January 1, 2024, was a milestone for small businesses and their owners, as well as bankruptcy trustees, receivers, and chief restructuring officers (“CRO” and collectively, “Troubled Company Fiduciaries”) of small businesses in a troubled company situation (“Debtors”). Why? The Corporate Transparency Act (the “Act”) – historic legislation that requires certain companies to report information about the company and the company’s owners with the U.S. Financial Crimes Enforcement Network (“FinCEN”) – became effective January 1st. The impact of the Act on assignees for the benefit of creditors (“Assignees”) is less significant because the assignment estate (the “ABC Estate”) is unlikely to be a “Reporting Company” (as defined below). Similarly, liquidating or litigation trusts (collectively “Liquidation Trusts”) created pursuant to a bankruptcy plan or other court order are not themselves Reporting Companies.

Knowing how the Act impacts Troubled Company Fiduciaries requires an understanding of:

• Which entities are required to file reports of beneficial ownership (“Reporting Companies” and “BOI Reports,” respectively);
• Who is considered to beneficially own a Reporting Company (“Beneficial Owners”);
• What information is required to be provided to and reported by a Reporting Company for each Beneficial Owner (“Beneficial Owner Information”); and
• The consequences of failure to report.

For Troubled Company Fiduciaries, the next step is to evaluate the structure and relationship of the parties to the Debtor to determine (i) whether a Reporting Company filing is required, (ii) any necessary Reporting Company due diligence, and (iii) what Beneficial Ownership Information must be provided by the trustee, receiver, or other party to a Reporting Company for its BOI Report.

To determine reporting obligations, Troubled Company Fiduciaries should answer the following questions:

• Is the Debtor a Reporting Company required to file a BOI Report identifying its Beneficial Owners?
• Is a party associated with the Debtor a Beneficial Owner of a Reporting Company which is required to provide Beneficial Owner Information to a Reporting Company to submit in a BOI Report?

Beneficial Ownership Information Reports

New Reporting Companies formed on or after January 1, 2024, are required to report to FinCEN (i) information about the Reporting Company, (ii) the persons who file or direct or control the filing of the documents that create a domestic company or register a foreign company (a “Company Applicant”), and (iii) the Beneficial Owners of the Reporting Company – individuals who have substantial control over a Reporting Company or own or control at least 25% of the ownership interest in a Reporting Company. Reporting is required within 90 days of formation for Reporting Companies formed in 2024 and within 30 days of formation for Reporting Companies formed after 2024.

Reporting Companies organized on or before December 31, 2023, must report information about the Reporting Company and its Beneficial Owners, but not about any Company Applicant, to FinCEN by December 31, 2024. Thus, there is a window of time for Reporting Companies in existence before January 1, 2024, to report.

Changes in BOI Reports must be timely filed within 30 days of a change in circumstances required to be reported under the Act. For example, when a Reporting Company becomes a Debtor and a Troubled Company Fiduciary becomes involved with the Debtor, which triggers a change in substantial control of the Reporting Company, requiring an update to any existing BOI Report the Reporting Company previously filed with FinCEN (more on this issue below).

Need for and Use of Information

Regrettably, money laundering, terrorist financing, human trafficking, and other illicit activities are real concerns, and bad actors use entities and financial systems for nefarious purposes. The Act is the U.S. response to global efforts related to the international Financial Action Task Force (“FATF”) to counter these activities. The U.S. has never had a centralized registry of entities and beneficial owners to assist law enforcement; the Act is a first step to close that gap. It is an unfortunate burden, but it is our present reality.

There is understandable concern as to access to the reported information. The information will be collected via the Beneficial Ownership Secure System (“BOSS”). BOSS is intended to be secure and with access limited to law enforcement, government agencies, and similar authorized users. The registry is not public.

Reporting Companies

The Act covers domestic corporations, limited liability companies, and other entities organized by filing a document with a secretary of state or similar office and foreign companies registered to do business in the U.S., subject to 23 specific exemptions, including, for example, companies otherwise subject to government reporting and oversight (such as financial institutions and investment and insurance companies), large operating companies, and tax-exempt entities.

A defining characteristic of a domestic Reporting Company is the manner of its formation. If formation of a domestic entity does not require filing with a secretary of state or similar office, the domestic entity is not considered a Reporting Company. A defining characteristic of a foreign Reporting Company is the requirement of registration with a secretary of state or similar office. If no registration is required, the foreign structure is not considered a Reporting Company.

