- All companies formed on or after January 1, 2024, within 30 days of formation, must file an initial report of their beneficial ownership with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department.
- All companies formed prior to January 1, 2024, on or before January 1, 2025, subject to limited exceptions, must file an initial report with FinCEN.
- All reporting companies are obligated to update reports within 30 days of any change in the information provided to FinCEN.
- Proposed regulations move the 30 day deadline to 90 days for reporting companies formed in 2024.
Who is Required to Submit a Report?
Practically all organizations established through filings with a Secretary of State office or its equivalent are categorized as reporting entities and are obligated to submit reports. This includes:
- Corporations
- Limited Liability Companies
- Most Limited Partnerships and Limited Liability Limited Partnerships
- Business Trusts
- Comparable foreign entities that must register to conduct business within a U.S. state
This requirement does not discriminate based on purpose or complexity; it applies equally to single-member LLCs holding residential real estate and to operational corporations with numerous shareholders.
The responsibility for filing lies with the entity itself, not with its advisors or beneficial owners. However, individuals responsible for the failure to file, as well as beneficial owners who provide false information, may be subject to liability.
Which Entities Would be Exempt?
Certain entities are excluded from the category of reporting companies and are hence not obligated to file reports:
- Exchange Act Reporting Issuers
- Banks
- Licensed Insurance Companies
- Public Utilities
- Operating companies considered to be of “significant” size meeting specific criteria, such as having over 20 full-time employees in the United States, maintaining a physical office presence in the country, and reporting at least $5 million in annual gross receipts or sales in the preceding tax year
- Governmental Entities
- Registered Investment Companies, Investment Advisors, and Brokers
- Registered Accounting Firms
- Tax Exempt Organizations
Additionally, "Inactive" entities are exempt if they:
- were established before January 1, 2020
- are not actively engaged in business operations
- are solely owned by U.S. individuals
- have not undergone any changes in ownership within the past 12 months
- have neither sent nor received more than $1,000 in the previous 12 months
- possess no assets
A shared trait among exempt entities is that most of them are already subject to some form of oversight or regulation, making them less susceptible to exploitation for money-laundering purposes.
Who Qualifies as a Beneficial Owner?
Any individual who, either directly or indirectly, wields significant influence over the reporting company or possesses or directs at least a quarter of the ownership interests of the reporting company.
Something to keep in mind:
- Beneficial ownership extends beyond conventional notions of "owners."
- The regulations are intentionally broad, aiming to encompass a wide range of individuals.
This framework differs from other reporting frameworks in these key aspects:
- Multiple beneficial owners may exist.
- There will always be at least one beneficial owner.
- Entities themselves are not considered beneficial owners; thus, it's necessary to trace ownership back to actual individuals.
Substantial Control
Substantial Control refers to individuals who, whether directly or indirectly, exert significant influence over the reporting company. These individuals would be considered beneficial owners.
An individual is deemed to have "substantial control" if they:
- Hold a significant managerial role, such as a senior officer within the reporting company (e.g., president, CEO, COO, CFO, general counsel, or any other individual performing equivalent functions).
- Possess authority regarding the appointment of senior officers or the majority of the board.
- Influence or direct crucial decisions affecting the reporting company, including but not limited to decisions pertaining to business nature, scope, and attributes; reorganization, dissolution, or merger; major financial transactions and investments; equity issuance or significant debt incurrence; budget approval; selection or termination of business segments and geographic focus; compensation and incentive schemes; significant contract agreements or terminations; and amendments to substantial governance documents.
There must be at least one individual exercising substantial control, and there can be multiple people with such influence. Furthermore, the exercise of control does not necessarily have to be direct, as it can occur through intermediaries, contractual arrangements, nominees, trusts, and other similar mechanisms.
Ownership Stake
Each person who, whether directly or indirectly, possesses or directs a minimum of 25% of the ownership stake in the reporting company.
Ownership stake encompasses:
- any form of equity, stock, profit-sharing participation, etc., irrespective of whether they entail voting rights
- capital or profit interests in Limited Liability Companies (LLCs) or partnerships
- convertible instruments, warrants, options, and similar subscription rights (whether classified as debt or not) or puts, calls, derivatives, and similar instruments.
