and its regulations list 23 categories of entities that are exempt from the definition of a Reporting Company. Generally, the exempt entities are entities that are already subject to state or federal supervision and reporting including, public companies issuing securities, licensed securities brokers and dealers, banks and credit unions, insurance companies, governmental agencies, venture-capital fund advisors, public utilities, pooled investment vehicles (“Pooled Investment Companies”), accounting firms and specified tax-exempt entities and entities assisting an exempted tax-exempt entity (“Tax-Exempt Assisting Entity”), and entities registered and subject to reporting requirements under the Securities Exchange Act of 1934, the Investment Advisors Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, and the Paying, Clearing, or the Settlement Supervision Act of 2010.  Subsidiaries of each of the forgoing, except for subsidiaries of Pooled Investment Companies and Tax-Exempt Assisting Entities, whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more exempt entitles, are also exempt.  “Large Operating Companies” are also exempt from the CTA reporting requirements.  Large Operating Companies are those that employ 20 or more full-time employees in the U.S., have an operating presence at a physical office in the U.S., and filed a federal income tax return for the prior year, reporting more than $5million in gross receipts or sales in the U.S.  Finally, the regulations exempt “inactive businesses” which are defined as those that were in existence on or before January 1, 2020, are not actively engaged in business, are not owned by a foreign person, has had no change in ownership in the last 12 months, has not sent or received funds in an amount greater than $1000 in the last 12 months, and does not otherwise hold any assets. Of note, if an inactive business becomes “active,” then the newly active business has 30 days to file an initial report with FinCEN.

Reporting Companies in existence prior to the Effective Date and Reporting Companies formed on and after the Effective Date are required to file with FinCEN, the only difference is the deadline for making the initial filing with FinCEN.  The vast majority of existing entities and entities formed after the effective date will be considered a Reporting Company and required to file with FinCEN[4].

Beneficial Owners

A Beneficial Owner is anyone who (i) exercises “substantial control” over the Reporting Company or (ii) owns or controls 25% or more of the ownership interest in the Reporting Company.  An individual has “substantial control” if the individual (i) serves as a senior officer of the Reporting Company, (ii) has the ability to appoint or remove any senior officer or a majority of the board of directors (or similar body) of the Reporting Company, (iii) has the ability to direct, decide or substantially influence important matters for the Reporting Company or (iv) has any other form of substantial control of the Reporting Company. Substantial control can be exercised either directly or indirectly. Substantial control can be exercised through board representation, control of a majority of the voting power, rights associated with a financing arrangement, control over one or more intermediary entities, financial or business relationships or other contract or arrangement.

The regulations broadly define an individual’s “ownership interest” to include (i) traditional stock ownership and membership and partner interests, (ii) capital or profits interests, (iii) convertible instruments, and (iv) put, call or other option rights.  It does not matter whether the interests are vested or not.  The ownership interest is determined at the present time and any options or similar interests are treated as if exercised.

Under the regulations, Beneficial Owners do not include (i) minor children(of note, however, the parent or guardian is considered a beneficial owner), (ii) nominees, intermediaries, custodians and agents, but the principal is considered a beneficial owner, (iii) individuals (excluding senior officers) acting solely as employees without an economic interest, (iv) individuals whose sole interest is a right of inheritance, and (v) creditors, unless they meet the definition of a beneficial owner under another definition.

Company Applicant

A Company Applicant is any individual who files the document that creates the Domestic Reporting Company or registers a Foreign Reporting Company in the U.S. This includes not only the individual who actually files the document, but also any individual who directs or controls the filing of such document.[5]

Beneficial Owner Information (“BOI”) to be Reported

The initial report submitted by a Reporting Company must include the following information[6]:

1. For the Reporting Company:

a. The full legal name;

b. All trade names or “doing business as” names whether or not registered;

c. Street address of the company’s principal place of business or, if it does not have a principal place of business, the primary business location;

d. The jurisdiction where it is formed or, for a Foreign Reporting Company, where registered; and

e. The IRS Taxpayer Identification Number (“TIN”), including an Employer Identification Number (“EIN”) for the Reporting Company.

