by Kim Heyman, JD, LLM, AEP, Pathstone
The information contained in this article is provided is for educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice.
Few jurisdictions in the United States (“U.S.”) require legal entities to disclose information about their beneficial owners. Historically, this lack of transparency created opportunities for bad actors to hide their identities while perpetrating fraud, drug trafficking, financing of terrorism, tax evasion and other criminal activities. The U.S. has long been viewed as lagging behind other developed countries in its safeguards to prevent the flow of illicit money. Governments all over the world and international organizations have been pushing for greater transparency of beneficial ownership information to combat terrorism and money laundering. As part of their efforts, they have advocated for the creation of central registries to make that information available for law enforcement, tax authorities, and other similar entities. It is from this background that the Corporate Transparency Act (the “CTA”) was enacted, to increase national security, to protect legitimate businesses, to enhance law enforcement efforts and to support the growing international consensus to enhance beneficial ownership transparency.
What is the Corporate Transparency Act?
The CTA was enacted into law on January 1, 2021, under The National Defense Authorization Act for Fiscal Year 2021.2 The CTA requires certain entities to report information about their beneficial owners and the individuals who created them (collectively referred to as “beneficial ownership information” or “BOI”) to the U.S Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). All BOI submitted to FinCEN will be confidential. The CTA directs the Secretary of the Treasury to maintain BOI in a secure, nonpublic database. To implement this requirement, FinCEN developed the Beneficial Ownership Secure System (“BOSS”), from which information will not be available to the general public and may only be disclosed under limited circumstances.3
FinCEN issued proposed regulations establishing a BOI reporting requirement on December 8, 2001, which were adopted largely as proposed on September 29, 2022 (the “Final Regulations”). Pursuant to the Final Regulations, the CTA will be effective on January 1, 2024. The biggest changes from the proposed regulations to the Final Regulations were made to reduce the burdens on entities required to provide a BOI report.
All wealth planning and tax professionals will need to understand the CTA’s compliance obligations, which are primarily focused on corporations, limited liability companies and partnerships that do not conduct operating businesses and that are not otherwise subject to regulation by a federal agency.
This article highlights the rules under the Final Regulations. It will explain the definitions of key terms, the exemptions from the CTA and the requirements imposed on “Reporting Companies.”
What is a “Reporting Company”?
This definition is central to determining who falls within the CTA regime. It helps to keep in mind the purpose of the CTA – to discover what may be elicit use of shell companies. Therefore, organizations that are otherwise regulated are excluded from the definition. A “Reporting Company” is either a domestic reporting company or a foreign reporting company.
The term “Domestic Reporting Company” means any entity that is:
A corporation;
A limited liability company; or
Created by filing a document with a secretary of state or any similar office under the law of a state or Indian tribe.
The term “Foreign Reporting Company” means any entity that is:
A corporation, limited liability company or other entity
Formed under the laws of a foreign country; and
Registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or any similar office under the law of a state or Indian tribe.
Notwithstanding the foregoing broad definition, the following are exempted:
Trusts (other than certain business trusts), general partnerships and sole proprietorships, which usually are not created by filing a document with a secretary of state or similar office;
Companies that have significant business operations in the U.S. To qualify as a so-called “Large Operating Company,” an entity must have all of the following requirements:
An operating presence at a physical location in the U.S.;
At least 20 full-time employees; and
At least $5 million of gross receipts or sales as shown on its prior year’s federal income tax return.
Entities wholly owned or controlled by a Large Operating Company (or, for the most part, with any other type of CTA-exempt entities) are also exempt under the “Subsidiary Exemption;”4
Tax-exempt charitable organizations under section 501(c) of the Internal Revenue Code of 1986, as amended (the “Code”) (and will remain exempt for 180 days after the loss of its tax-exempt status);
A charitable or charitable split interest trust described in section 4947(a)(1) or (2) of the Code;
A political organization exempt under section 527(e)(1) of the Code;
Public accounting firms registered under section 102 of the Sarbanes-Oxley Act;
Publicly traded entities;
Domestic governmental authorities;
Banks, credit unions, depositary institutions and the like;
Securities exchanges;
Insurance companies;
Broker dealers and Registered Investment Companies (“RICs”);
Public utilities;
Financial market utilities; and
Certain pooled investment vehicles.
