As some may remember, in 2021, the federal government passed the Corporate Transparency Act. The goal of the Act is to aid law enforcement in its efforts against money laundering, financing of terrorism, tax fraud, financial fraud, and other crimes, and requires that many small and medium-sized businesses report the identity of their owners to the federal government. In general, the Act requires that “reporting companies” file a report with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department, that includes certain information about the entity, including each “beneficial owner” and “company applicant” of the entity.
FinCEN is required to maintain the information in a secure, non-public database and make it available only to (a) federal agencies engaged in national security, intelligence, or law enforcement activities, (b) State, local, or Tribal law enforcement agencies, if a court of competent jurisdiction has authorized the law enforcement agency to seek the information, (c) subject to certain requirements, a foreign law enforcement agency, prosecutor, or judge, upon request from a federal agency on behalf of such foreign agency or person, (d) financial institutions, with the consent of the reporting company, to facilitate the financial institution’s compliance with customer due diligence requirements, and (e) federal functional regulators or other appropriate regulatory agencies.1 A person that fails to comply with the reporting requirements may be subject to civil and criminal penalties, including imprisonment.2
The Act mandated that the Treasury Department issue regulations implementing the new law and, in September 2022, the Treasury Department issued a final rule implementing the beneficial ownership information reporting requirements of the Act, which provides guidance on a number of key issues. The final rule on access to beneficial ownership information and safeguards has not yet been issued.3
Implementation Date:
All reporting companies formed on or after January 1, 2024, or that become a foreign reporting company on or after that date, must report their required information within thirty days after the company is formed or has become a foreign reporting company.4 All reporting companies already in existence on January 1, 2024, or in the case of foreign reporting companies, that became a foreign reporting company before January 1, 2024, are required to report their required information by January 1, 2025.5
Definition of a Reporting Company:
Under the rules, a “reporting company” means either a “domestic reporting company” or a “foreign reporting company.” A “domestic reporting company” is any corporation, limited liability company, or other entity created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.6 A “foreign reporting company” is a corporation, limited liability company, or other entity formed under the law of a foreign country that is registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.7
Importantly, twenty-three categories of entities are then exempted from the definition of a reporting company. The exempted entities are: (1) securities reporting issuers; (2) governmental authorities; (3) banks; (4) credit unions; (5) depository institution holding companies; (6) money services businesses (meaning any money transmitting business registered with FinCEN under 31 U.S.C. § 5330, and any money services business registered with FinCEN under 31 CFR 1022.380); (7) registered securities brokers or dealers; (8) registered securities exchanges or clearing agencies; (9) other Exchange Act registered entities; (10) registered investment companies or investment advisors; (11) venture capital fund advisers; (12) insurance companies; (13) state-licensed insurance producers; (14) Commodity Exchange Act registered entities; (15) public accounting firms; (16) public utilities; (17) financial market facilities; (18) pooled investment vehicles, unless it is a foreign pooled investment vehicle in which case special rules apply; (19) tax exempt entities;8 (20) entities assisting a tax exempt entity; (21) large operating companies; (22) subsidiaries of any exempt entity except subsidiaries of money services businesses, pooled investment vehicles, entities assisting a tax exempt entity, or inactive entities; and (23) inactive entities that meet certain criteria, including not being owned wholly or partially by any foreign person. 9
Entities that want to take advantage of any of the exemptions will need to closely examine the applicable section because many of the exempt entity classifications are subject to specific requirements. An exemption that could be applicable to many entities is the “large operating companies” exemption. An entity qualifies as a large operating company if it (a) employs more than 20 full-time employees in the United States, (b) has an operating presence at a physical office within the United States, and (c) filed a federal tax return for the previous year demonstrating more than $5,000,000 in gross receipts or sales, excluding gross receipts or sales from sources outside the United States.10
If an exempted entity at some point no longer meets the criteria for an exemption, it must file the required report within 30 days after no longer meeting the exemption criteria. A reporting company that later meets the criteria for an exemption from reporting must report that it is no longer a reporting company in an updated report.
