Corporate Transparency Act Archives - Randel Law, Inc., Your Business and Succession Planning Lawyer as well as Corporate Transparency Compliance

In October of 2022, I sent out an early warning that Congress had adopted the Corporate Transparency Act (CTA), which will require small, privately held companies to report information about their ownership to the federal government. Because the CTA takes effect on January 1, 2024, I thought now would be a good time for a reminder and some updates about the CTA. You can see my earlier post here.

The agency enforcing the CTA is the Financial Crimes Enforcement Network or FinCEN. Initially FinCEN stated that companies formed on or after January 1, 2024, would have thirty calendar days after formation to file their initial BOI (beneficial owner information) report with FinCEN. More recently, FinCEN extended the reporting deadline from thirty days to ninety days. Companies in existence on 12/31/23 will still have until 1/1/25 to file their initial BOI report.

Although there have been some lawsuits filed to prevent FinCEN from enforcing the CTA as unconstitutional, the prudent course of action is to assume those challenges will not succeed. Here is a short list of the actions you should be considering:

• Determine whether your company is required to file BOI reports
• Alert your clients and contacts about this new requirement
• Rewrite your corporate documents (and tell your clients to rewrite theirs) so that investors/owners/officers/directors agree to provide the required information to the company (and any changes thereto), and consent to the company submitting that information to FinCEN
• If you or any of your clients invest in or are an officer or director of numerous companies, consider obtaining a “FinCEN Identifier” so you only have to provide your sensitive information one time directly to FinCEN, and not to every company in which they hold shares or are an officer or director.
• If you hear someone talking about forming a new company in the next few months, tell them to consider forming the entity by 12/31/23 to buy an additional year before they have to file their first BOI report (but synch up with their tax advisor to avoid triggering a tax filing or payment for 2023).

Click here to go to FinCEN’s landing page for the Corporate Transparency Act, where you can find further links to useful information such as FAQ’s and a compliance guide. For a more complete summary of the CTA, see the following outline:

What it is:

The Corporate Transparency Act (part of the Anti-money Laundering Act of 2020), a law passed by the United States Congress to prevent drug dealers, terrorists, and other bad actors from laundering their ill-gotten gains in the U.S. by hiding behind shell companies. The law requires small, privately held companies to report “beneficial ownership information” (BOI).

Who enforces it:

The Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury.

Which entities must file reports:

Basically any legal entity formed by filing articles or a similar document with a Secretary of State or similar agency (e.g. corporations, LLCs, and limited partnerships). However, 23 types of entities are exempt from filing BOI reports, including:

• Publicly traded companies
• Highly regulated companies e.g. investment advisers, broker-dealers, insurance companies, banks, etc.
• Tax-exempt entities e.g. 501(c)(3)s
• Privately held companies that have:
(a) Over 20 FT employees in the US
(b) More than $5,000,000 annual revenue, AND
(c) A physical office in the US.

Note it’s the entity itself that must file BOI reports with FinCEN, not the individuals whose information is being reported.

When reports must be filed:

• Entities already in existence on 12/31/23: by 1/1/25
• Entities formed on or after 1/1/24: 90 days after formation
• All entities: within 30 days after a change in previously reported information (including addition of a new individual who must be reported)

Individuals who must be included in the report:

Any individual who exercises “substantial control” over the entity, including:
• Senior Officers (probably includes managers of most LLCs)
• Anyone who controls the appointment of senior officers or election of a majority of the board (note members of the board of directors are not specifically included)
• Anyone who directs, determines, or has substantial influence over important decisions made by the entity (which probably does include directors of most small companies)
Any individual who owns or controls 25% or more of the entity:
• There are extensive rules regarding what counts as an ownership interest and how to calculate the percentage. Non-voting stock is counted. Unexercised options are counted.
• Only individuals are to be reported, whether they own their stock directly in the reporting entity or indirectly through a parent entity. Parent entities are not reported. But if an individual owns stock in a parent entity that indirectly adds up to over 25% of the reporting entity, he or she has to be included in the report. For example, individuals A and B in the below diagram would be reported, but neither parent nor individual C or D would be reported:

3. For entities formed after 12/31/23, any “Company Applicant”, which means any individual who:
• directly filed the document that created the entity; or
• was primarily responsible for directing or controlling the filing of the document that created the entity.
The regulations are unclear for many scenarios (this is another reason to consider forming a new entity prior to 12/31/23).

Information that must be reported:

• The individual’s full legal name
• Date of birth
• Home address (their residence, not their office)
• Unique identifying number from passport, driver’s license or similar government ID
• An image of that document (i.e. a pdf or jpeg)

FinCEN is required to keep the information confidential and only use it for its own law enforcement purposes or only disclose to specified other law enforcement agencies for specified purposes.

An alternative is for individuals who anticipate being included on many different entities’ BOI reports to go directly on FinCEN, submit the information only one time, and obtain a “FinCEN Identifier” to provide to each entity, rather than giving their home address and a picture of their driver’s license or passport to numerous entities.

How to file reports:

• Online in a portal being set up by FinCEN
• Format initially proposed by FinCEN was highly criticized
• FinCEN working on a new format

Penalties for willful failure to file or filing incorrect information:

• Monetary fine of up to $10,000
• imprisonment for up to two years, or
• both

Resources:

FinCEN website: https://www.fincen.gov/boi

FinCEN FAQs: https://www.fincen.gov/boi-faqs

FinCEN fact sheet: https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet

FinCEN compliance guide: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf

This post 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.

Rick Randel New Company Ownership Reporting

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,

Rick

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.