What does a Reporting Company have to report?
A Reporting Company is required to provide information on its “Beneficial Owners.” A “Beneficial Owner” is defined as any individual who, directly or indirectly, (A) exercises “Substantial Control” over a Reporting Company (regardless of any actual ownership of the entity) or (B) owns or controls more than 25% of the “Ownership Interests” in the Reporting Company.
Who has “Substantial Control?”
Whether an individual has Substantial Control over a Reporting Company is based upon the facts and circumstances. In addition, multiple people may have Substantial Control over a Reporting Company, and all of them will be considered Beneficial Owners for these purposes.
The Senior Officers of a Reporting Company are all deemed to have Substantial Control. A “Senior Officer” is defined as any individual holding the position (or exercising the authority of) a President, CEO, CFO, COO, general counsel or any other officer regardless of title performing a similar function.
Any individual with the authority to remove any Senior Officer or a majority of the Board (or similar body) of a Reporting Company has Substantial Control.
Any individual who otherwise directs, determines or has substantial Influence over “Important Decisions,” such as:
Sale, lease, or other transfer of any principal assets;
Reorganization, dissolution or merger;
Major expenditures, investments, issuing equity or taking on significant debt, or approval of operating budget;
Altering lines of businesses or geographic focus;
Compensation of Senior Officers;
Decisions regarding major contracts;
Changes to governing documents; and
Other similar decisions impacting the Reporting Company.
The exercise of Substantial Control over a Reporting Company may be exercised directly or indirectly, as a trustee of a trust or similar arrangement, including through:
Board representation;
Ownership or control of a majority of the voting power or voting rights of the Reporting Company;
Arrangements, financing or business relationships with others acting as nominees; or
Control over one or more intermediaries that exercise Substantial Control.
An individual who owns or controls more than 25% of the “Ownership Interests” in a Reporting Company is also a Beneficial Owner.
“Ownership Interest” is broadly defined to include:
Any equity, stock, or similar instrument;
Any capital or profits interest;
Any instrument convertible into one of those listed above;
Any put, call or other option of buying or selling one of those listed above, unless such option is created and held by a third party without the knowledge of the Reporting Company; or
Any other instrument, contract or understanding used to establish ownership.
Ownership or control of an Ownership Interest in a Reporting Company can be held directly or indirectly through a contract, understanding, relationship or otherwise, including:
Joint ownership;
Through ownership or control of intermediary entities;
Through another individual acting as the agent, custodian or nominee of such individual;
With regard to a trust or similar arrangement, multiple individuals may be deemed to own or control the same Ownership Interest:
The trustee or other individual with authority to dispose of trust assets;
A beneficiary who is the sole permissible recipient of income and principal or who has the right to demand a distribution or withdraw substantially all of the assets; or
A grantor who has the right to revoke the trust or withdraw the trust assets.
How to determine if an individual controls or owns 25% of a Reporting Company:
Ownership and control are determined as of the present time, and any options or similar interests held by an individual are treated as exercised;
If a Reporting Company issues capital or profit interests, including entities taxed as partnerships for federal income tax purposes, an individual who owns at least 25% of the capital or profit interests in the entity will be a Beneficial Owner;
If a Reporting Company is a corporation, is taxed as a corporation for federal income tax purposes or otherwise issues stock, an individual who either holds 25% of the total voting power of all classes of ownership interests entitled to vote or at least 25% of the outstanding value of all classes of ownership will be a Beneficial Owner;
If the facts and circumstances do not allow the foregoing calculations to be performed with reasonable certainty, then an individual who owns or controls 25% or more of any class or type of ownership interest in the Reporting Company will be deemed to be a Beneficial Owner.
The following are excluded from the definition of a Beneficial Owner:
Minors, in which case the parent or legal guardian of the minor may be treated as the Beneficial Owner;
An individual acting as the nominee or agent on behalf of another individual;
Individuals whose ownership interests are only through a future right of inheritance;
An individual acting solely as an employee of a Reporting Company, who is not a senior officer; and
An individual who is a creditor of a Reporting Company.