Beneficial Owners and Company Applicants:
A reporting company formed on or after January 1, 2024 must include in its report certain information about each “beneficial owner” and each “company applicant.” The term “beneficial owner” not only includes any individual who, directly or indirectly, owns or controls at least 25 percent of the ownership interests of the reporting company but also any individual who, directly or indirectly, exercises substantial control over the reporting company.11
Ownership interests essentially include all forms of ownership, regardless of how classified. Both capital and profit interests are included.12 Convertible instruments, futures, and warrants are included.13 Any “put, call, straddle, or other option or privilege of buying or selling” a company’s equity is treated as an ownership interest.14 For purposes of determining an individual’s percentage ownership interest, options and similar interests of the individual are treated as exercised.15 Additionally, for corporations, an individual’s percentage ownership interest is the greater of the total combined voting power of their ownership interests or the total combined value of their ownership interests.16
An individual is considered the owner of the interest even if title is held by the individual’s nominee or agent.17 When an ownership interest is held by a trust, the owner may be the trustee or other individual with authority to dispose of trust assets, a beneficiary who is the sole permissible recipient of income and principal from the trust or has a right to demand a distribution of substantially all of the trust assets, or a grantor of a revocable trust.18 When the owners of a reporting company include one or more other entities, the beneficial owners are the individuals who own or control the intermediary entities that separately or collectively own or control ownership interests of the reporting company.19
As noted above, the definition of a beneficial owner includes any individual who directly or indirectly exercises substantial control over the reporting company. An individual is considered to have such substantial control if the individual: (1) serves as a senior officer of the company; (2) has authority over the appointment or removal of any senior officer or a majority of the board of directors; (3) directs, determines, or has substantial influence over important decisions20 made by the company; or (4) has any other form of substantial control over the company.21 An individual may directly or indirectly, including as a trustee, exercise substantial control through: (1) board representation; (2) ownership or control of a majority of the voting power or voting rights of the company; (3) rights associated with financing arrangements; (4) control over intermediary entities that separately or collectively exercise substantial control over the company; (5) arrangements or relationships, including informal, with others acting as nominees; or, (6) any other contract, arrangement, understanding, relationship, or otherwise.22 Determining whether an individual exercises substantial control will therefore not always be a straightforward determination. As just one example, the regulations do not specify any particular
percentage of board representation that qualifies as substantial control. Instead, a qualitative analysis based on the particular facts and circumstances of the reporting company must be performed.
There are a few exceptions to the definition of beneficial owner. It specifically does not include an individual acting solely as an employee and whose control over or economic benefits are derived solely from the employment status of such person, provided the person is not a senior officer.23 It also does not include a minor child (information about the minor child’s parent or legal guardian must instead be reported), an individual acting as a nominee, intermediary, custodian, or agent on behalf of another person, an individual whose only interest is a future interest through a right of inheritance, or a creditor of the entity unless the creditor meets the criteria of the initial definition.24 If an exempt entity has an ownership interest in a reporting company and an individual is a beneficial owner of the reporting company solely by virtue of their ownership interest in the exempt entity then the name of the exempt entity may be reported instead of the information otherwise required with respect to such beneficial owner.25
Reporting companies formed on or after January 1, 2024 (or in the case of a foreign reporting company, that becomes a foreign reporting company on or after such date) are also required to report information about each “company applicant.” A company applicant means the individual who directly files the document that creates the company, or in the case of a foreign reporting company, the individual who directly files the document that registers the company to do business within the United States.26 A company applicant also includes an individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.27 Up to two individuals can therefore qualify as company applicants. For example, if an attorney directs a staff person to file articles of organization for a limited liability company through a particular State’s online filing portal, the company applicant includes the staff person who physically performs the online filing as well as the attorney responsible for the filing.
