Tag: Financial Crimes Enforcement Network

Client Update: Corporate Transparency Act Report of Beneficial Ownership Information

Pursuant to the Corporate Transparency Act of 2021 (31 USC 5336) (the “Act”), beginning on January 1, 2024, most newly formed entities (including but not limited to corporations, limited liability companies, and certain partnerships) will be required to report to the Financial Crimes Enforcement Network (“FinCEN”) information about the identity of the entity’s beneficial owners and senior officers. By January 1, 2025, most existing entities will have to make such a report.

Who needs to file?

Most entities, especially those newly formed, will need to make a report to FinCEN at some time in 2024. While most people will readily identify this as a requirement for businesses (and dismiss it as such), it is important to remember that the reporting requirement will extend to ALL entities that don’t qualify for an exemption. This means that every small business, like family corporations and single-member LLCs, that are organized through a filing with a US state will have to comply. The requirements will also extend to other entities, including so-called “single asset” LLC’s that are or were established for a non-business purpose, for things like real estate (such as a family cottage), private planes, and holding companies.

As mentioned above, while there are numerous exemptions available, they are mainly related to businesses that operate in industries that are already highly regulated. One, more widely applicable exception is one dealing with “large operating companies,” which will exempt those companies that meet ALL of the following criteria:

  • More than 20 employees (annualized FTE’s);
  • More than $5M in gross receipts (as reported on the prior year’s return); AND
  • Maintain a physical presence (either owned or leased) in the United States.

Additionally, considering the vast numbers of administratively dissolved corporations and limited liability companies that are not in good standing, another broadly applicable exemption may apply for certain “inactive” entities that meet ALL of the following criteria:

  • was in existence on or before January 1, 2020.
  • is not engaged in active business.
  • does not have any ownership by foreign person, directly or indirectly.
  • has not experienced a change in its ownership in the preceding twelve-month period.
  • has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period; AND
  • does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

Finally, sole proprietorships and general partnerships that are not incorporated or organized by a filing with a US state (and consequently lack the liability protections and other benefits of operating under such filings) will also be exempt from reporting. Thus, while many entities will slip through the net by virtue of being too small or too large, the vast majority of entities in the middle will not.

What must be reported?

If an entity is not eligible for one of the exemptions identified above, it is a “reporting company” under the Act and is obliged to make a report. Reporting companies will need to identify their “beneficial owners” [1] and those individuals who have “substantial control” [2] over the entity. With regard to each such person, a reporting company is required to report ALL of the following information:

  • their full legal name,
  • their date of birth,
  • their current residence or business address.
  • the unique identifying number from an acceptable identification document (such as a nonexpired driver’s license, state issued ID, or passport); and
  • an image of the identification document that includes the unique identifying number.

Additionally, while the Act does not require annual reporting, reporting companies will be obligated to update their reports within 30 days of any change in the reported information. That means a reporting company will have to update their FinCEN report each time an owner/officer is added or removed and for things as simple as when such people change addresses.

Do I really need to comply?

YES! Willful failure to file an initial or updated report with FinCEN is subject to a $500/day fine (up to $10,000) and imprisonment for up to two years.

What to do now?

If you a contemplating forming a new entity, it may be advantageous to file your organizing documents (such as Articles of Incorporation for Corporations or Articles of Organization for LLCs) by the end of 2023. This will provide you with added time to gather the information that FinCEN requires and allow some time for FinCEN to “work out the kinks.”

If you will form a new entity after January 1, 2024, you should make gathering the personal information of your principals part of your organizing process. Note that under FinCEN’s current rulemaking, new entities will be required report their beneficial owners within 30 days of the filing of their organizing documents.

If your entity is already operating, now is a good time to start gathering all of the information about your beneficial owners and officers with substantial control.

Contact your Fraser attorney for more information.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Robert D. Burgee is an attorney at Fraser Trebilcock with over a decade of experience counseling clients with a focus on corporate structures and compliance, licensing, contracts, regulatory compliance, mergers and acquisitions, and a host of other matters related to the operation of small and medium-sized businesses and non-profits. You can reach him at 517.377.0848 or at bburgee@fraserlawfirm.com.