2. For each Beneficial Owner[7] and Company Applicant for each Reporting Company created or registered on or after January 1, 2024:

a. Full legal name;

b. Date of birth;

c. The residential street address of the Beneficial Owner and the business address of the Company Applicant;

d. The unique identifying number from one of the following: a non-expired U.S. Passport or passport issued by a foreign government, a non-expired identification document issued by a state, local government or Indian Tribe, or a non-expired State driver’s license; and

e. An image of the document from which the unique identifying number is obtained.

Reporting

The due date for the initial report filed by a Reporting Company depends on when the Reporting Company was created or registered.  Reporting Companies in existence or registered before the Effective Date are required to file their initial report with FinCEN within one year from the Effective Date or on or before December 31, 2024.  Reporting Companies created or first registered on or after the Effective Date are required to file their initial report with FinCEN within in 30 days of creation or first registration.

If a Reporting Company filed information that is inaccurate, a corrected report must be filed within 30 days of the date the Reporting Company knew or should have known that the information was inaccurate.  Similarly, if there is a change in the information previously reported to FinCEN, the Reporting Company must file an updated report within 30 days.  Thus, whenever there is a change in the information regarding a Beneficial Owner or there is a change in the Beneficial Owners of a Reporting Company, such as a change of a Senior Officer of the Company, an updated report must be submitted within 30 days of the change.

As required by the CTA, FinCEN is developing the Beneficial Ownership Secure System (“BOSS”) that will receive, store, and maintain the BOI.   Reports will be submitted electronically via an online interface and must be submitted by a user authorized by FinCEN to use BOSS.  At the present time there is no procedure for paper filing of reports.

Failure to File

Failure to timely file a report required by the CTA and the regulations may result in both civil and criminal penalties.  Under the CTA it is unlawful for any person to (A) knowingly provide, false or fraudulent BOI or (B) willfully failing to file or provide complete or updated BOI.  A violation of the filing requirements can result in the imposition of a civil penalty of not more than $10,000; and, upon conviction, imprisonment for not more than 3 years.  Of note, the CTA provides that negligent violation does not expose a person to the civil or criminal penalties.

Conclusion

Now is the time to begin preparing to file the reports required by the CTA and its regulations.  Woods Rogers Vandeventer Black’s corporate and business attorneys are available to assist with any questions related to CTA compliance and filing initial reports.

[1] Most states do not require disclosure of information about the beneficial owners of corporations, limited liability companies, or other similar entities.

[2] The purpose of the CTA is to protect the U.S. financial system against illicit use of shell companies, to conceal proceeds of corrupt and criminal acts by requiring disclose of beneficial ownership of entities.

[3] FinCEN is authorized to share the BOI with government agencies, financial institutions, and financial regulators, subject to specific protocols.

[4] FinCEN estimates that there will be more than 32 million Reporting Companies in existence who are required to file when the regulations become effective.

[5] For example, if an attorney directs a paralegal to file articles of incorporation for a Reporting Company, then both the attorney and the paralegal are subject to the CTA’s reporting requirements.

[6] The regulations allow FinCEN to issue a “FinCEN identifier” to individuals and Reporting Companies that apply for an identifier. The application for a FinCEN identifier must include all of the BOI required to be reported by the individual or Reporting Company, as applicable.  Upon receiving a FinCEN identifier, the FinCEN identifier may be submitted in a report to FinCEN in lieu of the BOI required to be reported.

[7] If the Beneficial Owner is a minor child, the Reporting Company shall report the information of the parent or legal guardian of the minor child.  If an individual is a Beneficial Owner of a Reporting Company exclusively by virtue of ownership interest in an exempt entity, the report may include only the name of the exempt entity in lieu of the other listed information.