Do you own an LLC or a corporation that was created by filing with the Secretary of State, Division of Corporations? Do you plan to create a new company? If so, you may be subject to a new federal rule requiring such companies to file a report with the U.S. Department of Treasury, Financial Crimes Enforcement Network (FinCEN). The new rule goes into effect as of January 1, 2024. If your company exists before that date, you will have one year to file your initial report. Otherwise, you have 30 days.
The information your company must submit provides identifying information about the persons who own and control the company and the individual who actually files the registration form.
The new rule was issued under the Corporate Transparency Act (the Act), which became law in 2021 as part of the National Defense Authorization Act. The CTA was enacted to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, human trafficking, and other illegal enterprises. Corporate structures and shell or front companies are frequently used to hide the identities of owners/control persons, allowing them to launder their ill-gotten gains through the U.S financial system. Because this activity threatens U.S. national security and economic prosperity, Congress enacted the CTA and charged the Department of Treasury with establishing regulations requiring companies to report identifying information about the persons who own and control these business entities. FinCEN promulgated its new rule in final form on September 29, 2022 (the Final Rule).
The Final Rule requires domestic and foreign LLCs, corporations, and “other similar entities” to identify their “beneficial owners” and “company applicants” and provide additional information about those persons, including their address and date of birth, along with an image of an acceptable form of identification for the individual, such as a passport. “Beneficial owners” are individuals who own or control a reporting company either as a result of their percentage of ownership interest or because of their:
- Service as a senior officer (but the Final Rule excludes corporate secretaries and treasurers if they have ministerial functions and little control);
- Authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body); and
- Direction, determination, or decision of, or substantial influence over, important matters affecting a reporting company (including “undisclosed principals” such as those who have been sanctioned and therefore cannot overtly participate in an industry).
“Company applicants” are the individuals who file with the State or other agency to formally create the business entity. Companies are required to keep the information they have reported current and accurate on an ongoing basis within 30 days of any change in beneficial ownership, whether the change in ownership occurred as a result of a transfer of ownership at death, transfer as a sale or gift, or merely occurred as a name change due to marriage or divorce, or a change resulting from a minor becoming an adult.
The information will be kept at FinCEN in a central database that will be accessible by law enforcement.
A lengthy list of business entities are excluded from the reporting requirement, including the following:
- large businesses (those that employ more than 20 full-time U.S employees; had more than $5 million in gross receipts or sales including entities owned or operated by the company) in the preceding tax reporting year; and has an operating presence at a physical office within the U.S.
- publicly traded companies
- entities registered with the SEC, including broker-dealers, investment advisers, and investment companies
- domestic pooled investment vehicles, including funds, but only if they are operated or advised by an SEC- registered broker-dealer, investment adviser or investment company, or an exempt private investment company. (The subsidiaries and affiliates of such exempt pooled investment vehicles are not necessarily exempt, and must independently satisfy an exemption from the CTA.)
- securities exchanges and clearing agencies
- tax-exempt entities and entities that assist tax-exempt entities
- public utilities
- banks, insurance companies, credit unions, registered accounting firms, and money transmitting businesses
- businesses entities owned or controlled by one or more of the entities excluded by the Act
- inactive entities that:
- have existed since prior to January 2, 2020
- are not engaged in an active business
- are not owned directly or indirectly, wholly or partially, by a foreign person
- have not in the preceding twelve-month period changed ownership or sent or received more than $1000, and
- do not hold any assets
Unless your company falls within one of these excluded categories, you will be subject to the new reporting requirements.
If you are unsure how to proceed, please reach out to me for compliance counsel.