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 under 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.
- While 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 an entity qualifying as a reporting company.
- The new reporting requirements will take effect on Jan. 1, 2024, with reporting companies created or registered before that date required to file their initial reports by Jan. 1, 2025. Reporting companies created or registered on or after Jan. 1, 2024, must file within 30 days of creation or registration.
- The beneficial ownership information reported to the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) will be accessible to authorized government entities but will not be part of any publicly accessible database.
The new reporting requirements are the result of federal legislation, the Corporate Transparency Act (CTA), enacted on Jan. 1, 2021. The final reporting regulations released by FinCEN, which take effect on Jan. 1, 2024, implement the CTA’s requirements and will subject millions of privately held entities to beneficial ownership reporting obligations. These reporting requirements are purposely broad and designed to help prevent and combat the use of entities for illicit activities by targeting smaller, unregulated companies that may act as shell companies in money laundering schemes. While these final regulations retain the overall structure of previously issued proposed regulations, FinCEN has incorporated helpful modifications and clarifications to the rules in response to numerous comments, including minimizing reporting obligations related to “applicants” and increasing the amount of time certain reporting companies have to file initial reports and corrected reports. FinCEN also provided useful commentary and examples as to how the final rules apply.
Who 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 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.
Only an entity that is created or 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, most trusts used for estate planning purposes should not qualify as reporting companies, since such trusts generally are not created (nor registered to do business) by the filing of a document with a government authority (with the exception of statutory trusts or Massachusetts business trusts). Information about any trust’s “beneficial owners” as determined under the final regulations (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.
Most sole proprietorships, general partnerships and non-U.S. entities not registered to do business in the U.S. should similarly not fall within the definition of 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.). Most privately held entities used for personal estate, tax or privacy planning generally will not be exempt.
Family Offices. Most family offices in the U.S. will be reporting companies, as they are typically organized as LLCs, limited partnerships or corporations. However, some family offices may qualify for an exemption. In the case of family offices, the most relevant exemption categories are likely the exemptions for large operating companies, investment advisers registered under the Investment Advisers Act of 1940 and “venture capital fund advisers” under the Investment Advisers Act. In order to qualify for the large operating company exemption, family offices must have more than 20 full-time employees in the U.S., U.S.-sourced gross receipts in excess of $5 million and an operating presence at a physical office 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 final regulations to include (1) service as a senior officer,
(2) authority to appoint or remove any senior officer or a majority of the board (or similar body), (3) directing, determining or having substantial influence over important decisions made by the reporting company and (4) any other form of substantial control. Each individual who has substantial control must be identified and reported. Given the breadth and vagueness of this test, it may be difficult to apply to multi-tier structures involving companies and trusts.
With respect to the disclosure of individuals who own or control at least 25% of the ownership interests, the final 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.). An ownership interest can be owned or controlled directly or indirectly through a variety of means, including joint ownership or through a trust.
If an ownership interest in a reporting company is held through a trust, each of the individuals listed below are 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
The final regulations emphasize that the above categories are merely examples and do not address all applications under which individuals may be considered to own or control ownership interests through a trust. FinCEN has not provided guidance on whether trust protectors, distribution or investment advisors of trusts or beneficiaries of trusts with multiple beneficiaries must be reported.
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 and agents acting on behalf of others; individuals acting solely as employees (but only if they are not 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 final regulations define the term “applicant” to include the following one or two individuals:
- The individual who directly files the document that creates or registers the entity
- The individual who is primarily responsible for directing or controlling the filing of the document, if more than one individual is involved in the filing of the document
The final regulations have limited the information that reporting companies must report for applicants as follows: (1) reporting companies formed or registered before Jan. 1, 2024, will not have to report their applicants and (2) reporting companies formed or registered on or after that date must report information about their applicants but will not be required to update the information if there are subsequent changes.
What Information Must Be Reported?
