On January 1, 2024, the new beneficial ownership reporting requirements of the Corporate Transparency Act will take effect in the United States.  As we noted in a prior client alert, the requirements will have a sweeping effect, as many companies created in the U.S. or registered to do business in the U.S. will be required to report certain information regarding their beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury. Entities required to report beneficial ownership information that are formed or registered before January 1, 2024 will have until January 1, 2025 to file an initial beneficial ownership report, and entities required to report beneficial ownership information that are formed or registered after January 1, 2024 but before January 1, 2025 will have 90 days to file an initial beneficial ownership report.

Background

The Corporate Transparency Act (the “Act”) was enacted in January 2021, with bipartisan support, and provides for the most significant overhaul of the nation’s bank secrecy and anti-money laundering laws since the USA PATRIOT Act of 2001. The Act authorizes FinCEN to collect beneficial ownership information about many entities created or registered in the U.S., regardless of business activities. This new reporting regime is intended to combat money laundering, terrorist financing, tax fraud and other illicit activities by making it harder for bad actors to hide through shell companies or other opaque ownership structures. Information collected by FinCEN will be kept in a secure, non-public database and access will be limited to certain government officials and authorized financial institutions. 

Companies Subject to Reporting Requirements

Reporting Companies

Entities that are subject to the Act’s reporting requirements are called “reporting companies” and include both domestic and foreign reporting companies. Domestic reporting companies include any corporation, limited liability company or other entity created by filing a document with a secretary of state or any similar office of a U.S. state, territory or Indian tribe, unless the entity fits within one of 23 exemptions laid out in the Act. Foreign reporting companies include any corporation, limited liability company or other entity formed under the law of a foreign country and registered to do business in any U.S. state, territory or tribal jurisdiction by the filing of a document with a secretary of state or any similar office, unless the entity fits within an exemption.

These definitions are very broad and, in addition to corporations and limited liability companies, will typically cover limited liability partnerships, limited partnerships and statutory and business trusts because they are generally created or registered by a filing with a secretary of state or similar office.  Certain types of entities, including general partnerships and most other trusts, will typically be excluded because they are generally created without the need for a government filing. However, the determination of whether an entity ultimately qualifies as a reporting company is driven by state law and state registration and filing practice. For example, state laws vary on whether certain entity types, such as trusts, require the filing of a document with the secretary of state or similar office to be created or registered. Accordingly, any determination about reporting company status must consider the state specific issues and not rely simply on the type of entity involved.

Exempt Entities

There are 23 exemptions from being deemed a reporting company, which predominantly apply to large companies and their wholly owned subsidiaries, meaning that most smaller entities will be required to report beneficial ownership information. The exemptions generally cover:

• “Large operating companies,” which are entities that have (i) more than 20 full-time U.S. employees (employees cannot be aggregated across related companies), (ii) reported more than $5 million of gross receipts or sales from U.S. sources on a consolidated basis to the IRS for the prior year and (iii) an operating presence at a physical location in the U.S.;
  
  
• Entities registered with the Securities and Exchange Commission, including public companies, brokers-dealers, investment companies, investment advisers, securities exchanges and clearing agents;
  
  
• Banking institutions, including banks, bank holding companies, savings and loan holding companies, trust companies, credit unions and money service businesses;
  
  
• Non-bank financial institutions, including venture capital fund advisers, money service businesses, insurance companies and pooled investment vehicles;
  
  
• Miscellaneous entities, including public accounting firms, public utilities, financial market utilities, tax-exempt entities, entities assisting tax-exempt entities and Commodity Exchange Act registered entities;
  
  
• Entities whose “ownership interests” are wholly owned by one or more of most types of exempt entities (“ownership interests” are discussed below); and
  
  
• Inactive entities that meet certain requirements.

It will be important to carefully review the qualifying criteria before determining that an entity satisfies one of the exemptions.

Reporting Requirements

Contents of Reports

An entity that qualifies as a reporting company and does not satisfy any of the exemptions must submit to FinCEN a report disclosing certain information about itself, each of its beneficial owners and, if the reporting company was created or first registered on or after January 1, 2024, each of its company applicants. The terms “beneficial owner” and “company applicant” are defined in the Act and described further below. Beneficial owners and company applicants are natural persons and cannot be legal entities.

For itself, the reporting company will have to report its legal name, any trade or “doing business as” names, its principal U.S. business address, its jurisdiction of formation and, if it is a foreign entity, the U.S. jurisdiction where it first registered, and its taxpayer identification number or, where a foreign reporting company has not been issued a taxpayer identification number, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction. For each beneficial owner and, if required, company applicant, the reporting company will have to report the individual’s legal name, date of birth, residential address (for certain company applicants a business address may be used instead), a unique identifying number from an acceptable identification document (such as an unexpired passport or U.S. driver’s license) and the name of the issuing jurisdiction. In addition, the reporting company must provide for each beneficial owner and, if required, company applicant, an image of the person’s applicable identification document.

