Overview:
On the cusp of 2023, “reporting companies” can look ahead even further to 2024. The Financial Crimes Enforcement Network (FinCEN) issued a final rule applying to most corporations, limited liability companies, and other entities – foreign and domestic – under the Corporate Transparency Act (CTA). They must file reports with FinCEN identifying each “beneficial owner” and “company applicant” who directly files the document to form or registers the entity to do business, or who is primarily responsible for directing or controlling such filing.
Reporting companies created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports with FinCEN. Entities created or registered after January 1, 2024, will have 30 days to file their initial reports.
What Is a Reporting Company?
Issued in the final quarter of 2022, the final rule applies to most corporations, limited liability companies and other entities created in or registered to do business in the United States to disclose beneficial ownership information. It applies only to legal entities that have 20 or fewer employees and less than $5 million in gross receipts or sales as reflected in the previous year’s federal tax returns. The final rule sets forth 23 exemptions to the definition of reporting company. Exempt entities are not required to make any filing to claim an exemption; however, if a reporting company becomes an exempt entity after filing an initial report with FinCEN, that change would require the filing of an updated report.
Exempt Entities:
- Public company – An issuer with a class of securities registered under Section 12 or subject to Section 15(d) of the Securities Exchange Act of 1934, as amended
- Government authority – An entity established under the laws of the U.S., a tribe, state, or political subdivision of a state, or under an interstate compact between two or more states, that exercises governmental authority on behalf of the U.S. or any such tribe, state, or political subdivision
- Banks, savings associations, trust companies (including non-depository trust companies), credit unions, bank holding companies, and savings and loan holding companies
- A “money transmitting business” registered with FinCEN under 31 U.S.C. § 5330, and any “money services business” registered with FinCEN under 31 C.F.R. § 1022.380 (e.g., a money transmitter, check casher, issuer or seller of traveler’s checks, provider of pre-paid access, or dealer in foreign exchange)
- Securities brokers or dealers registered with the Securities and Exchange Commission (SEC)
- Exchanges or clearing agencies registered with the SEC
- Other entities registered with the SEC under the Securities Exchange Act of 1934
- Investment companies and investment advisers registered with the SEC
- Venture capital fund advisers that have reported their beneficial ownership information to the SEC on Form ADV
- State-licensed insurance producers
- Futures commission merchants, introducing brokers, swap dealers, major swap participants, commodity pool operators, commodity trading advisers, retail foreign exchange dealers, and registered entities under Section 1a of the Commodity Exchange Act registered with the Commodity Futures Trading Commission
- Public accounting firms
- Regulated public utilities
- Financial market utilities
- Pooled investment vehicles operated by certain exempt entities (see discussion below)
- Certain non-profit and other tax exempt organizations, and certain entities that operate exclusively to provide financial assistance to, or hold governance rights over them
- Large operating companies – Entities that employ more than 20 full-time employees, has an operating presence at a physical office within the U.S., reported more than $5 million of gross receipts or sales in the previous year on a Federal income tax return, and have physical presence (i.e., an office) in the U.S. (i.e., a large operating company)
- Wholly-owned subsidiaries of certain exempt entities
- Certain inactive entities that were in existence on or before January 1, 2020, do not engage in an active business or hold any assets, are not owned directly or indirectly by a foreign person, have not experienced a change in ownership in the preceding 12 months, and have not sent or received funds in an amount greater than $1,000 in the preceding 12 months
- Insurance companies
Who Are Beneficial Owners and Company Applicants?
Beneficial Owners
A “beneficial owner” includes “any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least twenty-five (25) percent of the ownership interests of a reporting company.” The CTA requires the identification of each beneficial owner of the respective reporting company. All individuals that exercise substantial control and own or control at least 25 percent of the reporting company must be identified.
Substantial Control
Notably, FinCEN revised the definition of “substantial control” to ensure that reporting companies identify key individuals who direct the actions of such entities. Under the final rule, an individual exercises substantial control over a reporting company if the individual:
- serves as a senior officer of the reporting company
- has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of the reporting company
- directs, determines or has substantial influence over important matters of the reporting company, including, for example, the reorganization, dissolution or merger of the reporting company, the selection or termination of business lines or ventures of the reporting company and the amendment of any governance documents of the reporting company, or
- has any other form of substantial control over the reporting company
Control of Ownership Interests
The final rule establishes standards for determining whether an individual has an ownership interest in a reporting company. An “ownership interest” is defined as any instrument, contract, arrangement, understanding or mechanism used to establish ownership, such as any equity, stock, capital or profit interest. An individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding or relationship, including, for example, acting as intermediary, custodian or agent on behalf of another or certain trust arrangements.
The definition of “beneficial owner” does not include 1) minor children, 2) individuals acting as nominees, intermediaries, custodians or agents, 3) employees acting solely as employees and not as senior officers, 4) individuals whose only interest in a reporting company is a future interest through a right of inheritance, and 5) creditors of a reporting company.
Company Applicants
The final rule requires the identification of company applicants who are primarily responsible for directing or controlling the filing of the formation documents for the reporting company. The “company applicant” is either 1) the individual who directly files the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business within the U.S., or 2) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another.
Timeline:
Reporting companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file their initial reports with FinCEN. Entities created or registered after January 1, 2024 will have 30 days to file their initial reports. Reporting companies have 30 days to report changes to the information in their previously filed reports and must correct inaccurate information in previously filed reports within 30 days of when the reporting company becomes aware or has reason to know of the inaccuracy of information in earlier reports.
Reports:
The following information must be provided in the report:
- For the Reporting Company:
- Full legal name
- Any trade name or “doing business as” name, whether registered or not
- Street address that is the principal place of business (if a domestic reporting company) or the primary location in the U.S. where the reporting company conducts business (if a foreign reporting company)
- Jurisdiction of formation
- For a foreign reporting company, the state or tribal jurisdiction where the company first registers
- Taxpayer identification number (TIN) or, if a TIN has not yet been issued for a foreign reporting company, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction
- For Each Beneficial Owner:
- Full legal name
- Date of birth
- Residential street address
- A unique identifying number and the issuing jurisdiction of a non-expired U.S. passport, non-expired driver’s license, or other non-expired identification document issued by a state, local, or tribal jurisdiction, or, if none of those is available, then a non-expired passport issued by a foreign jurisdiction
- An image of the document from which the unique identifying number was obtained
- For Each Company Applicant
- Full legal name
- Date of birth
- Business street address
- A unique identifying number and the issuing jurisdiction of a non-expired U.S. passport, non-expired driver’s license, or other non-expired identification document issued by a state, local, or tribal government, or, if none of those is available, then a non-expired passport issued by a foreign government
- An image of the document from which the unique identifying number was obtained
Conclusion:
Treasury officials estimate the regulatory burden will be small, costing about $85 per business.
The new regulations open the door to imposing new standards for trusts and other legal business entities that continue to permit secret ownership structures.
The Treasury Department’s final rule is here, the Treasury Statement from September 29, 2022 is here, the Treasury fact sheet regarding the final rule is here.