The Corporate Transparency Act (the “Act”) was enacted in January 2021 as part of the National Defense Authorization Act for Fiscal Year 2021, in an effort to enable critical national security, intelligence and law enforcement efforts to counter money laundering, financing of terrorism and other illicit activity. In doing so, Congress determined that the collection of beneficial ownership information is necessary because “malign actors” seek to conceal their ownership of corporations, limited liability companies and similar entities to facilitate their illicit activities. Noting that most state laws do not require disclosure of ownership information when forming a business entity, the Act requires these privately held companies to make this disclosure at the federal level and requires the federal government to maintain that information in a secure database.
The Act creates a new and potentially burdensome obligation on private companies. For example, the Act will require reporting by family-owned companies that often operate with numerous separate entities holding various types of assets. Many other privately owned businesses that are not accustomed to providing this type of information will be required to do so for the first time.
When does the Act go into effect?
The Act became effective on January1, 2021. The filing obligation was delayed until Financial Crimes Enforcement Network of the Treasury Department (“FinCEN”) adopted rules to implement the requirements of the Act. FinCEN has now issued rules that provide that the reporting requirements under the Act take effect on January 1, 2024 (“Effective Date”).
When are reports due?
Companies that are subject to the reporting requirements are referred to as “Reporting Companies.” Reporting Companies formed before January 1, 2024 will have until January 1, 2025 to file the initial beneficial ownership report.
Reporting Companies formed after January 1, 2024 must file the initial report within 30 days (subject to a proposed extension to 90 days for Reporting Companies created or registered in 2024) after the earlier of the date on which it receives actual notice that its creation is effective or a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the company has been created.
Who must report?
Reporting Companies includes corporations, limited liability companies and any “similar entity” that was formed by filing a document with a secretary of state or similar office of a state or Indian Tribe in the U.S. or that was formed outside the U.S. but registered to do business in the U.S. by the filing of a document with the secretary of state of a state or similar office under the laws of a state or Indian Tribe.
Are there exceptions?
There are numerous exceptions (more than twenty categories) to the reporting obligations for certain businesses. These exceptions generally are for larger, more highly regulated types of companies. A detailed description of all of the exemptions is beyond the scope of this article but the most significant exceptions, generally, are:
· Large operating companies that (i) have more than 20 full-time employees in the US (not on a consolidated basis), (ii) an operating presence at a physical office within the US and (iii) reported more than $5 million in gross receipts or sales (net of returns and allowances) on its filed prior year federal tax return, excluding gross receipts or sales from sources outside the US, as determined under federal income tax principles (but note that many disregarded entities don’t file a return). There remain a number of uncertainties surrounding the number of employees and revenue tests.
· Public companies with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended or that are required to file supplementary and periodic information under Section 15(d) of that Act.
· Certain inactive companies that existed on or before January 1, 2020 and that are not engaged in active business, have not experienced a change in ownership in the prior 12 months, are not owned by a foreign person, have not sent or received any funds in an amount greater than $1,000 (including all funds sent to or received from any source through a financial account or accounts in which the entity or an affiliate of the entity maintains an interest) in the prior 12-month period; and do not otherwise hold any kind or type of assets, whether inside or outside the US, including an ownership interest in any corporation, LLC, or other similar entity.
· Registered Investment Companies.
· Venture capital fund advisers.
· Insurance companies.
· Banks and Credit Unions.
· Certain tax exempt entities under Section 501(c).
· Subsidiaries of certain exempt entities (e.g., an entity whose ownership interests are controlled or wholly owned by an exempt entity such as a public company).
This list is not exhaustive, nor does it contain all of the limitations to these exceptions. Potential Reporting Companies should carefully consult the actual rules before making any determination as to whether an exception applies. It is likely that most private companies will not fit into the exceptions and thus will be required to file with FinCEN. FinCEN has estimated some 30 million filings will be filed in the first year.
Who is identified in the Report?
The Act requires that a Reporting Company provide required information about each of its Beneficial Owners (described below).
Additionally, only for companies formed after January 1, 2024, the report must include the persons who are deemed “Company Applicants.” The Company Applicant is an individual who either directly files the document that creates the company or is primarily responsible for directing or controlling the filing of the document that creates the company. Rules adopted by FinCEN state that it intends for a reporting company to limit the number of its Company Applicants to one or two individuals (depending on whether a second individual directs or controls the filing of the entity creation or registration document by the individual directly filing it).
Who is a Beneficial Owner for purposes of the report?
