On January 1, 2021, Congress enacted the Corporate Transparency Act (the “CTA”) as part of The National Defense Authorization Act. The CTA mandates the establishment of a national registry requiring companies to disclose the identity of their beneficial owners to the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The aim of the CTA is to prevent money laundering and the financing of terrorism through the use of shell companies. To do this, the CTA will require “corporations, limited liability companies and other similar entities” formed or registered to do business in the U.S.—which previously could be created, registered and operated in many states without disclosing the identity of the persons who own or control them—to provide information regarding their beneficial ownership to FinCEN for law enforcement use.1 Since the enactment of CTA in 2021, the Department of the Treasury has completed the formal rulemaking process required by the CTA and issued final rules to implement the main provisions of the CTA (the “Final Rules”).2 This OnPoint provides a further update detailing how the new disclosure regime will operate. More information, including answers to frequently asked questions and informational videos, can be found at https://www.fincen.gov/boi.
Effective January 1, 2024, FinCEN will launch an information collection and management system to track beneficial ownership of business entities. The following summarizes the type of information that will be collected, who will be affected, and how existing business entities will be brought into compliance.
What type of information will be collected?
Every “reporting company” (defined below) will be required to submit a disclosure report to FinCEN. The disclosure reports must include the following information about the reporting company:
- the full legal name of the reporting company;
- the trade name or “doing the business name” of the reporting company, if any;
- a complete current address;
- the state, tribal, or foreign jurisdiction of formation or registration; and
- the reporting company’s IRS Taxpayer Identification Number (TIN) and Employer Identification Number (EIN).
Disclosure reports must also include the following information about each beneficial owner of such reporting company:
- full legal name;
- date of birth;
- a current residential address;
- an identification number (e.g., non-expired ID, driver’s license or passport number); and
- an image of the corresponding identifying document.
For reporting companies created or registered after January 1, 2024, the person who submits the formation or registration documentation to the applicable state authority for a reporting company (and the person who is primarily responsible for directing or controlling that filing, if different) must also provide this information with respect to himself or herself as a “company applicant.”
Individuals (upon submission of the five requisite pieces of information) and reporting companies (upon filing of their initial report) may obtain a unique FinCEN identifier number, which can be used for future filings, updates and corrections regarding beneficial ownership information.
What is a “reporting company”?
A “reporting company” is any domestic or foreign corporation, limited liability company, or other entity created or registered to do business by the filing of a document with a secretary of state or similar office under the laws of any state or Indian tribe. Limited partnerships and trusts created by filing with a secretary of state are also captured by this scope, but charitable trusts and split-interest trusts are specifically exempted from the definition of reporting companies.
Are all business entities subject to the reporting requirements?
No. The CTA and Final Rules provide 23 categories of business entities that will not be considered reporting companies. For example, public companies, registered broker dealers, and certain investment companies, investment advisers, banks, bank holding companies, credit unions, money-transmitting businesses, commodity trading companies, pooled investment vehicles, 501(c) tax-exempt entities, inactive business entities and insurance companies will not be required to submit their beneficial ownership information. A more detailed analysis of some of these exemptions is available in our November 2022 OnPoint and in the Frequently Asked Questions published by FinCEN available here.
Perhaps most relevant to clients contemplating non-public M&A transactions, business entities in the two following groups will be exempted from disclosing beneficial ownership details:
- any business entity that (i) employs more than 20 employees on a full-time basis in the U.S.; (ii) filed in the previous year income tax returns in the U.S. demonstrating more than $5,000,000 in gross receipts or sales (including the receipts or sales of subsidiaries and other entities through which such entity operates), and (iii) has an operating presence at a physical office within the U.S.; or
- any business entity owned or controlled by a business entity that is itself exempt from the beneficial ownership disclosure, with some limited exceptions.
As a result of the large operating company exemption, many larger operating companies and their subsidiaries will be exempt from having to disclose beneficial ownership details. However, smaller operating companies and passive holding companies may need to submit disclosure reports if no relevant exemption applies.
Do exempt business entities have any filing requirements under the CTA?
Generally, no, a business entity that is exempt from beneficial ownership disclosure will not need to submit a disclosure report unless it ceases being exempt, in which case it must file an updated report within 30 days.
Who is a “beneficial owner” of a reporting company?
The CTA defines a “beneficial owner” as an individual who directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:
- exercises “substantial control” over a reporting company; or
- owns or controls 25% or more of the “ownership interests” of a reporting company.
The Final Rules specify that an individual is deemed to have “substantial control” if he or she (1) serves as a senior officer of a reporting company, (2) has authority to appoint or remove any senior officer or a majority of the directors of the reporting company, (3) directs, determines, or has substantial influence over decisions of the reporting company (including decisions regarding the sale, lease, mortgage or other transfer of assets, major expenditures or investments, compensation arrangements for senior officers, or the entry into or amendment of significant contracts or governance documents), or (4) has any other form of substantial control over the reporting company. In addition, other indicia of control will be considered in determining whether an individual exercises “substantial control” over a reporting company, including board representation, ownership or control of a majority of voting power, or financial or contractual rights granted to such individual.