All reporting companies must disclose the information below for each beneficial owner, and reporting companies formed or registered on or after Jan. 1, 2024, also must disclose the information below for each applicant:
- Full legal name
- Date of birth
- Current street address
- Identification number from an acceptable identification document (such as an unexpired passport or driver’s license), along with the jurisdiction that issued the document
- An image of the identification document showing both the individual’s photograph and the identification number
Alternatively, individuals can apply for and use a FinCEN identifier number (FIN) by providing FinCEN with the above information. The required information must be updated whenever there is a change. A FIN could simplify the process for updating reports, particularly where the same beneficial owner 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 independently tracked and updated.
A reporting company also must provide information about itself, including the full name of the company, any trade or “doing business as” name, the business street address, the jurisdiction of formation, the jurisdiction where the company first registered to do business in the U.S. (in the case of foreign reporting companies) and the IRS taxpayer identification number (TIN). If a foreign reporting company does not have a TIN, it will be required to provide a foreign tax identification number, along with the name of the jurisdiction that issued the number.
All reports and applications submitted to FinCEN under the CTA require a certification that the reported information is “true, correct, and complete.”
When Must Reports Be Filed or Updated?
Reporting obligations will take effect on Jan. 1, 2024, although new and existing entities have different filing deadlines:
- Entities formed/registered before Jan. 1, 2024, must file initial reports no later than Jan. 1, 2025.
- Entities formed or registered on or after Jan. 1, 2024, must file an initial report within 30 days of the date they are formed/registered.
For purposes of filing an initial report for a new entity, the 30-day period starts on the earlier of (1) the date on which the reporting company receives actual notice that its creation or registration has become effective or (2) the date on which a secretary of state (or similar office) first provides public notice (such as through a publicly accessible registry) that the reporting company has been created or registered.
Reporting companies also must timely update information or correct any inaccurate information contained in a previously filed report. The final 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 the reporting company or a beneficial owner, such as an address change) or to correct inaccurate reports. Changes in beneficial ownership when an individual dies must be reported within 30 days of the settlement of the deceased individual’s estate if the individual was a beneficial owner “by virtue of property interests or other rights subject to transfer upon death.”
With respect to previously reported information on applicants, reporting companies are not required to report updates to applicant information but must correct any inaccurate information. A reporting company also must file updated reports if:
- A minor who is a beneficial owner of the company attains the age of majority (if information for a parent/guardian, instead of for the minor, was previously reported)
- The company was previously exempt but no longer meets exemption criteria
- The company filed an initial report but now meets exemption criteria
FinCEN has clarified that it does not expect a reporting company to file an updated report upon company termination or dissolution.
The final regulations do not currently allow reporting companies to seek extensions to the filing periods for initial, updated or corrected reports, but FinCEN has said that it may consider providing guidance or relief as appropriate, depending on the facts and circumstances.
Will the Information Be Publicly Available?
No, the database will not be available to the public.
Who Will Have Access to the Information?
All information reported under the final 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. FinCEN will issue additional regulations to address who may access beneficial ownership information, for what purposes and required safeguards.
What Are the Penalties for Noncompliance?
Civil and criminal penalties may apply to willful failures to file an initial report, an updated report or a corrected report, as well as willfully providing (or attempting to provide) false or fraudulent beneficial ownership information. The civil penalty is $500 per day. Criminal penalties may include a fine of up to $10,000 and/or imprisonment for up to two years. Penalties may apply to reporting companies as well as to responsible individuals and other entities. For an individual, penalties may apply to the extent such individual causes the failure or is a senior officer of a reporting company when it willfully fails to report complete, accurate or updated beneficial ownership information. Individuals also may be subject to penalties with respect to applications to FinCEN for FINs. Noncomplying entities also will likely find it difficult to open or maintain a bank account, particularly in the U.S.
What Should I Do Now?
In the coming year, family offices and individuals who have created entities as part of their personal planning should review their entities and trusts and start gathering the information that will become reportable beginning in 2024. Those who are considering creating new entities for personal planning reasons next year may wish to consider whether existing entities can be used. At a minimum, it would be preferable to form new entities in 2023 (as opposed to 2024), as entities created in 2023 will have until Jan. 1, 2025, to file initial reports, while entities created in 2024 will have to file initial reports within 30 days of creation.