Insights

CORPORATE TRANSPARENCY ACT – FORTHCOMING EFFECTIVE DATE

May  2023 (updated)

On January 1, 2021 Congress passed the Corporate Transparency Act which imposes a new federal filing regime. On September 29, 2022, the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued final rules to implement the Act. The purpose of this Memorandum is to alert you to the forthcoming filing requirements.

The Act requires corporations, limited liability companies, partnerships and similar entities (including certain trusts) registered with any state (including foreign entities which have registered in the United States) to file with 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. Under the final rule, a beneficial owner of a reporting company is “any individual who, directly or indirectly, exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.” [1]

No report will be required, if the entity has more than 20 employees, $5 million in reported revenue on its most recent tax return 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 includes SEC-registered reporting companies.

The disclosure will require reporting certain identifiable information for both the entity and each reporting person including name, address, birth date and individual identifying information such as a driver’s license, passport or other FinCEN acceptable information. Reporting a company’s beneficial ownership information to FinCEN, will be accomplished electronically through a secure filing system available via FinCEN’s website. This system is currently being developed and will be available before reports must be filed. To some extent, some of the information required is similar to what financial institutions generally require when opening accounts or providing financing.

Except for companies existing prior to January 1, 2024, the report is required to be filed by the “Company Applicant”[2]  We anticipate that corporate filing services will initiate procedures to

file the FinCEN notices and state formation filings simultaneously.  However, for existing entities, the entity, its counsel or accountant will have to complete the FinCEN filing by January 1, 2025.

The final rule takes effect January 1, 2024. Reporting companies will be required to comply with the following timeframes:

• One Year for Existing Companies: Domestic reporting companies created, or foreign reporting companies registered to do business in the United States before January 1, 2024, must file their initial report with FinCEN no later than January 1, 2025.
• 30 Calendar Days for New Companies: Domestic reporting companies created, or foreign reporting companies registered to do business in the United States, on or after January 1, 2024, must file their initial report with FinCEN within 30 calendar days of the date when they are effectively created or registered.
• 30 Calendar Days for Companies no longer exempt: Any entity that no longer meets all of the criteria to remain an exempt entity must file a report within 30 calendar days of the date when it no longer meets the criteria for an exemption.
• 30 Calendar Days for Updates: Reporting companies will have 30 calendar days to file an updated report if there is a change in the information previously reported to FinCEN (e.g. ownership changes).
• 30 Calendar Days for Error Corrections: If a reporting company filed a report containing information that was inaccurate at the time of filing, and such information remains inaccurate, the reporting company must file a corrected report within 30 calendar days of the date it becomes aware, or has reason to know, that the information is inaccurate.

Some Practical Takeaways

1. LLC Operating Agreements, Stockholder Agreements and Trusts 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 may 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 feasible and designate an individual within the organization to coordinate all the FinCEN filings and amendments required for the entity.
5. In entities with multiple LLCs and/or corporations, as owners, the filer will have to determine the actual beneficial owner(s) who meet the FinCEN definition.

If you have any questions, please contact our office.

 

[1] FinCEN notes in the Final Rule that the reference to “substantial control” is meant to cover varying and flexible governance structures, such as series LLC’s and decentralized autonomous organizations, for which different indicators of control may be relevant.

[2] The Final Rule clarifies that a “company applicant” (i) for a domestic reporting company is the individual who directly files the document that created the entity, (ii) for a foreign reporting company is the individual who directly files the document that the first registers the entity in the United States, and (iii) for both domestic and foreign reporting companies, is the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.