The United States Department of the Treasury's Financial Crimes Enforcement Network ("FinCEN") has issued a final rule, available here, establishing beneficial ownership reporting requirements pursuant to the Corporate Transparency Act. The rule will require most corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners. The Corporate Transparency Act authorizes FinCEN to collect that information, maintain it in a confidential, secure, and non-public database, and disclose it to authorized government authorities and financial institutions. According to FinCEN, the reported information will be useful to law enforcement and will help prevent bad actors from hiding behind opaque corporate structures, including anonymous shell and front companies. The rule becomes effective on January 1, 2024, and reporting companies created or registered before January 1, 2024 will have until January 1, 2025 to file their initial reports. The rule provides 23 possible exemptions from the reporting requirements for entities that qualify.
Entities Subject to the Reporting Requirements
Companies subject to the reporting requirements include both domestic and foreign companies. A domestic reporting company includes any entity that is a corporation, limited liability company, or other entity created by filing a document with a secretary of state or any similar office under the law of a state or Indian tribe. A foreign reporting company is a corporation, limited liability company, or other entity formed under the law of a foreign country and 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.
Reporting companies include (subject to specific exemptions) most limited liability partnerships, business trusts, and limited partnerships, in addition to corporations and limited liability companies, because such entities are generally created by a filing with a secretary of state or similar office. Other types of legal entities, including certain trusts, are generally excluded from being reporting companies to the extent that they are not created by the filing of a document with a secretary of state or similar office.
There are 23 categories of entities that are exempt from the reporting requirements. The exemptions cover, among other types of entities, many public companies, large operating companies, financial institutions, investment companies, investment advisers, venture capital fund advisers, pooled investment vehicles, tax-exempt entities, inactive entities, and subsidiaries of certain of these entities. We can help determine whether any particular entity will qualify for a reporting exemption.
Contents of Reports
A reporting company's initial report must include with respect to the reporting company: full legal name; any trade or "doing business as" names; primary business address in the United States; jurisdiction of formation and, if a foreign reporting company, the state or tribal jurisdiction where it first registered; Taxpayer Identification Number (the "TIN") (including an Employer Identification Number); and, where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.
The initial report must also include with respect to every individual who is a beneficial owner of the reporting company (described below) and every individual who is a company applicant for the reporting company (described below): the individual's full legal name; date of birth; current residential or business address; unique identifying number from an acceptable identification document; and image of such identification document. Note that only reporting companies created or registered after January 1, 2024 are required to provide information for company applicants.
Beneficial Owners and Company Applicants
A "beneficial owner" refers to any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25 percent of the ownership interests of the reporting company. The rule lists three primary indicators of "substantial control:" service as a senior officer of the reporting company; authority over the appointment or removal of any senior officer or a majority of the board of directors of the reporting company; or the direction, determination, or substantial influence over important decisions regarding the reporting company. The rule provides procedures for determining whether an individual owns or controls 25 percent of the ownership interests of a reporting company. Among other things, these procedures address how a reporting company should handle a situation in which ownership interests are held in trust. Five types of individuals are exempted from being deemed a "beneficial owner:" minor children; certain types of individuals acting on behalf of another individual; reporting company employees (excluding senior officers); individuals whose only interest in a reporting company is a future interest through a right of inheritance; and creditors of a reporting company.
A "company applicant" refers to, for a domestic reporting company, the individual who files the document that forms the company or, for a foreign reporting company, the individual who files the document that first registers the company to do business in the United States. A "company applicant" also refers to, for a domestic or a foreign reporting company, the individual who is primarily responsible for directing or controlling the filing of the relevant document.
If one or more entities that is exempt from the reporting requirements has a direct or indirect ownership interest in a reporting company and an individual is a beneficial owner of the reporting company exclusively by virtue of the individual's ownership interest in any such exempt entity, the reporting company's report may include the name of any such exempt entity in lieu of the foregoing required information with respect to such beneficial owner.
If an individual provides relevant information to FinCEN directly, the individual may obtain a "FinCEN identifier," which can then be provided in any report instead of the required information about the individual.
Timeframe for Reporting
As discussed above, reporting companies created or registered before January 1, 2024 will have until January 1, 2025 to file their initial reports. In addition, reporting companies created or registered after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports. Further, any entity that no longer qualifies under a reporting exemption will have 30 days after the date it no longer qualifies to file an initial report.
Reporting companies will be required to file an updated report within 30 days after any change to information previously submitted to FinCEN. If, subsequent to filing a report, a company qualifies for a reporting exemption, that change must be reported to FinCEN in an updated report. However, if a company terminates or dissolves, FinCEN does not expect a reporting company to file an updated report.
The new requirements will have a sweeping effect across the United States. Under the new requirements, almost every corporation and limited liability company, as well as significant number of other entities, will be required to report beneficial ownership information, unless an exemption is available. For businesses with complicated organizational structures, it will take a substantial amount of time to collect the necessary information for all the relevant entities and to prepare the required reports.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.