In the computation of ownership stake:
- All options or comparable interests are treated as if exercised or converted.
- For entities taxed as partnerships, capital and profits interests are aggregated. However, if aggregation cannot be reasonably determined, they are calculated separately.
- For corporations, ownership is determined based on the total combined voting power or the total combined value of all classes of ownership.
Ownership or control, as outlined above, serve as illustrative examples. Both terms encompass a broad range of scenarios, explicitly including:
- Joint ownership
- Control or ownership via custodians, nominees, or agents
- Ownership or control through trusts
- Control or ownership via intermediaries.
Who Would Not be Considered a Beneficial Owner?
- Children under the age of 18 (reporting obligation falls on parent/guardian)
- Persons acting as nominees, intermediaries, custodians, or agents on behalf of another individual
- Employees whose power stems exclusively from their employment status (relevant solely to the ownership interest)
- Individuals whose interests represent future inheritance rights (though upon inheritance, they may possess or direct ownership interests)
- Creditors whose sole entitlements involve receiving a predetermined sum of money
Trusts as Beneficial Owners
Regarding trusts, an individual may exert ownership control in the following capacities:
- Trustee or Authorized Disposer: This includes trustees or other individuals with the authority to dispose of trust assets.
- Beneficiary Rights: Individuals who either (i) are the exclusive recipients of income and principal from the trust or (ii) possess the right to demand a distribution or withdrawal of a significant portion of the trust's assets.
- Grantor or Settlor Rights: Individuals with the power to revoke the trust or withdraw its assets by other means.
Multiple Controllers: It is possible for more than one individual to exercise control over a trust.
Combination with Personal Ownership: Ownership through trusts will be aggregated with personal ownership.
Less Prescriptive Approach: The rules are intentionally designed to be less specific than the constructive ownership provisions of the IRS Code.
Company Applicants
Beneficial ownership reports must also include details about "Company Applicants," defined as:
- The individual who directly files the document that establishes the reporting company.
- The individual who primarily oversees or manages the filing process.
What Does This Mean?
- There can be no more than two company applicants, but there could be just one.
For the first definition, this is typically the person at a service company or a compliance and legal (C&L) employee (often a paralegal) who physically submits the filing.
For the second definition, this usually refers to a C&L employee (either an attorney or a paralegal) responsible for preparing the filing paperwork.
It is uncommon for the client to be the company applicant unless they bypass the C&L entirely. The guidelines are unclear on the scenario where a C&L attorney prepares and submits the paperwork, but the client signs it.
Only new reporting companies (formed on or after January 1, 2024) need to provide information about company applicants.
There is a requirement to update information about company applicants as necessary.
Required Information for Reporting
Reporting Company Details:
- Full legal name
- Any trade name or "doing business as" (dba) name
- Current street address of the principal place of business (no PO boxes or "c/o" addresses)
- Jurisdiction of formation/organization
- Taxpayer Identification Number
Beneficial Owners:
- Full legal name
- Date of birth
- For company applicants forming entities in the normal course of business, the street address of the company applicant's business
- For beneficial owners, the current residential street address (it does not need to be the same as the address used for tax purposes, but start with the residential address)
- A copy of one of the following unexpired identification documents along with the ID number: (i) passport, (ii) driver's license, or (iii) other state or local government-issued identification document (the reporting company does not need to collect Social Security Numbers)
Proposed regulations do not require an explanation for why the beneficial owner is being reported (i.e., it is not necessary to indicate whether the person qualifies under substantial control or ownership interest criteria, nor to specify the percentage of ownership).
If a beneficial owner who owns ownership interests is an exempt company under the Corporate Transparency Act (CTA), only the name needs to be reported.
Filing Deadlines
For Reporting Companies Created Before January 1, 2024:
- Initial report must be filed no later than January 1, 2025.
For Reporting Companies Created On or After January 1, 2024:
- Initial report must be filed within 30 days of the earlier of: (i) receiving actual notice of the creation, or (ii) the date the Secretary of State publicly announces the formation.
For Companies That Lose Their Exempt Status:
- If a reporting company no longer qualifies for an exemption, it must file an initial report within 30 days of losing the exemption status.