“Ownership interest” refers to equity, stock or similar instruments, including capital or profit interests, partnership interests, convertible instruments, warrants, or other options, rights or privileges to acquire equity, capital, or other interests in a reporting company (including put rights, call rights, options, and other contractual rights).
The Final Rules exclude certain categories of people from the definition of beneficial owners who are subject to reporting:
- minor children;
- nominees, intermediaries, custodians, and agents on behalf of another individual;
- non-senior officer employees, when acting solely as an employee and when their substantial control or economic benefits over a reporting company are derived solely from their employment status; and
- creditors whose ownership interest in a reporting company is achieved solely through rights or interests to secure repayment or enhance the likelihood of repayment.
When must disclosure reports be filed?
All reporting companies must submit an initial report within 30 days of receipt of actual notice or posting of public notice of creation or registration.
All business entities that become reporting companies due to loss of exempt status must submit an initial report within 30 days of becoming subject to the reporting requirements or losing their exemption.
All reporting companies formed prior to January 1, 2024, will have until January 1, 2025, to come into compliance and file an initial report.
If at any time a reporting company discovers an inaccuracy in a previously filed report, or if there is a change to previously reported information, an updated disclosure report must be filed within 30 days of the discovery of such inaccuracy or such change.
How will disclosure reports be filed?
Information regarding how to submit disclosure reports is forthcoming from FinCEN. FinCEN does not expect to begin accepting any disclosure reports prior to January 1, 2024.
Who will have access to the information submitted to FinCEN?
Once provided to FinCEN, the information required to be disclosed under the CTA will not be generally available to the public. Although final rules with respect to the access and safeguard provisions of the CTA are forthcoming, the proposed rulemaking issued on December 15, 2022, suggests the seriousness with which FinCEN approaches the protection of information from unauthorized disclosure. Information disclosed under the CTA will be available under specific circumstances to five categories of recipients:
- U.S. federal, state, local and tribal government agencies engaged in national security, intelligence, or law enforcement (both criminal and civil) activities who request beneficial ownership information for use in such activities. In addition, state, local and tribal law enforcement agencies can gain access to beneficial ownership information if authorized by a court of competent jurisdiction.
- Foreign law enforcement agencies, judges, prosecutors, and authorities will be able to request beneficial ownership information; such requests will be evaluated, and (if approved) information will be provided by, U.S. federal agencies.
- Financial institutions who use the disclosed information to facilitate compliance with customer due diligence requirements under applicable law will have access to beneficial ownership information only with the consent of the relevant reporting company.
- Federal regulators acting in a supervisory capacity assessing financial institutions for requirements with customer due diligence requirements will have access to any beneficial ownership information that has already been obtained by such financial institution.
- Officers and employees of the U.S. Department of Treasury will have access to beneficial ownership information for purposes of tax administration, enforcement actions, intelligence and analysis, sanctions investigations, and for administration of the CTA disclosure framework (including audits, enforcement and oversight).
Unauthorized use or disclosure of beneficial ownership information can result in civil and criminal penalties.
Are there any equivalent state-level filings that will need to be made?
On June 20, 2023, the New York State legislature approved the LLC Transparency Act that, if enacted, will require all limited liability companies formed or registered to do business in New York to disclose the name, date of birth, business street address and a unique identifying number of all beneficial owners. The New York law draws upon the CTA definitions of entities that will be exempt from reporting and what constitutes a “beneficial owner,” and it notes that if the limited liability company is already subject to reporting under the CTA, it can submit a copy of its federal disclosure statement to New York’s Department of State instead of making a separate disclosure. Unlike the CTA, the New York State law is targeted specifically at limited liability companies, and not other forms of business entities.
By contrast with the CTA, under which disclosed information is maintained in a confidential database (as described in more detail above), information disclosed under the New York LLC Transparency Act will be publicly available in a searchable database (subject to limited exceptions).
The New York LLC Transparency Act will come into effect one year after it is signed, at which point any limited liability company that is newly formed or registered in New York will have 30 days from formation or registration to submit its initial disclosure report. Like the CTA, initial reports for limited liability companies already formed or registered in New York prior to the law coming into effect must be filed by January 1, 2025. Additional rulemaking and guidance regarding the submission of disclosure reports is expected to be issued after the law is enacted.
It remains to be seen whether other states will create similar reporting thresholds with respect to business entities formed and/or registered to do business within their jurisdiction.
The implementation of the CTA represents an important and noteworthy change to business practices. For many businesses, a fact-intensive legal review will be required to determine the exact nature of the required disclosure, and the new disclosure regime will require the development of new internal compliance and monitoring systems to ensure that both initial reports and any subsequent amended reports are timely filed. Business leaders should begin the process of evaluating how the disclosure requirements will apply to their companies in advance of January 1, 2024, to ensure there is no interruption in the operation of their business or delay in the completion of transactions when the reporting requirements go into effect.
Additional information regarding the CTA, including answers to frequently asked questions, can be found at https://www.fincen.gov/boi.