Beginning January 1, 2024, certain legal entities and their beneficial owners will face significant new reporting requirements in the United States.  

Under the Corporate Transparency Act (including the corresponding rules, the “CTA”), key identifying information must be reported to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and will be used to establish a secure, nonpublic database of the beneficial ownership of reporting companies. 

The CTA is intended to assist critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity.  The purpose of the reporting requirement is to make ownership and control of certain legal entities more transparent to the government, thereby making it more difficult to hide the proceeds of illegal activities through shell companies or complex ownership structures.  Beneficial ownership information (BOI) reporting, FinCEN believes, is a tool that will prevent corrupt actors, terrorists, and others from hiding money and other property in the United States while joining the growing trend of the international community to create a central register of BOI and to make beneficial ownership more transparent to, and for the benefit of, governmental authorities.

The Reporting Rule

The following discussion highlights important provisions of FinCEN’s Final Rule on Beneficial Ownership Information Reporting Requirements (the “Reporting Rule”) to assist certain legal entities (known as “reporting companies”) in understanding the general obligations contained in the Reporting Rule.  

The Reporting Rule requires reporting companies to file reports identifying (1) their beneficial owners and (2) individuals who have filed an application with authorities to create the entity or register it to do business.  Because the Reporting Rule is complex, however, each potential reporting company should refer to Section 5336, to the Reporting Rule, or to detailed guidance promulgated by FinCEN, such as the Small Entity Compliance Guide and Frequently Asked Questions (FAQs) on the Beneficial Ownership Reporting Rule.

As the Reporting Rule is new, certain ambiguities remain as to its interpretation, and FinCEN may continue to update, revise, and clarify its guidance.  

Reporting Companies and Exemptions

Reporting companies are legal entities—both U.S. and non-U.S.—that are subject to the Reporting Rule unless an exemption applies.  A domestic (U.S.) reporting company is any company that is created by filing a document with the secretary of state or similar office of a state or American Indian tribe in the United States.  A foreign (non-U.S.) reporting company is any foreign company that has filed a document registering to do business in the United States with a secretary of state or similar office of a state or American Indian tribe.  As such, corporations, limited liability companies, and limited liability partnerships that require secretary of state filings to accomplish formation fall within the “reporting company” definition unless the entity qualifies for an exemption.  State laws vary on whether trusts or foreign entities are required to file a document with the secretary of state or similar office; if such a filing is required, then the trust or foreign entity is also a reporting company unless an exemption applies.

There are 23 exemptions available under the CTA for entities to be excluded from the requirements of the Reporting Rule.  Several of the exemptions relate to companies in specific industries, such as governmental authorities, public utilities, banks, credit unions, insurance companies, accounting firms, and certain companies that provide financial or investment services.  There are also exemptions for publicly traded companies, certain tax-exempt entities, and what the Reporting Rule refers to as “large operating companies.”  The full list of exemptions may be found on page 6 of FinCEN’s FAQs.  Pages 4-14 of FinCEN’s Small Entity Compliance Guide contain additional information about exemption eligibility.

In order to qualify for the “large operating company” exemption, an entity must have more than 20 full-time employees in the United States, an operating presence at a physical office within the United States, and have filed a federal income tax (or information) return in the previous year showing more than $5 million in gross receipts or sales.

A company will qualify for the “securities reporting issuer” exemption if it is either an issuer of a class of securities registered under the Securities Exchange Act of 1934 or is required to file supplementary and periodic information under that law.

A “subsidiary” exemption may apply if an entity’s ownership interests are controlled or wholly owned, directly or indirectly, by one or more of 18 specifically exempt entities—including many of those listed above (e.g., public companies, governmental authorities, banks, credit unions, and others).  The full list of 18 exempt entities may be found on page 30 of the FAQs.  

The FAQs make clear that a reporting company does not have to report information about its parent or subsidiary companies.  A parent company may not, however, file on behalf of its group of companies; any company that meets the definition of a “reporting company” and is not itself exempt must file its own report.  

In sum, while the definition of a “reporting company” is extremely broad, the CTA contains many exemptions.  These exemptions generally relate to those legal entities who are already “known” to FinCEN but for the CTA, such as publicly traded companies, banks, and large operating companies.

Beneficial Owners: 25 Percent Ownership Interests or Substantial Control

A reporting company must report information concerning the entity’s beneficial owners, known as a BOI report.  A “beneficial owner” is defined in the CTA and the Reporting Rule as any individual who, directly or indirectly, owns or controls at least 25 percent of the ownership interests of the reporting company OR exercises substantial control over the reporting company.  Thus, the term “beneficial owners” is somewhat of a misnomer, as individuals who do not have any ownership or equity stake in an entity whatsoever may be deemed a beneficial owner if they exercise the requisite control over the entity.

Ownership interests include, for example, equity, stock, voting rights, capital or profit interests, options, or other types of instruments used to establish ownership.