Reporting Companies must report information about their “Beneficial Owners,” meaning any individual who, directly or indirectly, exercises substantial control or owns not less than 25% of the ownership interest of the Company.
Substantial control is a key element in determining who must be included. Generally, substantial control would include:
· Senior officers of the company such as president, chief executive officer, chief operating officer, chief financial officer, general counsel and similar officers performing a similar function.
· Someone who has authority over the appointment or removal of a senior officer or a majority of the board of directors or similar body.
· Someone who directs, determines, or has substantial influence over important decisions made by the company, (which could and likely would include all board members, even independent directors), or
· Someone who has “any other form of substantial control" over the company.
Keeping in mind that many LLCs and partnerships are governed in a manner by individuals that do not have “corporate” types of titles, for an individual who does not hold one of the officer positions listed above, their title is not determinative of whether they are considered a senior officer. The determination is instead made based on whether the individual exercises authority or performs a similar function as one of the listed officers.
As to what constitutes “ownership interests” for determining who has “not less than 25% of the ownership interest” in a Reporting Company, the rules define the term ownership interests broadly. The rules apply without regard to the specific type of entity in which the interest is held. Ownership interests include any of the following:
· Any equity, stock, or similar instrument.
· An interest in a joint venture.
· A certificate of interest in a business trust.
· Any capital or profits interest in an entity.
· Any convertible instruments (such as convertible debt but also other instruments that would include Simple Agreement for Future Equity, known as SAFEs.)
· Any warrant or right to purchase, sell, or subscribe to a share or other interest described above.
· Any put, call, straddle, or other option or privilege of buying or selling any such interests.
· Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.
The rules also contemplate that an individual may own an ownership interest through contracts or other arrangements, such as nominees, or agents and through ownership in another entity.
If an ownership interest in a Reporting Company is held through a trust, the report would include the trustee, the grantor if the grantor may revoke the trust and certain beneficiaries with the right to demand distributions or withdrawals or who is the sole permissible recipient of the trust’s income.
What information is to be reported?
The information that is required to be reported to FinCEN in these reports for each Beneficial Owner includes such owners:
· date of birth;
· current residential or business address; and
· a unique identification number such as a passport, driver’s license or similar identification number and an image of the identification document.
This information must be updated within 30 calendar days after any change of information previously submitted.
Using a FinCEN Identifier.
An individual may obtain a FinCEN identifier (“FinCEN ID”) by providing to FinCEN the same information as the Reporting Company is required to provide regarding its Beneficial Owner. This would allow the Reporting Company to then report the individual’s FinCEN ID on its report in lieu of listing the specific information regarding the individual. However, if an individual obtains a FinCEN ID, the individual must file an updated application with FinCEN within 30 days after any change in their reported information. Additionally, the person must correct any inaccuracy in previously reported information within 30 days of becoming aware of the inaccuracy.
How is the information treated?
The information is to be stored securely by FinCEN for each Reporting Company until at least five years after termination of such Reporting Company. The information is to be treated confidentially by FinCEN, but the Act allows disclosure to U.S. federal law enforcement agencies, certain other law enforcement agencies with court approval, and to non-U.S. law enforcement agencies if requested by a U.S. federal law enforcement agency. Disclosure may be made to certain financial institutions with the consent of the Reporting Company.
What are the penalties for violation of the Act?
The Act contains penalties for violations of the various obligations and for providing false information. Civil and criminal fines of up to $10,000 and up to two years imprisonment can be imposed under the Act for any person who willfully provides or attempts to provide false or fraudulent information or fails to report complete or updated information to FinCEN.
Penalties may be imposed on reporting companies and individuals who cause a reporting company not to report or are senior officers of a reporting company at the time of its failure to report.
Additional penalties apply for unauthorized knowing disclosure or use of reported information.
What action should you take now?
Companies that are subject to the Act should begin the process of understanding these new requirements so that they can timely gather information that will be needed for compliance. Reporting Companies will need to make certain that they are able to gather that information from their beneficial owners.
Companies should also review their governing documents to ascertain the impact of various types of arrangements that may impact the determination of beneficial owners. It may be beneficial to adopt provisions requiring that owners provide required information to the Reporting Company as needed for compliance.
FinCEN is updating their guidance and we anticipate that further guidance will be forthcoming, but FinCEN has provided a Small Entity Compliance Guide at the link below for further reference.
For further information about the Act, contact any of our corporate law group attorneys.
Bretton Crane, Jr.