I. The Corporate Transparency Act

With a goal of preventing money laundering, funding of terrorist organizations, and other illicit activities that may threaten national security, Congress passed the Corporate Transparency Act (“Act”). Under the Act, Reporting Companies are required to report certain information about each Beneficial Owner and, for companies created on or after January 1, 2024, the Company Applicant, to the Financial Crime Enforcement Network of the Department of Treasury (“FinCEN”). Information required to be reported includes, but is not limited to, name, date of birth, current address, and a unique identifying number from an acceptable identification document (such as a driver’s license or active passport number) of each Beneficial Owner and Company Applicant.

Reporting Companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file their initial reports. Companies created or registered on or after January 1, 2024 will have 30 days to file their reports. All companies will have 30 days to report any changes to the information in any previously filed report. Failure to report or correct any report may lead to civil penalties of up to $500 per day the company is not compliant and criminal penalties, including up to $10,000 in fines and two years’ imprisonment. 

II. Who must report? 

A Reporting Company is a corporation, limited liability company, or any entity created by a filing with a secretary of state or similar office under the laws of a state or Indian tribe or formed under the laws of a foreign country and registered to do business in the United States or a tribal jurisdiction.

There are twenty-three entity categories that are exempt from reporting, included in this exempt list are: (i) publicly traded companies, (ii) banks, (iii) brokers, (iv) dealers, (v) investment companies, (vi) investment advisors, (vii) insurance companies, (viii) not-for-profits and (x) pooled investment vehicles operated or advised by, among others, a bank or registered investment advisor.

A key exclusion are large operating companies, which are entities that: (i) have more than 20 full-time domestic employees, (ii) filed a federal tax return in the previous year demonstrating more than $5 million in gross receipts or sales in the aggregate and (iii) have a physical office in the United States. Subsidiaries that are controlled or wholly owned by an exempt entity and certain inactive entities are also exempt from reporting.

III. Who must be reported

a. Beneficial Owner

Beneficial Owner is defined as any individual that, directly or indirectly, either: (i) exercises substantial control over the entity or (ii) owns or controls not less than 25% of the ownership interests of the entity.

An individual may exercise substantial control if (i) he or she services as a senior officer, excluding secretary and treasurer, of a reporting company, (ii) has authority over the appointment or removal of any senior officer or a major of the board of directors (or similar body) of a reporting company or (iii) can direct, determine, or have substantial influence over important decisions made by the reporting company. This list is illustrative and non-exhaustive, there is also a catch-all provision to recognize that control exercised in novel and less conventional ways can still be substantial. 

In considering ownership interest, a beneficial owner may directly or indirectly own or control an ownership interest of a Reporting Company. As an example, the Beneficial Owner will indirectly control a Reporting Company if it owns an intermediary entity that in turn owns the Reporting Company.

Beneficial Owner does not mean: (i) a minor, (ii) an individual acting as a nominee, intermediary, custodian, or agent, (iii) an employee whose control is derived solely from employment status of that person, (iv) an individual whose right in interest is through a right of inheritance or (v) a creditor, unless that person exercises substantial control or owns more than 25% of the ownership interests of the reporting company. The advise of tax accountants and lawyers does not count as having substantial control even if the advice has a substantial influence on the decision making of a Reporting Company.

b. Company Applicants

A Company Applicant is: (i) the individual who directly files the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business; and (ii) any individual who is primarily responsible for directing or controlling the filing of the formation document. In this case, attorneys and paralegals may be considered a Company Applicant.  

IV. Reporting an Exempt Entity and Change of Control or Status of Exempt Entity

A reporting company is required to disclose the exempt entities that have an ownership interest in it but do not need to report the beneficial owners of the exempt entity. Reporting Companies that have a change of beneficial ownership and certain exempt entities that no longer meet exemptions are required to update or file a report with FinCEN within 30 days. 

V. How to Report

FinCEN is establishing a database where all reports will be submitted and stored that will be known as the Beneficial Ownership Secure System (“BOSS”). The reports stored in BOSS are not available to the general public and FinCEN is only permitted to release this information by request of certain financial institutions in connection with due diligence requirements and certain law enforcement activities.

VI. New York’s LLC Transparency Act

Currently on the desk of Governor Kathy Hochul is a bill that would require limited liability companies in New York to report their Beneficial Owners. Unlike the federal Act, the state bill would make Beneficial Owners public information. Failure to comply with the New York bill for two years would place the LLC in delinquency status and may lead to a $250 fine. 

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