Beneficial Owners

For purposes of the Act, a “beneficial owner” includes any individual (i.e., natural person) who, directly or indirectly, either (i) exercises substantial control over the reporting company, or (ii) owns or controls 25% or more of the ownership interests of the reporting company.

There are four indicators of substantial control: (i) service as a senior officer of the reporting company (i.e., President, CEO, CFO, COO, GC and similar officers); (ii) authority to appoint or remove any senior officer or a majority of the board of directors; (iii) the ability to direct, determine or substantially influence certain important decisions made by the reporting company related to corporate structure, expenditures, business lines, compensation, contracts or governance; and (iv) any other form of substantial control over the reporting company. Note that an individual may be deemed to exercise substantial control over the reporting company through a contract, arrangement, understanding, relationship, or otherwise. An individual that satisfies any of the four indicators for substantial control will be deemed a beneficial owner of the reporting company.

Alternatively, an individual may be a beneficial owner because he or she owns or controls 25% or more of the ownership interests of the reporting company. Any of the following may be an “ownership interest”: equity, stock, voting rights¹ or a similar instrument; a capital or profit interest; an instrument convertible into the foregoing; an option or other non-binding right to buy or sell any of the foregoing; and any other instrument, contract, arrangement, understanding, relationship or other mechanism used to establish ownership. A reporting company may have multiple types of ownership interests and individuals may indirectly own or control ownership interests. Note that depending on the structure of trust arrangements, any of the grantor/settlor, trustee and/or beneficiary of a trust, among others, may be deemed to own or control the ownership interests held in the trust.

After identifying what types of ownership interests a reporting company has issued, the reporting company must determine who owns or controls 25% or more of those ownership interests. If the reporting company has issued any convertible instruments or options, those are assumed to be converted and exercised for purposes of the calculation. Note that there are different approaches to making the 25% calculation depending on the type of entity involved and whether any ownership interests have more voting power or represent more of the value of the entity than other ownership interests.

There are five types of individuals that are exempt from being deemed a beneficial owner: minor children (if information of the parent or guardian of the minor child is reported instead); individuals acting as a nominee, intermediary, custodian, or agent on behalf of another individual; individuals acting solely as an employee of a reporting company and who are not senior officers; individuals whose only interests in a reporting company are through a right of inheritance; and creditors of a reporting company who are beneficial owners solely through rights for the payment of a predetermined sum of money.

If a beneficial owner owns or controls their ownership interests in a reporting company exclusively through entities exempt from reporting beneficial ownership under the Act, then the names of those exempt entities may, in certain circumstances, be reported to FinCEN instead of the individual beneficial owner’s information.

Company Applicants

Only reporting companies created or first registered on or after January 1, 2024 will need to report their company applicants. The term “company applicant” covers up to two individuals who are (i) the person that directly files the document with the secretary of state or similar office creating or first registering the reporting company and (ii) the person primarily responsible for directing or controlling the filing of that document.  Companies and legal entities cannot be company applicants.  If a third-party service provider files the document creating or first registering the reporting company, the individual at that third-party service provider will be a company applicant.

Timeline for Reporting

Reporting companies formed or first registered before January 1, 2024 will have until January 1, 2025 to file an initial beneficial ownership report. Reporting companies formed or first registered on or after January 1, 2024 but before January 1, 2025 will have 90 days after receiving actual or public notice that its creation or registration is effective to file an initial report. Reporting companies formed or first registered on or after January 1, 2025 will have 30 days after receiving actual or public notice that its creation or registration is effective to file an initial report. Additionally, if an entity no longer meets the criteria for an exemption, the entity must file an initial beneficial ownership report within 30 days after the date it no longer qualifies.

After an initial report is filed, there are no annual or quarterly filing requirements.  However, reporting companies must report changes to any previously reported information within 30 days after a change occurs (e.g., registration of a new “doing business as” name, change in beneficial owners or change of residential address of a beneficial owner). Given this updating requirement, companies should have a regular process for considering applicable updates to previously reported information as well as any exemption they may no longer qualify for. Note that a reporting company is not required to file an updated report for any changes to previously reported information about a company applicant.

Next Steps

As the first day to submit beneficial ownership reports approaches (January 1, 2024), companies should prepare for how they will handle the Act:

• Evaluate whether each entity in the organizational chart is a “reporting company” or qualifies for an exemption;
  
  
• Gather necessary information for initial beneficial ownership reports, including from unaffiliated third parties that will need to supply information;
  
  
• Implement appropriate governance and security procedures for any personal information that is collected given state and federal privacy laws;
  
  
• Update internal policies and procedures to ensure required information is obtained and submitted on a timely basis going forward, including for updates; and
  
  
• Consider procedures for obtaining necessary information from third parties going forward, such as information sharing covenants in operating agreements for joint ventures.

¹Note that the definition of “ownership interests” under the Act does not include voting rights and in fact includes equity and stock without regard to whether any such instrument confers voting rights. However, the Small Entity Compliance Guide issued by FinCEN includes voting rights as a type of ownership interest.

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