An important new set of reporting requirements is on the horizon for most business owners, including many people who own rental properties. On September 29, 2022 FinCEN issued final rules with respect to the Corporate Transparency Act, an underreported but impactful component of the 2021 National Defense Authorization Act, which seeks to better fight against money laundering and other financial crimes by giving the government a huge new pool of information about who controls an estimated 30 million companies.
Under the Corporate Transparency Act and the finalized regulations, many Limited Liability Companies, Corporations, and other registered companies such as Limited Liability Partnerships will be required to file an initial report with the federal government disclosing their “beneficial owners” and other information, as well as ongoing reports when any such information changes.
Who Must File
Any company which is a “reporting company” will be required to file an annual report. Reporting companies are essentially any domestic business entity created by filing a document with a secretary of state or similar state or tribal office, and any foreign company registered to do business with any state or tribal office, with certain specific business types excluded. In addition to non-registered sole proprietorships and inactive companies, the specific exclusions include large businesses (20 or more full time U.S. employees, over $5M in U.S. sourced revenue and physical operating presence in the U.S.), issuers of SEC registered securities, banks and similar businesses registered with FinCEN, registered investment companies and similar businesses regulated by the Registered Commodity Exchange Act, insurance companies, accounting firms, public utilities, certain pooled investment vehicles, and tax exempt entities. Such an exemption also applies to an exempt company’s wholly owned subsidiaries.
The rationale behind exempting inactive companies is likely out of a desire to avoid needlessly penalizing the owners of an incredible number of LLCs that have been formed and abandoned over the last several decades, while the rationale for exempting certain active businesses is that existing regulatory systems already provide the government with all of the information which would otherwise be reported under the new law.
What Must Be Reported
The report for any pre-existing company must include certain entity level information, as well as information about the “Beneficial Owners” the entity, while new companies will also be required to include information about the “Company Applicant.”
A Beneficial Owner is any individual who directly or indirectly (including through informal arrangements) exercises substantial control over a company or who owns or controls at least 25% of the ownership interest in the entity. Note that certain individuals, such as minor children, nominees, employees, and creditors are specifically exempted from the definition. Substantial control is a particularly broad concept that could potentially include not only senior officers and managers, but also board members and others with substantial influence. Additionally, ownership may not always be straightforward, as for instance in the case of a business owned by a trust. Rather than the trust being the Beneficial Owner, the trustees or beneficiaries may be the Beneficial Owners.
Company Applicants are any individuals who file a document or directs and controls the filing of such document creating a Reporting Company or registering a foreign Reporting Company. Note that much like Beneficial Owners, Company Applicants are individuals, meaning for instance that if a law firm creates a Limited Liability Company on a client’s behalf, multiple individuals from the Partner directing the filing to the law clerk clicking submit could all have their information as a permanent part of the business’ annual report. Also note that while for instance an accountant may be exempt from being a Reporting Company, it could still be a Company Applicant for a clients’ company.
Entity level information that must be reported includes the entity’s name, as well as any trade names or DBAs, its business street address, and its taxpayer identification number (generally its EIN). If there are any changes to this information, it will be required to file an updated statement. It must also report the current address (residential for Beneficial Owners, business for Company Applicants), full legal name, date of birth, and identifying number (driver’s license, passport, etc.) along with a copy of the identifying document for each Beneficial Owner and Company Applicant. Alternatively, individuals who may be Beneficial Owners or Company Applicants will be able to provide the same information directly to FinCEN and obtain a “FinCEN ID” that they will be able to provide to the Reporting Company, who will in turn include such number on their report.
What Will this Information be Used For?
Under the Corporate Secrecy Act, this trove of new information will be readily available to Federal agencies involved in national security intelligence, or law enforcement activity, as well as state, local and tribal law enforcement agencies (with court approval). Note that the Act specifically allows “Officers and employees of the Department of Treasury,” which contains the Internal Revenue Service, to obtain access for “tax administration purposes.” The information will not, however, be publicly available.
When To Report
Reporting under the finalized rules begins January 1, 2024. For companies that existed before this, they have a one-year grace period to file their initial report (until January 1, 2025) and will not be required to provide information about their Company Applicant (a concession that seems a nod to the fact that for millions of businesses, determining who initially created them would be impossible, let alone getting updated contact information for such individuals). For Companies formed on or after January 1, 2024, an initial report is due within 30 days of formation, and the Company Applicant must be disclosed.
Additionally, an updated report must be filed within 30 days of any change to the Reporting Company’s previously filed information (such as changing addresses or adopting a new DBA), or any change in the Beneficial Owners or their information listed on the initial report (but not a change in the Company Applicant’s information). If a Reporting Company becomes aware (or has reason to know) that information they filed was incorrect, they have 30 days to file a corrected report. Notably, having Beneficial Owners obtain a FinCEN ID, and using such ID in their initial report could reduce the frequency with which a Reporting Company will have to file updated reports, as a change a personal move by a Beneficial Owner would no longer have any affect on the report itself, and the requirement would instead be shifted to the Beneficial Owner to update FinCEN directly.
What to Do Now
Individuals who own or operate Limited Liability Companies or other registered companies should speak with their attorneys to see if they will be required to file a report, and for assistance with their filing. They should start collecting the information of any beneficial owners that they do not already have and adopt policies requiring any beneficial owners to inform the company of any changes to their information. Individuals who are Beneficial Owners may also want to begin the process of obtaining a FinCEN identifier number, which then can be used to avoid having to give certain information to Reporting Companies.
Companies which assist clients with forming Limited Liability Companies or other entities (including some accounting firms and law firms), on the other hand, should work on minimizing and formalizing who may direct and actually file the formation documents for Limited Liability Companies and other registered entities, as well as ensure that all such individuals obtain FinCEN identification numbers, and are aware that if any of their personal information changes, it must be updated with FinCEN.
Significant financial and criminal penalties may be incurred for failing to file an initial report, or to file updated reports when required. Anyone who may be affected by the new law should therefore be proactive in ensuring they remain in compliance.