While a Debtor may be a Reporting Company, a receivership, ABC Estate, or Litigation Trust itself should not be considered a Reporting Company with a separate BOI Report filing obligation. A receivership is a remedy established by a court, not an entity. Similarly, an ABC Estate is a structure established by common law or statute rather than an entity. Lastly, a trust is a legal relationship, not an entity. However, a Troubled Company Fiduciary with broad powers will likely be considered to have a responsibility to see that a Debtor with reporting obligations fulfills its obligations and does not incur penalties for non-compliance (discussed below). Furthermore, if the Troubled Company Fiduciary is itself a domestic entity organized by filing with a secretary of state or similar office such as a limited liability company, which is typically the case, the trustee or receiver itself will likely have its own BOI Report filing obligations. For further guidance on these filing obligations see:

• The Corporate Transparency Act Takes Effect January 1, 2024 – What to Know and How to Report

Beneficial Owners

Reporting Companies are required to report Beneficial Owners. Beneficial Owners are individuals, not entities. Thus, if there are tiers of entities in an organization, the determination of the ultimate Beneficial Owners to be identified in the BOI Report requires analysis at each level of the overall organization. There are two categories of Beneficial Owners – (i) persons with substantial control over a Reporting Company; and (ii) persons with specified levels of ownership interests in a Reporting Company.

Substantial control. A person who has “substantial control” over a Reporting Company is a Beneficial Owner. There are three specific indicia of substantial control:

• Service as a “senior officer” of a Reporting Company (de jure authority);
• Authority over the appointment or removal of any senior officer of a Reporting Company or a majority of the board of directors (or similar body) of a Reporting Company (de facto authority); and
• Direction, determination, or substantial influence over “important decisions” made by the Reporting Company (de facto authority).

There is also a catchall for “any other form of substantial control” intended to encompass novel and less conventional ways in which control may be substantial. The intention is for the meaning of substantial control to be comprehensive and flexible with application in a broad range of circumstances.

Senior officers include individuals holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, chief restructuring officer, or any other officer, regardless of official title, who performs a similar function, but not those with ministerial functions, such as a secretary or treasurer.

Important decisions include, by way of example, decisions regarding:

• The nature, scope, and attributes of the Reporting Company, including the sale, lease, mortgage, or other transfer of any principal assets of the Reporting Company;
• The reorganization, dissolution, or merger of the Reporting Company;
• Major expenditures or investments, issuance of any equity, incurrence of any significant debt, or approval of the operating budget of the Reporting Company;
• The selection or termination of business lines or ventures, or geographic focus, of the Reporting Company;
• Compensation schemes and incentive programs for senior officers;
• The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts; or
• Amendment of any substantial governance documents of the Reporting Company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures.

Substantial control may be exercised directly or indirectly, including as a trustee of a trust or similar arrangement. Examples include, but are not limited to:

• Board representation;
• Ownership or control of a majority of the voting power or voting rights in a Reporting Company;
• Rights associated with any financing arrangement or interest in a Reporting Company;
• Ability of a trustee or beneficiary to dispose of a trust’s assets;
• Control over one or more intermediary entities that separately or collectively exercise substantial control over a Reporting Company;
• Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or
• Any other contract, arrangement, understanding, relationship or otherwise.

Depending on the particular constellation of a Reporting Company Debtor, one or more individuals, including the Troubled Company Fiduciary, may be considered to have substantial control of the Reporting Company Debtor, and thus constitute a Beneficial Owner, by reason of their substantial influence over important decisions with respect to the Reporting Company Debtor.

For example, assume that JDS, LLC (“JDS”), a financially troubled Reporting Company, requires the assistance of turnaround expert Bill Jones.

• As a Reporting Company, JDS is required to file a BOI Report and keep its BOI Report current.
• JDS will be required to provide personally identifying information for Mr. Jones as a Beneficial Owner of JDS on its BOI Report if Mr. Jones is appointed:
  • CRO of JDS with broad powers;
  • Chapter 7 or 11 trustee with broad powers in a bankruptcy case filed by JDS; or
  • Receiver of JDS with broad powers.

If Mr. Jones is employed through an entity (whether through his employer or an entity set up by Mr. Jones), the entity is, in effect, disregarded for reporting purposes and Mr. Jones must be named personally. Additionally, the entity may have independent reporting obligations under the Act.

• Mr. Jones is not considered a Beneficial Owner of JDS and associated reporting of Mr. Jones’ personally identifying information or FinCEN identifier is not required if:
  • JDS assigns its assets in an assignment for the benefit of creditors to Bill Jones ABC, LLC, a special purpose entity created to receive JDS’s assets and Mr. Jones is named Assignee; or
  • Mr. Jones is named trustee of the JDS Liquidation Trust, a trust created through the Chapter 11 plan in the bankruptcy case of JDS.

However, Bill Jones ABC, LLC itself may have its own obligation to file a BOI Report identifying the Beneficial Owners of Bill Jones ABC, LLC.

