The Corporate Transparency Act (the “CTA”), a set of new regulations being implemented by the Financial Crimes Enforcement Network (“FinCEN”), requires entities newly formed or registered to do business in the United States on or after January 1, 2024 (subject to certain exemptions) to submit a report declaring beneficial ownership information within 90 days of such formation or registration. Entities that were formed or registered to do business in the U.S. prior to January 1, 2024, have one year, until January 1, 2025, within which to submit a report. Currently, there are no extensions available. Reporting violations can lead both to civil and criminal penalties.
Background
The CTA was included as part of the National Defense Authorization Act that was passed by Congress in January 2021. It imposes new reporting and compliance obligations on certain business entities (“Reporting Companies”) as part of the U.S. government’s efforts to promote transparency and limit opportunities for money laundering and other criminal activity committed through shell companies or other opaque ownership structures. The CTA will create a federal database with beneficial ownership information about applicable entities, including corporations, limited partnerships, and limited liability companies. FinCEN is a unit of the U.S. Department of the Treasury.
Who is Affected
The CTA covers both domestic and foreign entities. Domestic Reporting Companies include corporations, limited liability companies, limited partnerships, and any other entity formed by filing a document with a U.S. state’s secretary of state. Foreign Reporting Companies include corporations, limited companies, and other entities formed under non-U.S. law that are registered to do business in any state of the United States.
The CTA currently provides twenty-three exemptions (see below) under which a company will not be considered a Reporting Company and will therefore not be required to file a beneficial ownership report with FinCEN. Importantly, public companies, private investment funds, broker/dealers, registered investment companies, registered investment advisers, and other large and already regulated companies will be exempt. We expect that smaller operating businesses, holding companies, family limited liability companies (including single-member LLCs), and entities formed for purposes of acquisitions, joint ventures, or other strategic partnerships will be most affected by the CTA requirements.
Whose Information is Reported
If a company is determined to be a Reporting Company under the CTA, the company’s “Beneficial Owners” must be identified and their information reported by the Reporting Company to FinCEN. The Act defines a Beneficial Owner of a Reporting Company as any natural person who directly or indirectly (i) exercises “substantial control” over the Reporting Company or (ii) owns or controls 25% or more of the ownership interests of the Reporting Company.
Individuals with “Substantial Control” over a Reporting Company include those who (i) serve as managers or senior officers, such as a president, CEO, or CFO, (ii) have the right to appoint a majority of the board of directors or similar governing body, or (iii) otherwise have substantial influence over important decisions made by the Reporting Company (which may be in the form of contractual rights).
Determining whether a Beneficial Owner owns or controls 25% or more of the ownership interests in the Reporting Company takes direct and indirect ownership into account, and treats options, convertible instruments, and similar equity rights as being exercised. This determination may be simple for some businesses and very complex in other business structures. Ultimately, the ownership test will require Reporting Companies to go “up the chain” of their organizational structures to determine their individual Beneficial Owners. Although under current law, most trusts are not Reporting Companies, trusts that are Beneficial Owners of a Reporting Company will be required to provide Beneficial Ownership Information on their Beneficial Owners to the Reporting Company to enable it to make its report to FinCEN. For trusts, that could include the trustees, beneficiaries, and grantors or settlors (and possibly trust protectors and trustee advisers).
For new entities formed on or after January 1, 2024, in addition to information about Beneficial Owners, the CTA will require certain information to be filed regarding up to two “Company Applicants” of a Reporting Company: (i) a “Company Filer” and (ii) the individual from the Reporting Company who directs the Company Filer. A Company Filer is the individual who directly files the document that creates the Reporting Company (or registers the entity to do business), such as an attorney, paralegal, or an employee at a business formation service.
What Information is Reported
Under the CTA, Reporting Companies are required to report the entity’s:
- full legal name;
- trade names or d/b/a names;
- principal place of business (or, in the case of a foreign Reporting Company, its primary location in the United States);
- State or foreign jurisdiction of formation (and in the case of a foreign Reporting Company, the State where it first registered); and
- unique taxpayer ID number.
The Reporting Company must also disclose for each Beneficial Owner and Company Applicant:
- full legal name;
- date of birth;
- current address (residential for Beneficial Owners, and business for Company Applicants);
- unique identifying number from an acceptable identification document (e.g., driver’s license or passport); and
- a copy of the above acceptable identification document.
The information provided to FinCEN is intended to be confidential and protected via a secure, non-public database typically used by the federal government to protect non-classified yet sensitive information. However, FinCEN will permit federal, state, and local officials (as well as certain foreign officials who submit a request through a U.S. federal government agency), to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will also have access to beneficial ownership information in certain circumstances, with the consent of the Reporting Company. Those financial institutions’ regulators will have access to beneficial ownership information when they supervise the financial institutions.
Changes of any Beneficial Owner of a Reporting Company or to any information about a Beneficial Owner – for example, changes caused by the sale of the business, receipt of a new investment, or name or address change for a Beneficial Owner – require the Reporting Company to file an updated report with FinCEN within 30 days.
How to Report
FinCen is still developing a secure online portal through which it will accept Beneficial Ownership Information, which portal is scheduled to launch on January 1, 2024. Instructions and other guidance regarding Beneficial Ownership information reports will be made available at www.fincen.gov/boi.
Deadlines
As noted above, Reporting Companies newly formed or registered to do business in the United States on or after January 1, 2024, must submit Beneficial Ownership Information within 90 days of such formation or registration. However, after January 1, 2025, new Reporting Companies will only have 30 days to submit such information. Reporting Companies formed or registered to do business in the U.S. prior to January 1, 2024, have one year, until January 1, 2025, within which to submit Beneficial Ownership Information.
Considerations for Investment Managers
Investment managers that are not registered investment advisers may be obligated to file Beneficial Ownership Information reports for their management company, general partners, or affiliates. Although 3(c)(1) and 3(c)(7) funds are not Reporting Companies, there may be indirect reporting done by private companies in which the fund is invested. Fund managers should be prepared to work with portfolio investments and may need to disclose large investors in the fund to such companies.
Risks and Penalties
Reporting violations can lead both to civil and criminal penalties. The CTA states that it is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent Beneficial Ownership Information or to willfully fail to report complete or updated Beneficial Ownership Information. Such a violation caries a civil penalty of up to $500 per day, a fine of not more than $10,000, and/or imprisonment for up to two years.
Next Steps
Seward & Kissel can help you navigate this new law and its compliance obligations. We will share more information on the CTA and reporting requirements as these become available. If you have any questions, please reach out to your Seward & Kissel relationship attorney or a member of the S&K Corporate Transparency Act Committee. In the meantime, impacted individuals or organizations should begin collecting information on any entities created, owned, or over which substantial control is exercised, which entity may be subject to the new reporting requirements.
Exemptions
The following includes a complete list of CTA exempt entities: