Congress enacted the Corporate Transparency Act (the “Act”) for Fiscal Year 2021 as part of the National Defense Authorization Act with an effective date of January 1, 2024, which this blog first reviewed herein The Not-So Transparent Corporate Transparency Act. The Act requires any “Reporting Company” to file “Beneficial Ownership Information” (“BOI”) reports with the Financial Crimes Enforcement Network (“FinCEN”) for its “Beneficial Owners” and if created after January 1, 2024, its “Company Applicants.” Failure to report the required information may result in civil penalties of up to $500/day until corrected or criminal penalties of 2 years imprisonment or a $10,000 fine.
The Act originally imposed a 30-day deadline to report for any entity created on or after January 1, 2024. Thankfully, FinCEN published proposed and final regulations on November 30, 2023, extending that deadline to 90 days after confirmation of creation of the entity. Reporting Companies in existence prior to January 1, 2024, have until January 1, 2025, to file their BOI report. Reporting Companies created on or after January 1, 2025, have 30 days to file their initial BOI report. Note that pending legislation may extend the deadline for companies in existence prior to January 1, 2024, to file their BOI an additional year, until January 1, 2026; however, unless and until passed, all Reporting Companies existing on December 31, 2023, should follow the January 1, 2025, deadline. FinCEN has published “Beneficial Ownership Information Reporting Frequently Asked Questions” and guidance on how to complete the report (www.fincen.gov/boi) to help explain the Act and the reporting requirements.
The Act defines a Reporting Company as any entity formed by a filing with a secretary of state or any foreign entity that’s registered to do business in the United States by filing with a secretary of state. This intentionally broad definition means that most privately owned businesses such as any corporation, limited liability company, limited partnership, or limited liability limited partnership, along with any other entity formed by filing a document with a secretary of state, will be subject to the duty to report. General partnerships, sole proprietorships, and trusts do not file documents with a secretary of state upon creation and thus are exempt from reporting. The Act exempts twenty-three categories of organizations such as banks, credit unions, depositories, securities brokers and dealers, tax-exempt entities, and large operating companies, all of which are already highly regulated.
Every Reporting Company needs to report its legal name, any names under which it does business, a principal business address, the jurisdiction of formation, its taxpayer identification number, and its Beneficial Owners. The Act looks at two separate “tests” to determine Beneficial Owners: the substantial control test and the 25% ownership test. Beneficial Owners are individuals who own or control 25% or more of ownership interest or any non-owner that exercises substantial control over the company. While those categories seem clear, a deeper investigation reveals they aren’t.
The “substantial control test” means any individual exercising substantial control over the company fits the Act’s definition of Beneficial Owner and therefore the Reporting Company needs to report the individual as a Beneficial Owner. A President, CEO, CFO, COO, general counsel, or any other individual performing similar functions exercises substantial control. Additionally, under the Act, anyone with the authority to appoint or remove certain officers, a majority of directors, or similar group of the Reporting Company exercises substantial control. Finally, any individual with the authority to make loans, undertake debt, modify governing documents, or otherwise make or influence important decisions for the entity exercises substantial control. If the definition seems broad, it is and that’s intentional. If it’s unclear whether an individual’s duties meet substantial control, prudent advice dictates disclosing the individual as a Beneficial Owner to avoid any potential penalties.
The “ownership test” requires a Reporting Company to identify all individuals who own or control at least 25% of the ownership interests of the company. Ownership interests include equity, stock, voting rights, capital or profits interest, convertible instruments, options, non-binding privileges to buy or sell any of the foregoing, and any other instrument, contract, or mechanism used to establish ownership. The Act does not require family attribution although it does require attribution for direct and indirect interests of an individual.
The Act requires any Reporting Company to disclose the name, date of birth, street address, a unique identifying number from a passport, driver’s license, or another such document, and a copy of that document for each of its Beneficial Owners determined under both the substantial control test and the ownership test. Additionally, any Reporting Company created on or after January 1, 2024, needs to report the individual who filed the formation or registration document for the Reporting Company, called the Company Applicant, and if different, the individual “primarily responsible for directing or controlling such filing,” limited to two individuals. This requirement has numerous implications for attorneys; a partner may direct an associate or paralegal to make the filing, thus both individuals would meet the definition of Company Applicant. The Act permits individuals who anticipate being Company Applicants to register for a FinCEN number that such individuals will provide to the Reporting Company instead of their personal information.
Trust and Estate attorneys need to advise clients that the Act considers a trustee who can dispose of trust assets that include at least 25% of a Reporting Company as a Beneficial Owner of that Reporting Company. Similarly, the Act includes the sole income and principal beneficiary of a trust owning at least a 25% interest in a Reporting Company as a Beneficial Owner of such Reporting Company. Any beneficiary with the ability to withdraw substantially all of the assets of a trust containing at least 25% of an interest in a Reporting Company will also be a Beneficial Owner of such Reporting Company.
As this article demonstrates, the Act has some complex provisions that have broad applicability. This article provides only a brief synopsis of the most relevant provisions. Estate Planning practitioners need to familiarize themselves with the provisions of the Act as it will affect any client with a privately-owned business. Attorneys will have heightened responsibilities to their clients who own Reporting Companies, both to make them aware of these requirements and to help them understand exactly what to report and when to report it.
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