Ownership interests. Individuals who directly or indirectly own or control at least 25% of the ownership interests in a Reporting Company are Beneficial Owners. Ownership interests are defined very broadly and include equity, stock, voting rights, or capital or profits interests; convertible interests into equity, stock, voting rights, or capital or profits interests; puts, calls, straddles, or other option privileges of buying or selling equity, stock, voting rights or capital or profit interests; or any other similar arrangement to establish ownership.

Regarding a trust that holds an ownership interest in a Reporting Company, the trust itself is not the Beneficial Owner. Rather, it is the constituent party or parties to the trust relationship, including:

• The trustee(s) of the trust or other individuals, if any, with the authority to dispose of trust assets;
• Each beneficiary, if any, who is the sole permissible recipient of income and principal from the trust or has the right to demand a distribution of or withdraw substantially all of the assets from the trust; and
• A grantor or settlor who has the right to revoke the trust or otherwise withdraw the trust’s assets.

The rules with respect to the relevant parties to a trust pertain to trusts of all kinds but were developed with a view to private trusts commonly used in gift and estate planning, not bankruptcy or similar circumstances. Nonetheless, the rules apply to bankruptcy and similar circumstances.

Once the relevant individuals are identified, the next step is to determine whether the 25% threshold is met. Each individual’s ownership interest as a percentage of the total shares or interests in the Reporting Company is calculated. Thus, if a person is identified as an owner via multiple trust relationships or otherwise, it is anticipated (although not entirely certain based on current guidance) that their interests would be aggregated for purposes of computing the 25% ownership threshold.

Creditor exception.Notably, in the context of Debtor Reporting Companies, a Beneficial Owner does not include a creditor of a Reporting Company which would meet the requirements of a Beneficial Owner solely through rights or interests for the payment of a predetermined sum of money, such as a debt incurred by the Reporting Company, or a loan covenant or similar right associated with the right to receive payment that is intended to secure the right to receive payment or enhance the likelihood of repayment. If, however, debt is converted to equity and the threshold for ownership discussed above is met, the creditor with equity likely will become a Beneficial Owner required to provide identifying information for relevant parties to the Debtor Reporting Company for reporting in an update to its BOI Report.

There are also exceptions for minor children, agents, and employees. For minors, the parent or legal guardian is reported, until the child attains majority, determined under the law of the state of the organization of the Reporting Company.

Again, if there are layered entities, the analysis requires tracing to the level of individuals– persons with personally identifying information such as a picture identification and a home address.

Information Required to Be Reported

The next question is what information is required to be provided with respect to a Beneficial Owner? The list is short, but the information is personally identifying:

• Full legal name;
• Date of birth;
• Complete current residential street address (not a P.O. box or business address); and
• Unique identifying number and issuing jurisdiction from and image of a non-expired U.S. passport, state driver’s license, or state, local, or tribe-issued identification documents (or if none of these are available, a foreign passport).

Rather than providing personally identifying information to each Reporting Company of which an individual is a Beneficial Owner, what is known as a “FinCEN Identifier” may be obtained from FinCEN online by providing the information listed above via the FinCEN website. Once a person has a FinCEN Identifier, they may provide this number to Reporting Companies in lieu of the information listed above.

Changes in Beneficial Owners and the identifying information for Beneficial Owners are required to be promptly reported to a Reporting Company, which in turn is required to update its BOI Report with FinCEN within 30 days of the change. For example, the appointment of a CRO for a Debtor Reporting Company would constitute a change in the Beneficial Owners requiring an updated BOI Report filing.

Consequences for Failure to Report

Penalties for willful failure to report can be imposed on Reporting Companies and on Beneficial Owners of Reporting Companies. Willfully failing to file a report or causing a Reporting Company not to file a required report or to report incomplete or false beneficial ownership information to FinCEN may result in civil or criminal penalties – civil penalties up to $500 each day a violation continues, or criminal penalties including imprisonment up to two years and a fine of up to $10,000.

Troubled Company Fiduciaries

As the discussion above highlights, the Act impacts Troubled Company Fiduciaries in several ways, including:

• Conducting due diligence to determine whether the Debtor is a Reporting Company and related oversight by the trustee or receiver of required BOI Report filing (and required updates to BOI Reports);
• Providing personally identifying information or FinCEN Identifier of the trustee or receiver to the Debtor Reporting Company for filing in its BOI Report and updating such information upon relevant changes; and
• Compliance generally with the terms of operating agreements and limited partnership agreements, which typically impose an obligation on shareholders, members, and partners to provide to the company or partnership all information required for the company or partnership to comply with its regulatory obligations and consent to the disclosure of information as required for the company or partnership to comply with its regulatory obligations.

Compliance with the Act is an added responsibility for Troubled Company Fiduciaries, and it is expected that there will be resistance from those considered Beneficial Owners in providing required personally identifying information. Resistance is understandable. Education and communication will reduce the friction and ease the process.

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