March  2021

On January 1, 2021 Congress passed the Corporate Transparency Act. The purpose of this Memorandum is to alert you to the forthcoming requirements.

The Act requires corporations, limited liability companies, partnerships and similar entities registered with any state (including foreign entities which have registered in the United States) to file with the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”), a report disclosing each individual who, directly or indirectly, either (i) exercises “substantial control” over the entity, or (ii) owns 25% or more of the beneficial interests in the entity (any individual satisfying either of these conditions is referred to here as an “Ultimate Beneficial Owner”).

No report will be required, if the entity has more than 20 employees, $5 million in reported revenue on its tax returns and a United States location. Other exemptions apply to nonprofit entities and to entities in certain industries which report to and are regulated by government agencies.  The latter would include SEC-registered reporting companies.

The disclosure (likely electronic) will require reporting certain identifiable information for each reporting person including name, address, birth date and individual identifying information such as a driver’s license, passport or  other FinCEN acceptable information.  To some extent, some of the information required is similar to what financial institutions generally require when opening accounts or providing financing.

The Act is a work in progress since more definitive guidance will only  be available when the Department of the Treasury issues final definitions and regulations (which it is required to do within one year of the passage of the Act – i.e., by December 31, 2021).  Once the regulations are effective, existing entities will then have two years to comply or face penalties for failure to comply.  Entities formed after the effective date of the regulations must file this information when the entity is formed or registered.  Reports will need to be updated within 1 year of a change in beneficial ownership.

Some Practical Takeaways

  1. LLC Operating Agreements and Stockholder Agreements should include a provision requiring the holders (or any transferee of the holder) to provide the necessary information and should include penalties for failure to timely provide the information.
  2. Confidentiality provisions regarding ownership interests must be tailored accordingly, (although FinCEN is generally not allowed to disclose the information provided to it.)
  3. It is likely that financial institutions providing financing will require copies of the FinCEN filings as part of their due diligence.
  4. To be proactive, entity managers should try to gather the necessary information from managers and holders as soon as the regulations are issued and designate an individual within the organization to coordinate all the FinCEN filings required for the organization.
  5. In entities with multiple LLCs and/or corporations, as owners, the filer  will have to determine the Ultimate Beneficial Owner(s).
  6. Trusts that own reportable interests in a filer will pose an interesting question as to the extent that trust beneficiaries will be considered as Ultimate Beneficial Owner.

We plan to update this memorandum when implementing regulations are adopted.

If you have any questions, please contact our office.

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