To determine whether an individual controls at least 25 percent of the ownership interests of a reporting company, the total ownership interests that an individual owns or controls, directly or indirectly, shall generally be calculated as a percentage of the total outstanding ownership interests of the reporting company.  The Reporting Rule contains specific parameters for calculating beneficial ownership, including in circumstances when equity in the form of options, profits interests, or similar securities exists.

An individual is deemed to exercise substantial control over a reporting company if that individual is a senior officer of the entity, such as the president, chief executive officer (CEO), chief financial officer, chief operating officer, general counsel, or any individual with the ability to appoint or remove a senior officer, or if the individual is acting as an “important decision-maker” for the entity, even if that person does not have a senior officer title or the ability to appoint or remove any senior officer.  For example, one or more members of the board of directors, or advisory board members, or owners who do not meet the ownership interest threshold could nevertheless be deemed to be an “important decision-maker” and meet the beneficial ownership definition. Pages 19-20 of the Small Entity Compliance Guide will help business entities identify who is a beneficial owner due to exercising substantial control over the company.

For example, if a company is owned by two founders and a venture capital (VC) firm, each owning one-third of the company, and the VC firm has a sole owner, the two founders and the owner of the VC firm would all be deemed to be beneficial owners under the Reporting Rule: the two founders would each own one-third directly, and the VC firm sole owner would own one-third indirectly through ownership in the VC.  If the VC firm itself has four owners, none of whom own 75 percent or more of that VC firm, then none of the VC firm’s owners would be deemed to be beneficial owners of the reporting company by virtue of its ownership—because the 25 percent ownership requirement in the reporting company would not be met.  Of course, one or more of the VC firm’s personnel could nevertheless be deemed to be beneficial owners if they satisfy the “substantial control” test.

Under a special reporting rule, a reporting company may report a parent company’s name instead of BOI under certain conditions.  A reporting company may report a parent company’s name in lieu of information about its beneficial owners if (1) the beneficial owners hold their ownership interest in the reporting company through the parent company exclusively and (2) the parent company is itself exempt from the “reporting company” definition.  But this special reporting rule will not allow beneficial owners who own ownership interests through exempt or nonexempt entities to obscure their standing as beneficial owners who may still exercise substantial control of a reporting company.  Such BOI would still be required to be reported.  

In any given situation, several individuals could be deemed beneficial owners, either through actual ownership or their position with the company (or both).  Therefore, determining the individuals who must be reported as beneficial owners can be quite complex and is a highly fact-specific determination.  According to the Reporting Rule, FinCEN expects that a reporting company will always identify at least one beneficial owner under the “substantial control” component, even if other individuals are subject to an exclusion or do not satisfy the “ownership interests” component.

Use of Beneficial Ownership Information

On December 22, 2023, FinCEN published a final rule discussing the protocols required by the CTA to protect personally identifiable information reported to FinCEN, recognizing that BOI is sensitive information (the “December 22 Rule”).

The December 22 Rule helps to ensure that only authorized recipients—including national security, intelligence, law enforcement, federal regulatory agencies, and the Department of the Treasury—have access to BOI; that those recipients use that access only for purposes permitted by the CTA; and that those recipients protect security and confidentiality if re-disclosing BOI. FinCEN is also authorized to disclose BOI to financial institutions for the purpose of meeting customer due diligence requirements under applicable law, provided the reporting company has given the financial institution consent to receive BOI.

FinCEN specifically declined to add a regulatory provision to address the authentication of BOI, as different jurisdictions have their own rules concerning the authentication of evidence.

Information Required for Reporting

A reporting company must report the following company information:

• Full company legal name and any “doing business as” or “DBA” name
• Current address of the principal place of business in the United States
• Jurisdiction of formation (e.g., state, tribal, etc.)
• Tax identification number issued by the Internal Revenue Service.

For every individual who is a beneficial owner of such a reporting company, the company’s report must include the following information for such individual:

• Full personal legal name
• Date of birth
• Current residential street address
• A copy of an unexpired, government-issued, identifying document that contains a unique identifying number (e.g., an unexpired U.S. passport or a state driver’s license).

Note that while an individual may file a report on behalf of a reporting company, the reporting company is ultimately responsible for the filing.  There is no penalty for filing an inaccurate BOI report if it is corrected within 90 calendar days.

There is no requirement to report a company’s termination or dissolution.

Updating Information

When a change occurs to information that has been filed concerning the reporting company or its beneficial owners, an updated report must be filed within 30 calendar days after the change occurs.  

The types of changes that trigger the updated reporting requirement include (1) any change to the information reported for the reporting company, such as registering a new business name; (2) a change in any of the beneficial owners, such as a new CEO or an equity sale that changes who meets the ownership interest threshold of 25 percent (which could include sales to new equity owners or transfers of equity between existing owners), or new or different senior officers or others who are classified as beneficial owners; or (3) any change in such beneficial owner’s reporting information, such as the owner’s name, address, or unique identifying number previously provided to FinCEN.  

Some changes that would trigger an updated report to be filed are “active” changes, when the need for the updated report is obvious under the circumstances.  For example, if a beneficial owner obtained a new identifying document, such as a driver’s license, the reporting company would have to file an updated report, along with an image of the new document.