For Changes in Previously Reported Information:
- If there is any change in the information previously reported about the reporting company or its beneficial owners (excluding company applicants), an update must be filed within 30 days of the change (note that this is based on the occurrence of the change, not the company's awareness of it).
- In cases of transfers due to death, the 30-day period starts from the date the estate is settled or ownership is actually transferred.
Penalties for Non-Compliance
Responsibility for Filing:
- The obligation to file rests with the reporting company, not the beneficial owners.
- However, beneficial owners can face penalties for providing false or fraudulent information.
Liability:
- The individual at the reporting company responsible for the failure to file is the one who causes the failure, or a senior officer at the time of the failure.
- Proposed regulations allow the reporting company to indicate "unknown" if certain information is not available.
Penalties:
- Penalties apply for:
- Willfully providing false or fraudulent beneficial ownership information.
- Willfully failing to submit complete reports or updates.
- Civil penalties can reach up to $500 per day.
- Criminal penalties can include fines up to $10,000 and up to two years in prison.
Who Can Access or Receive Beneficial Ownership Information?
Disclosure Permitted Under the Proposed Rule (December 15, 2022):
- U.S. Government Agencies: Federal, state, local, and Tribal government agencies can request beneficial ownership information (BOI) for specific purposes.
- Foreign Entities: Foreign law enforcement agencies, judges, prosecutors, central authorities, and other competent authorities can access BOI.
- Financial Institutions: These institutions can use BOI to meet Customer Due Diligence (CDD) requirements.
- Regulatory Agencies: Federal functional regulators and other appropriate regulatory bodies can access BOI when supervising financial institutions for CDD compliance.
- U.S. Department of the Treasury: The Treasury itself has access to BOI.
Special Conditions for Disclosure:
- National Security, Intelligence, or Law Enforcement: Federal agencies involved in these activities can request BOI if it supports their functions.
- State, Local, and Tribal Law Enforcement: These agencies can access BOI if a competent court authorizes it for a criminal or civil investigation.
- Foreign Requests: Must go through intermediary federal agencies and be made under an international treaty, agreement, or convention, or by trusted foreign law enforcement, judicial, or prosecutorial authorities.
Access by the Treasury Department:
- Treasury officers or employees whose official duties require BOI inspection or disclosure.
- For purposes of tax administration, BOI is available to relevant Treasury personnel.
Example #1
- John forms an LLC to hold his vacation home in Florida for privacy purposes.
- John is considered the beneficial owner.
Variations Adding Complexity:
- Ownership through a Revocable Trust (with his wife Jill as Trustee).
- Jill and their children as equity holders, each owning 20%.
- Children as non-equity holders, collectively owning 99%, divided equally among the three.
Example #2
John establishes an LLC and transfers his shares of a stock as equity compensation, into the LLC.
John then distributes equal interests in the LLC to three separate Irrevocable Trusts, each created for the benefit of one of his three children, with Jill serving as Trustee.
John acts as the Investment Manager, while Joe (his neighbor) handles the role of Distribution Manager.
Beneficial Owners:
- Joe (neighbor) and John
- The Trustee of each Trust
Works Cited:
“U.S. Beneficial Ownership Information Registry Now Accepting Reports.” U.S.
Beneficial Ownership Information Registry Now Accepting Reports | FinCEN.Gov, 1 Jan. 2024
Alessio D. Evangelista, “The Corporate Transparency Act Is Here and the New
York LLC Transparency Act Is Coming: Insights: Skadden, Arps, Slate, Meagher & Flom LLP.” Insights | Skadden, Arps, Slate, Meagher & Flom LLP, 31 Jan. 2023, www.skadden.com/insights/publications/2024/01/the-corporate-transparency-act#:~:text=The%20Corporate%20Transparency%20Act%20and,Crimes%20Enforcement%20Network%20(FinCEN)
Fraraccio, Miranda. “Corporate Transparency Act - What You Need to Know.” CO, 18
Dec. 2023, www.uschamber.com/co/start/strategy/small-business-corporate-transparency-act
“New York State Assembly.” Bill Search and Legislative Information | New York State
Assembly, nyassembly.gov/leg/?default_fld=&leg_video=&bn=S08059&term=&Summary=Y&Text=Y