Companies have always been required to report information regarding their officers and directors. They have never had to report information about their owners.
Until now. (Well, soon.)
Last month the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued the final version of its rules requiring small privately held businesses to report information about their owners under the Corporate Transparency Act of 2021. According to FinCen, the rule is “designed to protect U.S. national security and strengthen the integrity and transparency of the U.S. financial system, [by helping] to stop criminal actors, including oligarchs, kleptocrats, drug traffickers, human traffickers, and those who would use anonymous shell companies to hide their illicit proceeds.”
Almost all small, privately held businesses in corporate, LLC, or limited partnership form will be required to report the names of their stockholders, members or partners (it’s the business that files the report, not the individuals). There are many exemptions, including companies in highly regulated industries, publicly traded companies, and companies that have all three of the following: (1) twenty or more employees, (2) over $5,000,000 in annual revenue, and (3) an operating presence at a physical office within the U.S. As FinCen states in the press release adopting the rule: “The rule will require most corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners”.
Not all owners must be reported. Only individuals who own 25% or more of the company or exercise “substantial control” over the company must be reported. Not surprisingly, there are complicated rules to determine percentage ownership, including indirect ownership or “look through” rules. The term “substantial control” has a broad definition and includes being a director or senior officer, having the power to elect or appoint senior officers or a majority of the board of directors, or otherwise having substantial influence over important decisions within the company.
The report must name the above individuals and include their date of birth, address, and an identifying number from a driver’s license, passport or similar document as well as a copy of that document. FinCen is still working on the system (presumably online) by which the ownership reports will be filed.
Companies currently in existence or formed any time through December 31, 2023 have until January 1, 2025 to file their first report. Companies formed on January 1, 2024 or after have 30 days after formation to file their report. All companies must file an updated report within 30 days after any change to, or discovering any inaccuracy in, the information previously reported.
There are penalties of up to $10,000 per occurrence or up to two years in jail for willful failure to comply with the reporting requirement.
The good news is that the information won’t be publicly available. In most cases, it will only be available to FinCen itself and certain law enforcement agencies that will be required to keep it confidential. However, the reporting obligation alone will be a significant administrative burden on small, privately held companies. Owners of small businesses should mark their calendars for mid-2024 to start preparing to file their required report no later than December 31, 2024.
For more information about the ownership reporting requirements, click here for a link to FinCen’s fact sheet on the new rule.
Feel free to contact me if you have any questions. Thanks,
This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.