New corporate transparency act requirements

By Tony Delyani
 
On January 1, 2021, Congress passed the Corporate Transparency Act, which will be administered by the Financial Crimes Enforcement Network, commonly known as FinCEN, an agency under the U.S. Treasury Department. Final rules providing more background and operational details under the Act become effective on January 1, 2024, simultaneously with compliance requirements under the Act. The purpose of the Act is to prevent bad actors, particularly terrorist and organized crime organizations, from utilizing legal entities to obscure money laundering and other illegal activities.
 
The Act applies both to entities currently in existence and to those created on and after January 1, 2024. It will require non-exempt “reporting companies” to provide to FinCEN the personal information of specified owners and members of management.

What is a reporting company?

 
The Act defines a “reporting company” as a corporation, limited liability company or other similar entity created by the filing of a document with a secretary of state or similar office or created in a foreign country and registered to do business in the U.S. By design, the rules do not provide an overview of or examples of which types of entities fall within the definition of “other similar entity.” This is consistent with the general approach of the rules to be broadened in order to prevent creating loopholes and exceptions of which bad actors could avail themselves. It appears clear that sole proprietorships will fall outside of the definition of “other similar entity,” with private trust instruments likely to as well, while limited partnerships created by a filing with a secretary of state are likelier to fall within it. Until the effective date, practitioners should monitor whether updates and clarifications to the existing rules are published.
 
The Act lists 23 types of entities exempt from the definition of “reporting company” and thus the filing requirements imposed on reporting companies. These consist primarily of tax-exempt entities and entities engaged in regulated businesses, such as insurance companies, banks, credit unions and securities brokers, dealers and investment advisors. In addition, entities with more than twenty full-time employees, more than $5,000,000 of annual gross receipts and a physical office in the U.S. will be exempt. This exemption also applies to subsidiaries of entities who qualify for this exemption.

When must information to be submitted to FinCEN?

Reporting companies in existence as of January 1, 2024, will be required to file an initial report with FinCEN on or before January 1, 2025, while reporting companies created after January 1, 2024, will be required to file an initial report within thirty days after creation. The initial report must provide information about the company itself and personal information about its “beneficial owners.”  Entities created after January 1, 2024, will be required to submit, in addition to company and beneficial owner information, personal information of the “applicant” who formed the entity.

Who is a beneficial owner?

The Act defines a beneficial owner as any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests of the reporting company. The final rule under the Act provides that an individual exercises substantial control over a reporting company if: (1) they serve as a senior officer of the reporting company, (2) have authority over the appointment or removal of any senior officer or a majority of the board of directors, (3) or direct, determine or have substantial influence over important decisions made by the reporting company, including those described in a list contained in the rule. Business owners and their advisors should keep in mind that the focus of the Act is to identify individuals, which in many cases will require sifting through information on multiple layers of entities in order to obtain individuals’ information.

Who is an applicant?

An applicant is any individual who files the documents required to form a reporting company or who files an application of a reporting company formed in a foreign country to do business in the U.S.

What information should be submitted to FinCEN?

A reporting company’s initial report must provide the following company information:

• Full legal name and any trade name or “doing business as” name
• Street address of principal place of business or, for non-U.S. entities, the primary location in the U.S. where it conducts business
• Jurisdiction of formation or, for non-U.S. entities, the U.S. jurisdiction where it first registers to do business
•  IRS taxpayer identification number or, for non-U.S. entities, a tax identification number issued by a foreign jurisdiction

 
In addition, a reporting company’s initial report must include the following information concerning all beneficial owners, and if formed after January 1, 2024, applicants as well:

• Full legal name
• Date of birth
• Residential street address or, in the case of an applicant who registers the entity in the course of their business, the street address of the business
• Unique identifying number and jurisdiction of issuance of a non-expired U.S. passport, non-expired identification document issued by a state or local government, non-expired driver’s license or non-expired foreign passport, in each case accompanied by an image of the document showing the unique identifying number

What are FinCEN identifiers?

To enable individuals who will be required to make numerous filings with FinCEN, such as paralegals and attorneys, to avoid submitting the same information repeatedly, the Act provides reporting companies, beneficial owners and applicants with an opportunity to be issued a “FinCEN identifier” by initially providing all the information otherwise required to be submitted to FinCEN and requesting an identifier. Thereafter, an individual issued an identifier will be able to submit only their identifier number rather than each piece of information ordinarily required.

What is the requirement to update information?

If the reporting company or beneficial owner information contained in a reporting company’s filing changes, the reporting company will be required to submit an updated report within 30 days of the change. Updating is not required when an applicant’s information changes.

To whom will submitted information be available?

There has been concern about whether beneficial ownership information will be publicly available – it will not. Rather, it will be available only to law enforcement agencies, certain regulators and in some narrow circumstances, financial institutions upon request to FinCEN.
 
The Act will undoubtedly present some practical and logistical challenges for practitioners. With sufficient notice to and education of clients, and by compiling reporting company, beneficial owner and applicant well before the effective date, practitioners should be able to begin filing in 2024 with a minimum of difficulty and disruption for their practices.
 

Tony Delyani is a director in McLane Middleton’s corporate department. Contact him at [email protected].
 
Reprinted with permission from the Massachusetts Society of CPAs.