Dear Client:
You may be affected by the Corporate Transparency Act (“CTA”), which is a new federal law that becomes effective January 1, 2024. The CTA applies to entities that were formed by a filing with the state’s secretary of state and to the owners and principals of those entities and those people that exert control over those entities. The CTA requires those people to file a report with the Financial Crimes Enforcement Network (“FinCEN”). Noncompliance with the filing requirement may result in significant penalties to you.
Corporate Transparency Act
In summary, the CTA requires certain entities (called “reporting companies”) to file with the Federal Government information on the entity, their beneficial owners (explained below), and company applicants (the persons who signed and/or filed the formation documents for the entity). The reporting requirements are applicable to a broad range of people and entities. Penalties for inaccurate and untimely reporting will be imposed.
If your entity was formed with the secretary of state prior to December 31, 2023, your initial reporting deadline is delayed until January 1, 2025. Entities formed on or after January 1, 2024, must comply with the reporting rules within 90 days after the entity is formed. For new entities created on or after January 1, 2025, the reporting deadline will be no later than 30 days after the entity is formed. The information necessary to properly file the required report should be gathered contemporaneously with or shortly after the entity is formed.
Entities that must report include corporations (including Subchapter S corporations), limited liability companies, LPs, LLPs, LLLPS and other types of entities that are formed by filing documents with the state’s secretary of state. Those individuals who own interests, whether in trust or outright, in such entities, whether they are active businesses or created to hold particular assets or for particular estate planning purposes, will be required to report to the Federal Government.
Each entity or individual required to report with the government will file its initial report online with FinCen.gov/boi on the form that will be accessible on the FinCEN website. As of the date of this letter, no form is available. The form will request the following information to be provided: (1) the full legal name and any trade or “doing business as name” for the reporting company, (2) a complete physical address of the reporting company (no P.O. Box or the address of the attorney who formed the entity), (3) state of formation, and (4) the Taxpayer Identification Number for the reporting company. The report must also include the following information for each beneficial owner and each company applicant: (1) full legal name, (2) date of birth, (3) complete current residential address, and (4) a unique identifying number from certain official governmental identification documents (e.g., non-expired passport or government issued driver’s license), and a copy of the document used.
A beneficial owner includes any individual who, directly or indirectly, either (i) exercises “substantial control” over a reporting company or (ii) owns or controls at least 25 percent of the ownership interests of such reporting company. There are a lot of key phrases in this definition, including “directly or indirectly,” “substantial control,” “owns or controls,” and “ownership interests.” Please review the final FinCEN rule for Beneficial Ownership Information Reporting Requirements (the “FinCEN rule”) for further information. Additional detailed information can be found on FinCen.gov/boi.
“Substantial control” over a reporting company can include (i) serving as a senior officer of the reporting company; (ii) having authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); and (iii) having substantial influence over important decisions made by the reporting company (which is further defined in the FinCEN rule). It is important to note that a person acting as trustee of a trust may have direct or indirect control of an entity owned by the trust.
“Ownership interests” include not only equity and stock instruments (and other similar arrangements), regardless of whether they are transferable or confer voting rights, but also a broad array of other interests, rights, and other arrangements set forth in the FinCEN rule.
Beneficial owners also include those who “control” ownership interests, including holding the interest as a joint owner, through an individual who acts as agent or nominee of the beneficial owner, through ownership or control of intermediary entities, or through a trust.
If a trust holds an ownership interest, the FinCEN rule provides that the beneficial owner is the trustee of the trust or other individual “with the authority to dispose of trust assets,” which may include a power of appointment. A trustee of a trust that holds a 25% ownership interest in a reporting company is likely to be a beneficial owner. But in addition to the trustee, the term also includes (a) a beneficiary who (i) is the sole permissible recipient of income and principal from the trust or (ii) has the right to withdraw or to demand a distribution of substantially all of the assets from the trust; and (b) a grantor who has the right to revoke the trust or otherwise withdraw the assets of the trust. These provisions could implicate a number of individuals who hold beneficial interests in the trust, and also include others associated with the trust, such as a trust protector, depending on the powers granted to these individuals under the trust agreement or applicable law. A reporting company that has trusts in the ownership or control structure will need to plan ahead to determine which individuals might be deemed to be beneficial owners of the entity as a result of their interests in or powers over the trust, and then gather all the information which may need to be reported on those individuals.
There are exceptions to the reporting requirements of the CTA, notably for many non-profits (but not including an entity owned by the non-profit), banks, and large companies with more than 20 employees, gross receipts in excess of $5 million and a physical office in the United States. In addition, if a minor is a beneficial owner, the minor’s parents’ information may be reported instead of the minor child’s information until the minor reaches the age of majority.
As noted earlier, for reporting companies in existence prior to January 1, 2024, an initial filing is required no later than January 1, 2025. For any reporting company created on or after January 1, 2024, and through December 31, 2024, the initial filing is due no later than 90 days after the company’s formation; companies formed after December 31, 2024, have initial filings due no later than 30 days after the company’s formation.
Updated reports are required within 30 days of any change in the reportable information of any of the beneficial owners or the identities of the beneficial owners. For instance, if a reporting company is wholly owned by A, and A moves, then the reporting company must file an updated report within 30 days of A’s address change. If A changes his or her name, then an updated report must be filed within 30 days of the name change. There are special rules regarding reporting after a death and transfers of ownership interests upon death. There are also many open questions as to what other events may constitute a change that triggers a requirement to file an updated report.
For individuals who are beneficial owners, it is possible to obtain a FinCEN Identifier (a confidential number similar to a social security number) that can be given to the reporting company. The reporting company would then file its report using the beneficial owner’s FinCEN Identifier. The individual will be responsible for updating FinCEN with any reportable changes within 30 days of any such change.
Severe penalties exist for willfully failing to report complete or updated beneficial ownership information to FinCEN or willfully providing false or incomplete information. The penalties for violations are up to $500 for each day that the violation continues or has not been remedied, up to a fine of $10,000, and up to 2 years imprisonment.
In addition, if you may be a beneficial owner, or a person responsible for making sure a reporting company is in compliance with this new law, ensure you have all the information necessary for timely compliance. For example:
- If you have ownership interests in any company that may be subject to the CTA reporting requirements, inquire with the company what steps it will be taking to ensure timely compliance with the law.
- If you are the trustee of a trust that holds an interest in a reporting company, and if the trust may hold a 25% interest in or control over the reporting company, you should consider having an advisor review the trust instrument to determine who may hold powers that could make them a beneficial owner and begin to gather the necessary information.
- If you believe that you may be a beneficial owner of one or more reporting companies, whether you are considered a beneficial owner because of direct ownership or control of the company or via an indirect interest, you may wish to apply to FinCEN for a FinCEN Identifier.
- It is uncertain what should be reported if a reporting company has no tax identification number (such as a single member LLC) because it uses an individual’s social security number. Because of this uncertainty, it may make sense to apply for a tax identification number now.
This law is still evolving. Please be sure to stay abreast of the CTA updates available on the FinCen website FinCen.gov/boi. If you would like to engage us to assist you with CTA compliance, please contact us.
Eberle Berlin