By: William L. Bricker Jr. and John Bricker
The Corporate Transparency Act (the “Act”) requires both existing and newly formed corporate entities (a “Reporting Company”) to file a report with the U.S. Department of Treasury identifying the entity’s beneficial owners.[1]
1. Entities Required to Report.
Any domestic or foreign entity that meets the definition of a Reporting Company must file a report with FinCEN.
· A domestic reporting company is:
o a corporation, a limited liability company, or any other entity that is created by the filing of a document with a secretary of state or equivalent office.
· A foreign reporting company is an entity that is:
o a corporation, a limited liability company, or other entity that is formed under the law of a foreign country, AND
o has registered to do business in the United States by the filing of a document with a secretary of state or equivalent office.
Trusts and general partnerships generally do not have to report because they are not formed by filing a document with a secretary of state or equivalent office. Charitable entities and larger operating companies (defined as having more than 20 full-time employees, $5 million in gross receipts or sales, and a physical office in the U.S.) are also exempt from reporting requirements.
2. What Must Be Reported?
A Reporting Company will be required to report information (i) about itself and (ii) information about its beneficial owner(s) as follows:
(i) Company’s full legal name,
(ii) any trade name or doing business names,
(iii) business address,
(iv) jurisdiction of incorporation or organization, and
(v) its taxpayer identification number.
For each individual “Beneficial Owner” of a Reporting Company:
(i) full legal name,
(ii) date of birth,
(iii) current residential address or, in the case of a Company Applicant who forms companies in the ordinary course of business, a business address,
(iv) unique identification number from a passport or other government identification document, and
(v) an image of such passport or other government identification document.
A Beneficial Owner is generally an individual who: (1) exercises “substantial control” over the Reporting Company; or (2) owns or controls at least 25% of the ownership interests of the Reporting Company.
· Substantial control is determined by the power an individual may exercise, such as the ability to direct, determine, or exercise substantial influence over important decisions for the Reporting Company.
· Any senior officer is deemed to have substantial control over a Reporting Company.
· This will include senior officers, such as the CEO, COO, CFO, president, and general counsel, among others, even if they have no ownership stake in the company.
Ownership interests generally refer to arrangements that establish ownership rights in the reporting company, including common or preferred shares as well as debt convertible to stock of the company.
Ownership interests are calculated by the “vote or value” approach for corporations, entities taxed as corporations, and other entities that issue shares. Under this approach the ownership interest is the greater of the individual’s voting power as percentage of total outstanding voting power and the individual’s ownership interest value as percentage of total outstanding ownership value.
For entities that are not corporations and do not issue shares, ownership interest is calculated by comparing the individual’s ownership interest to the outstanding ownership interest in the company.
Reporting Companies formed after January 1, 2024, must also identify the person(s) who filed the company’s formation documents (“Company Applicants”). A Company Applicant includes an individual who:
(i) directly files the document that creates the domestic reporting company or that first registers the foreign reporting company, or
(ii) is primarily responsible for directing and controlling the filing of the documents.
Company Applicants can be individuals in a business formation company, law firms, or individuals associated with the reporting company or its formation. The Reporting Company must obtain the required information and documents from each Company Applicant in order to timely apply with its FinCEN reporting obligations.
3. Who Will Have Access to the Report?
The Act authorizes FinCEN to disclose beneficial ownership information to federal, state, local law enforcement agencies; foreign law enforcement and national security agencies; and financial institutions and their regulators for Customer Due Diligence purposes. The Act imposes stringent access requirements and safeguards on the requesters listed. The information is to be kept electronically in a private database that is secure and protected. FinCEN has not indicated how this will be handled in practice.
4. How To File?
FinCEN is currently designing and building a new IT system called the Beneficial Ownership Secure System to collect and store reports for future filings.
5. When is a Report Due?
Initial Report
· A Reporting Company formed prior to January 1, 2024 will have one year (until January 1, 2025) to file its initial report.
· A Reporting Company formed on or after January 1, 2024 must file its initial report within thirty (30) days of the earlier of (i) the date on which a Reporting Company received actual notice that its creation (or registration) has become effective; or (ii) the date on which a secretary of state or equivalent office provides public notice, (e.g. a publicly accessible registry, that the Reporting Company has been created (domestic) or registered (foreign)).
Updated Report
· If there is a change in beneficial owner information after the initial report is filed, the Reporting Company will have to file an update within thirty (30) days of such change.
Failure to report can lead to civil and criminal penalties, including up to a US$500 fine per day, and up to a US$10,000 fine or imprisonment for up to two (2) years for a criminal violation.
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As if the Act were not sufficient, in June 2023 the New York State legislature passed the New York LLC Transparency Act (the “NYLTA”), which waits Governor Hochul’s signature before becoming law. If Governor Hochul signs the NYLTA, it will become effective 365 days after her signature. The NYLTA would require all existing and newly formed New York LLCs, as well as foreign LLCs that register to do business in New York, to report their “beneficial owners” to the New York Department of State and to update any ownership changes. Unlike reporting under the federal legislation, the New York reporting will be available in a public database for anyone to access.
[1] The reporting will be filed with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). FinCEN is a bureau of the U.S. Department of Treasury that is responsible for combatting U.S. and International money laundering.