Beneficial Ownership Reporting Now Required by Corporate Transparency Act

Verum Partners notes that, in 2021, Congress passed the Corporate Transparency Act (CTA) on a bipartisan basis. This legislation took effect January 1st, 2024, and requires certain U.S. companies to report beneficial ownership information to the Department of the Treasury’s Financial Crimes Enforcement Network, “FinCen.” The spirit of this reporting is aimed at establishing a non-public national registry to prevent and combat money laundering activities. Given the current geopolitical and cybersecurity climate, the environment is rife with money laundering and financial crimes. The Corporate Transparency Act will require all “reporting companies” to disclose information about their “beneficial owners” and “company applicants.”

Corporate Transparency Act Terminology

The CTA defines key terms:

• Reporting Company: A corporation, limited liability company, or similar entity created (a “Domestic Reporting Company”) or, in the case of any foreign entity, registered to do business (a “Foreign Reporting Company”) by filing a document with a Secretary of State or similar office under the law of any U.S. State or Indian Tribe.
• Beneficial Owner: An individual who owns 25% or more of a reporting company or exercises “substantial control“ over it, including LLC managers, senior officers, and board members.
• Company Applicants: Individuals who filed the reporting company's formation documents with the Secretary of State.

Who does the Corporate Transparency Act apply to?

Functionally, we note that these new federal reporting requirements will apply to virtually all small and medium-sized businesses in the United States. U.S. Reporting companies must disclose:

• Full name and trade names
• Principal business address
• Jurisdiction of formation
• Taxpayer Identification Number (TIN) or Employer Identification Number (EIN

Beneficial owners and company applicants must report:

• Name
• Date of birth
• Residential address
• Unique number identifier (SSN, Driver’s License, passport, etc.)

This filing can be executed on FinCEN's Beneficial Ownership Platform (BOI). Verum notes that LLCs owned purely for investment purposes are subject to these new rules. For example, Real Estate LLCs and Investment LLCs would fall under the umbrella of reporting companies with beneficial owners. These reporting requirements are not limited to Operating Companies.

Filing Deadlines and Compliance

As it pertains to reporting, companies established before January 1, 2024, need to file before January 1, 2025. However, companies formed since the start of 2024 need to file an inaugural report within 90 days from the actual date of formation. Any changes to the information previously reported need to be updated within 30 days. Beneficial Owners will be issued “FinCen Identifiers” (FinCen ID) for compliance purposes. Similarly, updates to information stored under the “FinCEN ID” need to be made within 30 days of each change. This includes ownership and addresses. There is a $500 penalty per day for late filing.

Corporate Transparency Act Exemptions

Companies that are exempt from reporting include publicly traded companies, very large operating companies, registered or large investment companies, companies in highly regulated industries that are already subject to substantial regulatory reporting, certain tax-exempt entities, general partnerships, and certain existing dormant entities. A domestic entity such as a statutory trust, business trust, or foundation is a reporting company only if it was created by the filing of a document with a Secretary of State or similar office. For example, a sole proprietorship, unless created by filing a document with the Secretary of State or similar office, is not considered a reporting company and does not need to file.

Law Enforcement and National Security

The information reported to the Department of Treasury will not be made public but will be used confidentially for law enforcement and national security purposes. FinCen has been building a secure and confidential cloud-based IT system that will meet the highest federal security level to store beneficial ownership information. False information or general non-compliance could result in civil and criminal penalties.

Outstanding Legal Battle

On March 1, 2024, the U.S. District Court for the Northern District of Alabama declared the Corporate Transparency Act (CTA) unconstitutional. The implementation of the Corporate Transparency Act sparked a significant debate on the balance between regulatory oversight and constitutional freedoms. This District Court ruling could eventually wind up on the docket of the Supreme Court. As the legal drama unfolds, the business community and legal experts will keep a close eye on how the federal courts navigate this challenge to the Corporate Transparency Act. The government has filed its appeal, but the CTA remains in effect, and FinCEN will continue to enforce it against everyone else. This means compliance is required, even as litigation remains ongoing.

Bottom Line

Businesses subject to the Corporate Transparency Act will face significant new reporting and record-keeping obligations. The information required to be reported will not be made publicly available and, in many cases, is already being provided to the Department of Treasury through the filing of federal income tax returns. Verum notes that there is no fee for submitting your beneficial ownership information report to FinCEN. Despite ongoing litigation, our recommendation is to comply with the Corporate Transparency Act requirements and utilize the free filing tool at “BOI E-FILING (fincen.gov).” Although there are ongoing legal challenges to these requirements, it is advisable to comply with filing obligations.

Citations:

BOI E-FILING (fincen.gov) Beneficial Ownership Information Reporting | FinCEN.gov What is New in 2024? New FinCEN Reporting Requirements for Beneficial Ownership Information | FAQ Update - Petrova Law What Is a “Reporting Company” Under the New Federal Corporate Transparency Act? | Saul Ewing LLP - JDSupra Corporate Transparency Act Ruled Unconstitutional by Federal District Court (forbes.com) Corporate Transparency Act Ruled Unconstitutional, but Scope of Judgment Is Limited (Harvard Law) All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. For additional information, please visit: https://verumpartnership.com/disclosures/