TAKEAWAYS

• When the Corporate Transparency Act (CTA) goes into effect in January 2024, millions of companies will face new beneficial ownership reporting obligations.
• The Financial Crimes Enforcement Network has proposed allowing non-exempt companies registered after the effective date, for a one-year break-in period, 90 days to make their beneficial ownership filings.
• Companies should take steps before December 31, 2023, to prepare for the CTA.

As has been widely reported, the Corporate Transparency Act (CTA) will become effective January 1, 2024, creating new obligations for millions of public and even the smallest private companies to report beneficial ownership information (BOI reports) with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Companies that are not exempt from CTA reporting (Reporting Companies), that are created or registered on or after the effective date, will have 30 days after they are formed, under current rules, to comply with the CTA reporting obligations. Non-exempt companies created before the effective date will have until December 31, 2024. For more information on the exemptions from the CTA, please refer to the Pillsbury Client Alert published on June 12, 2023.

FinCEN has now proposed amending its reporting rules, to allow entities more time to prepare for the new reporting regime. FinCEN proposes that Reporting Companies created or registered between January 1, 2024, and January 1, 2025, will have 90 days (instead of 30 days) after their creation or registration to file their BOI reports. FinCEN describes this as a one-time-only relaxation of the BOI reporting rules.

What to Do before December 31
The proposed rules might not be adopted, or might be adopted in revised form. Even if the proposed rules are adopted, there is much to be done before the end of 2023 to lessen the impact of the BOI reporting requirements. We recommend that all companies take the following steps before December 31, 2023, to prepare for the CTA:

• Conduct an internal review to identify all business entities that are wholly or partially owned or controlled by the company, such as entities that are part of a company’s corporate group, family ownership group, groups formed by trust relationships, etc.;
• Determine which of the entities have an exemption available from the CTA, and confirm the exemption determination with attorneys and accountants;
• Identify individuals who directly or indirectly (i) “substantially control” a Reporting Company, or (ii) own or control not less than 25% of the ownership interests in the Reporting Company, or (iii) have “any other form of substantial control” over the Reporting Company;
• Act now to dissolve, by year end, unneeded, inactive entities that are not exempt from BOI reporting, so that companies will not have to make filings for them under the CTA when it becomes effective; and
• Accelerate the formation of any required entities you know will be required in 2024, to avoid more accelerated reporting requirements in 2024. (If there is a choice to form a new entity in late 2023 and early 2024, we recommend forming the entity before year end so that the new entity will have until December 31, 2024, to comply with the CTA reporting obligations rather than 30 days.)

Many companies, including public reporting companies, some tax exempt organizations and companies already included within a Federal reporting system, such as banks or broker-dealers, may be exempt from the CTA, although partially owned subsidiaries or affiliates of a public reporting company may not be exempt even if their parent is exempt. If it is determined that some entities do not have an exemption from the CTA, we suggest that non-exempt companies take the following steps:

• Gather requisite information for upcoming filings; and
• Determine if any existing entity will need a separate tax identification number (TIN) (e.g., disregarded entities may use parent’s TIN) and obtain a TIN if necessary. (Confirm with accountants that the TIN requests are properly completed to indicate that the entities will not be filing returns.)

Reporting Companies will need to disclose specific information about themselves, their beneficial owners and their company applicants. As noted above, however, even exempt companies may have non-exempt entities, such as partially owned subsidiaries, that may need to report.

Because even large, exempt companies may have affiliated entities that are not exempt, we recommend that all companies establish record keeping and CTA compliance processes, which should involve the following:

• Internal procedures to record the names and ownership information of entities as they are formed, and as they are dissolved or sold;
• A process for (1) identifying the company “applicant” as defined in the CTA, which generally refers to one or two individuals that form or register the entity, and (2) obtaining the required information, including a copy of a qualifying form of identification;
• A process for monitoring and tracking any changes in information that will require the updating of CTA-related filings;
• Revision of entity formation documents and entity governance documents^[1] to permit each company^[2] to collect CTA-related information from its beneficial owners, including but not limited to:

- A representation by each shareholder, member or partner, as applicable, that it is compliant with, or exempt from, the CTA;

- A covenant by each shareholder, member or partner, as applicable, requiring continued compliance with and appropriate disclosures under the CTA, or to provide evidence of exemption from its requirements;

- Indemnification agreements by each shareholder, member or partner, as applicable, of the company and its shareholders, members or partners, for any failure to comply with the CTA or for providing false information; and

- A consent by each beneficial owner or controlling person for the company to disclose identifying information to FinCEN, to the extent required by law.

• A determination whether it is appropriate for individuals who have a role in the formation of new entities to obtain a FinCEN identifier, to assist in protecting privacy and facilitating the updating of beneficial ownership reporting; and
• Implementation of a process to timely file updated ownership reports.

Compliance with the CTA will require continuous attention going forward. We suggest that you form an internal working group to manage your internal record-keeping for CTA filings.

^{[1] Depending on the structure of the entity, changes to subscription documents, shareholders agreements, fund documents, indemnification agreements and other entity documents that are creating beneficial ownership reporting obligations may also be required to ensure compliance with the CTA.}

^{[2] Investment funds should consider adding similar representations and covenants by their investors to their subscription and management agreements. Lenders should also consider adding similar representations and covenants by their borrowers to their loan documents.}

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