[1] “Beneficial owner” means, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise—

(i) exercises substantial control over the entity; or

(ii) owns or controls not less than 25 percent of the ownership interests of the entity.

[2] “Substantial Control” refers to the entity’s officers, directors, and those with the power and authority to make or direct the major decisions for the entity. Note that a person may have substantial control without actually “owning” the company, nonetheless that person’s information must be reported to FinCEN.

Corporate Transparency Act Imposes Significant New Reporting Requirements on Businesses

Congress recently passed the Corporate Transparency Act (“CTA”), which requires certain business entities to report the “beneficial ownership” of an entity to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FINCEN”).

The CTA is intended to deter activity such as money laundering, financing terrorism, and tax fraud, among other things. Failure to disclose the necessary information may subject businesses to significant civil and criminal penalties.

FINCEN is charged with developing regulations to implement the CTA by January 1, 2022. It released an advance notice of proposed rulemaking on April 5, 2021.

What Businesses Does the CTA Apply to?

The CTA applies to a “reporting company,” which under the statute includes a corporation, limited liability company, or other “similar entity” formed by filing with a secretary of state (or similar office under the law of a state) or formed under the law of a foreign country and registered to do business in the United States. We anticipate that the regulations developed by FINCEN will further clarify what “similar entity” means.

Several types of entities are exempt from reporting requirements, including government entities, as well as certain financial institutions, certain nonprofits, and publicly traded companies. Entities that (i) employ 20 or more full-time employees in the United States; (ii) filed a federal income tax return showing more than $5 million in gross receipts or sales; and (iii) have an operating presence at a physical office within the United States are also exempt.

An “exempt grandfathered entity” is one that: (i) was formed over one year prior to January 1, 2021; (ii) has not engaged in active business; (iii) is not owned, directly or indirectly, by a foreign person; (iv) has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000; and (v) does not otherwise hold any type of assets.

Who is a Beneficial Owner or Applicant?

Under the CTA, a “beneficial owner” is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, (i) exercises substantial control over a corporation or limited liability company; (ii) owns 25% or more of the equity interests of a corporation or limited liability company; or (iii) receives substantial economic benefits from the assets of a corporation or limited liability company.

A reporting company must submit a report to FINCEN that discloses the full legal name, date of birth, address, and a unique identifying number from an acceptable identification document or a FINCEN identifier of any beneficial owner.

Reporting companies must also disclose similar information for any “applicant.” An “applicant” includes an individual who: (i) files an application to form a corporation, LLC, or other similar entity under state or Indian Tribe law; or (ii) registers or files an application to register a corporation, LLC, or other similar entity formed under the laws of a foreign country to do business in the United States by filing a document with the secretary of state or similar office under state or Indian Tribe law.

When Must Reporting Occur?

A reporting company that is formed or registered after the effective date of the regulations must submit a report to FINCEN with the beneficial ownership information related to the reporting company at the time it is formed or registered. A reporting company that was formed or registered before the effective date of the regulations must submit a report to FinCEN no later than two years after the effective date of the regulations. To the extent that there are changes in reported beneficial ownership information, a reporting company must submit an updated report to FINCEN by no later than one year after the date of the change.

What are the Penalties for Failing to Comply?

It is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information to FINCEN, or willfully fail to report complete or updated beneficial ownership information to FINCEN. Violations are subject to civil penalties of not more than $500 for each day that the violation continues, and criminal penalties of imprisonment of up to two years and fines of up to $10,000.

There is a safe harbor rule that protects individuals from liability if they voluntarily follow procedures and submit a report with correct information within 90 days. The safe harbor is inapplicable to individuals who submit a report with knowledge that it contains incorrect information in an effort to evade reporting requirements.

We Can Help

The foregoing is a summary of some of the important provisions of the CTA. The statute is lengthy and complex and there is much more to know. Businesses should consult with their attorney to understand their obligations under the CTA. For assistance, please contact Ed Castellani or your Fraser Trebilcock attorney.

Fraser Trebilcock Business Tax Attorney Edward J. CastellaniEdward J. Castellani is an attorney and CPA who represents clients involved with alcohol beverages as a manufacturer, wholesaler, or retailer. He leads the firm’s Business & Tax practice group, and may be contacted at ecast@fraserlawfirm.com or 517-377-0845.