Information the Reporting Company must include in its Report:
The reporting company must include in its initial report: (1) the company’s legal name; (2) any names under which it does business; (3) if it has a principal place of business in the United States, the street address of such principal place of business, otherwise, the street address of the primary location in the United States where it conducts business; (4) the jurisdiction of its formation; (5) if a foreign company, the jurisdiction in the United States where it first registered; and (6) the company’s tax identification number.28 With respect to each individual who is a beneficial owner or company applicant,29 the reporting company must include in the initial report the individual’s: (1) full legal name; (2) date of birth;(3) residential street address, except in the case of a company applicant who forms or registers an entity in the course of their business, in which case the street address of the company applicant’s business is required; and (4) the identifying number and image of the individual’s (a) United States passport, (b) State, local, or Indian tribe issued identification, or (c) State issued driver’s license, or (d) if the
individual does not have any one of the foregoing, a foreign passport.30
An individual does have the option of obtaining a FinCEN identifier by providing to FinCEN the information that would otherwise need to be reported about the individual by a reporting company, which must be kept up to date by the individual, and then providing to the reporting company the FinCEN identifier. The reporting company can report the FinCEN identifier in lieu of information
otherwise required about the individual.31
Updating Reports:
If any information that a company previously reported about either the company or its beneficial owners changes, including any change regarding who is a beneficial owner or the information reported for any particular beneficial owner, the company must file an updated report reflecting the change within 30 days after the date the change occurs.32 In order to comply with this requirement, reporting companies will need to report not only changes in their beneficial owners but also require that beneficial owners immediately notify the company if their reported information changes.
Existing companies that may need to report to FinCEN should make plans to acquire the required information about their beneficial owners and consider adding provisions to their governing documents requiring that all beneficial owners supply the company with the required information and immediately notify the company of any changes to the information.
Notice:
Attorney Advertising. This article is for informational purposes only, is not exhaustive, and is not, and should not be construed as, legal advice or legal services. You should consult with an attorney to determine the applicability of any laws or rules to your individual situation.
Article written by J. Michael Wood, Esq., Boylan Code LLP, 145 Culver Road, Rochester, New York 14620, (585) 232-5300, mwood@boylancode.com.
Dated: July 7, 2023
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1 31 U.S.C. § 5336(c)(2)(B).
2 31 U.S.C. § 5336(h).
3 A proposed rule on access and safeguards, however, was issued on December 15, 2022.
4 31 CFR 1010.380(a)(1)(i) and (ii).
5 31 CFR 1010.380(a)(1)(iii).
6 31 CFR 1010.380(c)(1)(i).
7 31 CFR 1010.380(c)(1)(ii).
8 A company typically will not receive its tax-exempt status until more than 30 days after it is formed and thus seemingly will be considered a reporting company when initially formed, and therefore required to file a report, even if it intends to become a tax-exempt entity.
9 31 CFR 1010.380(c)(2).
10 31 CFR 1010.380(c)(2)(xxi).
11 31 CFR 1010.380(d).
12 31 CFR 1010.380(d)(2)(i)(B).
13 31 CFR 1010.380(d)(2)(i)(C).
14 31 CFR 1010.380(d)(2)(i)(D).
15 31 CFR 1010.380(d)(2)(iii)(A).
16 31 CFR 1010.380(d)(2)(iii)(C).
17 31 CFR 1010.380(d)(2)(ii)(B).
18 31 CFR 1010.380(d)(2)(ii)(C).
19 31 CFR 1010.380(d)(2)(ii)(D).
20 The regulations provide further guidance on what constitutes an “important decision.”
21 31 CFR 1010.380(d)(1)(i).
22 31 CFR 1010.380(d)(1)(ii).
23 31 CFR 1010.380(d)(3)(iii).
24 31 CFR 1010.380(d)(3).
25 31 CFR 1010.380(b)(2)(i).
26 31 CFR 1010.380(e).
27 31 CFR 1010.380(e)(3).
28 31 CFR 1010.380(b)(1)(i).
29 Only reporting companies formed on or after January 1, 2024, or in the case of foreign reporting companies, registered in the United States after January 1, 2024, need to report information about company applicants.
30 31 CFR 1010.380(b)(1)(i).
31 31 CFR 1010.380(b)(4).
32 31 CFR 1010.380(a)(2).