Other changes that would trigger an updated report to be filed are passive as to the subject of the reporting.  For example, if a company has five equal shareholders (i.e., owning 20 percent each) and one of those shareholder’s equity is redeemed by the company, upon such redemption, the remaining four shareholders would then own 25 percent each, and each becomes, without any action on their part, a beneficial owner subject to the Reporting Rule.

Filing Timelines

Any reporting company that has already been created and registered to do business before January 1, 2024, and that is not subject to a reporting exemption must file a beneficial ownership report with FinCEN between January 1, 2024, and January 1, 2025.

Any new reporting company—i.e., entities created or registered to do business on or after January 1, 2024—must file a beneficial ownership report with FinCEN on a more current basis:  New reporting companies formed or first registered between January 1, 2024, and December 31, 2024, must file a beneficial ownership report with FinCEN within 90 days after it receives notice that the creation of the reporting company is effective. 

On January 1, 2025, and thereafter, a new reporting company must file within 30 days after it receives notice that the creation of the reporting company is effective.

Company Applicants

New entities formed after January 1, 2024, must also report information concerning what the Reporting Rule refers to as “company applicants.”  A company applicant means the individual who directly files the document to create or register the reporting company; it can also be the individual who is “primarily responsible” for directing or controlling such a filing if more than one individual is involved.  Determining whether an individual is “primarily responsible” for directing or controlling such a filing will be an important new determination for individuals and entities that engage in new entity formations.  The Small Entity Compliance Guide states as an example that if “Individual A” prepares the necessary documents to create a company and directs “Individual B” to file the documents with the relevant state or tribal office, then “Individual A” is a company applicant, and “Individual B,” who directly files the documents to create the company, is also a company applicant.

A company applicant, therefore, may be an individual employed by a business service company or a law firm, or the company applicant may simply be someone who creates the reporting company and files its formation documents without the assistance of any outside service provider.  If one individual both directs the formation and files the document, then that individual is the only company applicant (note that the Reporting Rule limits the number of company applicants for any reporting company to a maximum of two individuals). 

A company applicant is required to report the same individual information required of beneficial owners but, notably, is not required to update changes to any individual information.

Penalties

Those reporting companies, beneficial owners, and/or company applicants (or more specifically, any person fulfilling the reporting requirements) who willfully provide, or attempt to provide, false or fraudulent information or documents to FinCEN, or who willfully fail to report complete or updated BOI to FinCEN, may be subject to civil and criminal penalties.  The civil penalty could be assessed of up to $500 per day for each day that the violation continues, and the criminal penalty could be a fine of up to $10,000 or imprisonment for up to two years, or both.  The CTA also provides a “safe harbor” for any reporting company to avoid any civil or criminal penalty for filing incorrect information so long as it corrects information that has been filed within 90 days after the date that the report was submitted.

How to File

FinCEN will have a secure online portal on its Beneficial Ownership Webpage for reporting companies to file BOI (both initial and updated reports).  Both initial and updated reports should be filed online through the secure filing system, opening on January 1, 2024.

Conclusions and Action Items

With the window for filing BOI reports opening soon, companies should evaluate how the BOI reporting requirements apply to them, proceed with the collection of necessary information, and ultimately file with FinCEN.  We recommend a step-by-step approach as follows:

• Companies considering whether their entity must comply with the CTA should start with the assumption that the entity is a reporting company and would have to file a BOI report.
• Companies should carefully review the criteria to determine whether they qualify for one of the 23 applicable exemptions.
• Companies, if no exemption applies, should engage in the following:
  • First, they should identify its beneficial owners—the individuals who either exercise substantial control over a reporting company or who own and control at least 25 percent of the ownership interests—and then collect the information required to be reported for those beneficial owners.
  • For companies formed after January 1, 2024, they should also identify “company applicants” and collect information to be reported for those individuals. Note that no company applicant information need be reported for any reporting company formed prior to January 1, 2024.
  • Companies must file the BOI report with FinCEN starting January 1, 2024, subject to the following:
    • Companies existing prior to January 1, 2024, must file an initial BOI report on the FinCEN portal between January 1, 2024, and December 31, 2024.
    • Companies formed after January 1, 2024, and before January 1, 2025, have 90 days to submit initial BOI reports; after January 1, 2025, initial BOI reports are due within 30 days.

• Companies must monitor BOI in case changes require updates (or corrections) to the information previously reported to FinCEN. Reports containing updates or corrections are due within 30 days after the change occurs.
• Similarly, companies who have been exempt from the CTA should be mindful of changes in their organization that might cause such existing exemption not to apply.

As the reporting of BOI under the CTA is new, ambiguities remain as to its interpretation, and FinCEN may continue to update, revise, and clarify its guidance. 

Analysis of reporting obligations and exemption eligibility will be fact-specific and determined on a case-by-case basis.  Epstein Becker Green is available to discuss issues concerning a company’s situation in more detail.  

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