The beneficial ownership reporting requirements imposed by the Corporate Transparency Act, or CTA, are now in effect. 31 U.S.C. § 5336. The Financial Crimes Enforcement Network, or FinCEN, estimates tens of millions of existing companies will be reporting soon—in addition to the two million new entities created each year and their “company applicants.” “Willful” failures to comply could result in civil and criminal penalties.
While many practitioners know the CTA and related rules adopted by FinCEN require disclosure of certain information about entities and beneficial ownership information, many are just now realizing how broad and far-reaching those reporting requirements are. Unfortunately, as they grapple with the rules, they are finding that many questions about how to apply the rules in practice are not answered. We cannot canvass all the intricacies of these laws in the compress of a blog post, but we will provide a simple overview of the law and some ideas about what practitioners should be doing now.
Who Must File?
Starting in 2024, “reporting companies” must report beneficial ownership information to FinCEN. Reporting companies come in two flavors: (a) “domestic reporting companies” are entities created by filings with a secretary of state or equivalent in the U.S. and (b) “foreign reporting companies” are entities formed under foreign law but are registered to do business in the U.S. Twenty-three types of entities are exempted from the reporting requirements, most notably “large operating companies”—entities with a physical U.S. office, more than 20 “full-time” employees, and more than $5 million in gross revenues reported on their last U.S. federal tax returns. Importantly, an entity cannot consolidate its affiliate headcount, though revenue is tested on a consolidated basis.
What Must Be Filed?
Reporting companies must report the following information as to each of their “beneficial owners” and, in initial reports for entities formed or registered after January 1, 2024, their “company applicants”: full legal name, date of birth, current residential or business address, and a unique identification number from designated types of identification documents or a FinCEN identifier. Images of the identification document must be included.
A “beneficial owner” is each person directly or indirectly exercising “substantial control over the entity,” or owning or controlling at least 25% of the reporting entity’s ownership interests. The substantial control prong will capture many executive officers (or equivalents) and some directors—but it also could sweep in investors and others with powers according them “substantial influence” over “important decisions.” The ownership prong covers many interests well beyond voting equity and, importantly, covers indirect, up-the-chain owners, some of which may be beyond the visibility of the reporting company. Beneficial ownership determinations may be among the knottiest and treacherous for a reporting company and its counselors.
Company applicants are those who file formation or registration documents and, importantly, “any individual who directs or controls the filing of such document by another person.” Here is where you and your paralegals may be covered. As FinCEN’s guidance states, “For example, an attorney at a law firm that offers business formation services may be primarily responsible for overseeing preparation and filing of a reporting company’s incorporation documents. A paralegal at the law firm may directly file the incorporation documents at the attorney’s request. Under those circumstances, the attorney and the paralegal are both company applicants for the reporting company.”
When Must Filings Be Made?
Reporting companies formed or registered after January 1, 2024, must file initial beneficial ownership information, or BOI, reports within 90 days after their formation or registration (moving to 30 days after January 1, 2025); reporting companies formed or registered before that date must file reports on or before January 1, 2025. Most reporting companies are waiting to file for as long as they can to allow FinCEN to provide more guidance.
Reporting companies must file updated reports within 30 days “after the date on which there is any change with respect to any information previously submitted to FinCEN.” So, reporting will be continuous. Tricky issues lurk when direct or indirect beneficial ownership changes, especially since indirect changes may not be transparent.
Some Actions for Now.
Here are three of several actions practitioners might want to consider now—if they have not done so already:
- Revise engagement letters and communicate with your clients as to the relative responsibilities between you/your firm as to filings. We suggest that you clearly state that your client is responsible for filing the reports (perhaps with the help of the many services clamoring to charge them) and all updates.
- If you or your paralegals will be “company applicants,” obtain a FinCEN identifier, otherwise you will be providing personally identifiable information and documents to your clients.
- Review and revise your forms to cover CTA obligations. For example, governance documents for LLCs, partnerships, corporations, etc., should be examined for whether they compel owners to provide “indirect” ownership information on a continuous basis. Your clients can expect push-back; you can expect counseling and diplomacy.
Note: Copyright © 2024 by Jeff Dodd.
Jeff Dodd is a partner with Hunton Andrews Kurth in its Houston office. He has more than 44 years of experience helping businesses, large and small, with their corporate, securities, intellectual property, and technology transactions. Dodd also represents investors, including venture capital funds and other private investors, with their investments in their portfolio companies.