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Federal law will soon require that certain companies disclose personally identifiable information about themselves and their beneficial owners and company applicants (i.e., those who file the document that creates the company) to U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

This disclosure obligation, mandated by the Corporate Transparency Act (CTA), will require these companies to identify their beneficial owners and company applicants based on definitions developed by federal regulators. Because these reporting obligations begin on January 1, 2024, companies should begin taking steps now to prepare themselves for this new regulatory regime.

If you own or advise a corporation, limited liability company (LLC), limited partnership (LP), limited liability partnership (LLP), limited liability limited partnership (LLLP), business trust or any other entity created by the filing of a document with a Secretary of State or similar office under the law of a state or Indian tribe, or you are planning to form one of these entities, it’s imperative that you are aware of a new federal filing requirement coming in 2024.

Background

In 2021, Congress passed a new law called the Corporate Transparency Act (CTA) that requires corporations, LLCs, and other business entities to provide information about their owners to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), which is a unit separate from the IRS. The CTA is part of a government crackdown on corruption, money laundering, terrorist financing, tax fraud, and other illicit activity. It targets the use of anonymous shell companies that facilitate the flow and sheltering of illicit money in the United States.

Businesses subject to the law will have to file a Beneficial Owner Information (BOI) report with FinCEN, including each beneficial owner’s full legal name, date of birth, and residential street address, as well as an identifying number from a legal document such as a driver’s license or passport. FinCEN will include the information in a database for use by law enforcement, national security and intelligence agencies, and federal regulators that enforce anti-money-laundering laws. The database will not be publicly accessible.

The CTA did not take effect immediately. Rather, Congress gave the FinCEN time to write regulations governing how the CTA should be applied and to give businesses a heads-up about the new law. FinCEN has now issued its proposed regulations, and they take a fairly hard line on how the law will be applied.

The new regulations make the following clear:

• The filing requirement begins January 1, 2024 – The CTA effective date is January 1, 2024, with the following deadlines:
  • new entities will have to comply with the filing requirement of being formed.
  • existing entities will have one year to comply, and the initial report will be due no later than January 1, 2025.

• Millions of small businesses will be affected – The reporting requirements will apply to almost every small business that is not a sole proprietorship or general partnership, including corporations, LLCs, limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships—over 30 million in all.
  • Larger companies with over 20 full-time employees and $5 million in gross receipts are exempt.
  • Other exempt entities include, for example, publicly traded companies and other entities that file reports with the SEC, banks, credit unions, money services businesses, securities brokers and dealers, tax-exempt entities, insurance companies, state-licensed insurance producers, pooled investment vehicles, and public utilities.

• There will be many beneficial owners – The proposed regulations make it clear that a company can have multiple beneficial owners, and it may not always be easy to identify them all. There are two broad categories of beneficial owners:
  • any individual who owns or controls 25% or more of the company, or
  • any individual who, directly or indirectly, exercises substantial control over the company. Generally, an individual exercises substantial control over a reporting company if, among other requirements specified in the CTA, that individual is a senior executive officer, has authority to appoint or remove a senior officer or a majority of the board of directors, or is able to make or direct important decisions for the reporting company. That individual does not have to own or control any ownership interests of the reporting company.

• Substantial non-filing penalties – Violations of the CTA can result in a $500-a-day penalty (up to $10,000) and up to two years imprisonment.

• BOI report to be filed electronically – The initial BOI report and all updates and corrections will be filed electronically with FinCEN through the FinCEN’s website.

If you have questions about the CTA and its effect on you, we urge you to contact your legal counsel ASAP. From a legal perspective, we are limited in the assistance we can provide, but as your trusted advisor wanted to make you aware of this requirement so that you can plan ahead.

Resources

BOI Reporting – FinCEN
What Every Small Business Needs to Know about the CTA
Reporting to FinCEN Under the CTA
FinCEN Proposes Rules About Access to BOI