Many privately held limited liability companies (LLCs), corporations and other entities formed or registered to do business within the U.S. will soon be required by federal regulations to file reports to disclose their beneficial ownership and to update those reports to reflect changes to their beneficial ownership on an ongoing basis.
- The requirements will apply to privately held corporations, LLCs and other entities formed or registered to do business in any U.S. state (or with any American Indian tribe) for any purpose (including for estate, investment, real estate, tax, privacy or other personal planning).
- The new reporting requirements will not take effect until the issuance of final regulations (which are expected soon) and will apply to all qualifying entities, including those created before the effective date.
- Although most trusts used for estate planning would not be considered reporting companies under these requirements, information about a trust’s beneficial owners (grantors/settlors, beneficiaries, trustees, etc.) may be reportable if the trust directly or indirectly owns an interest in a reporting company.
- The beneficial ownership information reported to the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) will not be part of any publicly accessible database.
These new reporting requirements are the result of the passage of legislation, the Corporate Transparency Act (CTA), enacted on Jan. 1, 2021, designed to combat the use of entities for illicit activities. The CTA directed the U.S. Department of the Treasury to issue regulations to implement the reporting requirements contained in the CTA. FinCEN released the first proposed regulations in December 2021.
As of now, no reporting is required, and no effective date has been announced. We anticipate, however, that the effective date will be set by the final version of these regulations and that certain reporting requirements may be retroactive.
This article covers key components of the new reporting regime, including:
- Which entities must file
- Who must be identified in the reports
- What information must be provided
- When to file reports
- Whether the information will be public
- Who will have access to the information
- The penalties for noncompliance
Please note that the rules summarized in this article are largely based on the proposed regulations, which are not final and are subject to change.
Which entities must file beneficial ownership reports?
Reporting Companies. The CTA imposes filing obligations on “reporting companies,” which include both:
- Domestic reporting companies, including corporations, LLCs and other entities created by the filing of a document with a secretary of state or any similar office under the law of a state or American Indian tribe
- Foreign reporting companies, including non-U.S. entities that are registered to do business in any state or tribal jurisdiction
Importantly, only an entity that is created or is registered to do business by the filing of a document with a U.S. state or American Indian tribe falls within the definition of reporting company. As a result, while business trusts (such as statutory trusts or Massachusetts business trusts) likely will fall within the definition, most trusts used for estate planning purposes should not, since such trusts are generally not created (or registered to do business) by the filing of a document with a government authority. Information about any trust’s beneficial owners (e.g., settlors, beneficiaries, trustees) may nonetheless end up being reported to FinCEN if the trust directly or indirectly owns an interest in a reporting company.
Exempt Entities. The CTA exempts certain entities from reporting, including highly regulated entities and other entities that have been identified as posing a low risk for money laundering and other financial crimes (e.g., large operating companies with a physical presence in the U.S.).
Who must be identified in the reports?
The CTA requires two categories of individuals to be identified in beneficial ownership reports: (1) beneficial owners and (2) applicants.
Beneficial Owner. The term “beneficial owner” means any individual who, directly or indirectly, does one of the following:
- Exercises substantial control over the reporting company
- Owns or controls not less than 25% of the ownership interests of the reporting company
“Substantial control” is defined in the proposed regulations to include (1) service as a senior officer, (2) authority to appoint or remove any senior officer or a majority (or dominant minority) of the board (or similar body), (3) decision-making authority or substantial influence over important company matters, and (4) any other form of substantial control. Each individual who has the right to exercise substantial control must be identified and reported.
With respect to the disclosure of individuals who own or control at least 25% of the ownership interests, the proposed regulations define ownership interests broadly to include equity as well as other types of interests (such as capital or profit interests, convertible instruments, futures, warrants, options, etc.).
If an ownership interest in a reporting company is held through a trust, all the individuals listed below are each deemed to have an ownership interest in that reporting company:
- A grantor/settlor who has the right to revoke the trust or otherwise withdraw the trust’s assets
- A beneficiary who is the sole permissible recipient of the trust’s income and principal
- A beneficiary who has the right to demand a distribution of or withdraw substantially all of the trust’s assets
- A trustee of the trust
- Any other individual who has the authority to dispose of trust assets
Certain categories of individuals are excluded from the definition of beneficial owner, including minors (provided that information for a parent/guardian is provided), nominees, intermediaries, custodians, agents acting on behalf of others, individuals acting solely as employees (and not as senior officers), individuals whose only interest is through a right of inheritance, and creditors. Information regarding these individuals would still need to be disclosed if they qualify as “applicants,” however.
Applicant. The term “applicant” means any individual who files an application to form an entity or registers an entity to do business in the U.S., even if the person is acting only as an agent (such as a law firm employee) to assist in creation of the entity. As clarified by the proposed regulations, an applicant also includes “any individual who directs or controls the filing of [the] document by another person.”
What information must be reported?
A reporting entity must provide the following for each beneficial owner and each applicant:
- Full legal name
- Date of birth
- Current address
- Identification number from an acceptable identification document (such as an unexpired passport or driver’s license)
- An image of the identification document showing both the individual’s photograph and the identification number
Alternatively, individuals can request and use a FinCEN identifier number (FIN), which can be obtained by providing FinCEN with the above information. The required information must be updated whenever there is a change. A FIN could simplify this process, particularly where the same beneficial owner or applicant has been reported for multiple entities. Updates to the FIN information should apply to every report in which the FIN was used so that each separate entity report does not need to be tracked and updated.
A reporting company also must provide information about itself, including the full name of the company, any trade or doing business name, the business street address, the jurisdiction of formation or registration, and the IRS taxpayer identification number (TIN). If a company does not have a TIN, it should provide a Dun & Bradstreet Data Universal Numbering System Number or a Legal Entity Identifier.
When must reports be filed?
No reporting is required yet, but it will likely be required soon. The timing is unclear, as the effective date will be set by final regulations, which have yet to be issued.
New and existing entities have different filing deadlines:
- Existing entities must file initial reports within one year of the effective date of the final regulations.
- New entities (i.e., entities formed/registered after the effective date) must file an initial report within 14 days of the date they are formed or registered.
Reporting companies are also required to update information in a timely manner and correct any inaccurate information. The proposed regulations give reporting companies 30 days to file updates (e.g., to report changes in beneficial ownership and any change with respect to the information reported for a beneficial owner or applicant, such as an address change) and 14 days to correct inaccurate reports.
Will the information be public?
No, the database will not be available to the public.
Who will have access to the information?
All information reported in accordance with these rules will be stored in a secure private database maintained by FinCEN. The information will be available only in limited situations upon appropriate request by U.S. federal law enforcement agencies (including requests made by U.S. federal authorities on behalf of non-U.S. law enforcement), state and local law enforcement with court authorization for such information, financial institutions that have the consent of the business entity in question, and certain federal regulatory agencies. The Treasury Department has its own broad authorization to use the information, including for tax-related purposes.
The CTA imposes penalties for the unauthorized disclosure or use of the information.
What are the penalties for noncompliance?
Civil and criminal penalties may apply to filing failures. For example, any person who willfully fails to report complete or updated beneficial ownership information to FinCEN faces fines of up to $10,000 and/or imprisonment for up to two years. The same penalties also apply to any person who willfully provides (or attempts to provide) false or fraudulent beneficial ownership information. Penalties may apply to reporting companies as well as to responsible individuals and other entities. Penalties may apply to individuals who direct a reporting company not to report or are in substantial control of a reporting company when it fails to report complete or updated beneficial ownership information.
Any noncomplying entity will also likely find it difficult to open or maintain a bank account, particularly in the U.S.