Who is a “Company Applicant” (whose information must also be reported as part of BOI)? An individual who:
Directly files a document creating a Domestic Reporting Company;
Directly files the first document registering a Foreign Reporting Company; or
Is primarily responsible for directing such filing.
There may be only up to two Company Applicants for purposes of reporting. This limits the long list of people who may be involved in directing and implementing the formation of an entity.
This requirement is only applicable for Reporting Companies formed or registered after January 1, 2024.
The proposed regulations did not include these two limitations, making these requirements particularly onerous, as they would have required tracking down and reporting all people involved in creating entities going all the way back to the beginning of time.
What is required to be included in a report?
A Reporting Company must provide a BOI Report with the following information to FinCEN:
Information about itself:
Its full name and any other name (such as a d.b.a.) used by it;
If a Domestic Reporting Company, the address of its principal place of business (otherwise the primary location in the U.S. where it conducts business). A PO Box or third-party information (such as an agent for service of process) will NOT satisfy this requirement;
The state or tribal jurisdiction in which it was formed (or for a Foreign Reporting Company, the place of its first U.S. registration); and
Its EIN or TIN.
For each Beneficial Owner, and for entities formed on or after January 1, 2024, up to two Company Applicants, the Report must include:
Name;
Residential address for each individual;
Date of birth; and
For each individual, a unique identifying number and issuing jurisdiction from an acceptable identification document, and it must provide a copy of that document, such as a driver’s license or passport.
If a Company Applicant is an entity that forms or registers legal entities in the ordinary course of business, the entity’s current street address.
Alternatively, and this will be an important option, individuals and entities may apply to FinCEN for a unique identifying number.
What is a FinCEN Identifier?
The CTA requires FinCEN to provide a unique identifier, also called a FinCEN ID, upon request to:
An individual who provides FinCEN with the same information required to be included in a BOI Report for a Beneficial Owner or Company Applicant; and
Any Reporting Company that has provided its BOI to FinCEN.
Each individual may obtain only one FinCEN ID, and once obtained, the FinCEN ID may be used by any Reporting Company on the BOI Report rather than the information detailed above.
After a FinCEN ID is obtained, it is the individual’s and NOT the Reporting Company’s responsibility to keep the information up to date (including updating the image of the identifying document) and to correct any inaccuracies (within the same timetable set out below for Reporting Companies).
When is the BOI Report due?
For existing Reporting Companies, by January 1, 2025.
For Domestic Reporting Companies formed on or after January 1, 2024, within 30 calendar days of the earlier of the date on which [i] it receives notice that its creation is effective and [ii] on which the secretary of state or other agency publishes public notice that it has been created.
For Foreign Reporting Companies formed on or after January 1, 2024, within 30 calendar days of the earlier of the date on which [i] it receives notice that it has been registered to do business and [ii] on which the secretary of state or other agency publishes public notice that it has been registered.
Are any additional reports required?
No, unless (or until) information changes. An updated report must be filed within 30 calendar days after any change to any information previously submitted to FinCEN, such as:
Change in Beneficial Owners; or
Information related to a Beneficial Owner, such as change in address or name.
What if a report needs to be corrected?
If a Reporting Company learns or “has reason to know” that a BOI Report contains incorrect information, it has 30 calendar days to file a corrected report.
What are the penalties for failing to file a report?
An individual, Reporting Company or any other entity that directly or indirectly willfully provides, or attempts to provide, false or fraudulent information, or willfully fails to report complete or updated BOI, faces a civil penalty of $500/day the violation continues and is not remedied, and a criminal fine of up to $10,000 and/or a two-year prison sentence.
There is a 90-day safe-harbor if an individual voluntarily submits a report containing correct information.
Now that we know this, what should we as advisers do?
If you have not already done so, notify clients that the CTA will be effective on January 1, 2024.
Discuss the option of obtaining a FinCEN identifier as soon as possible with clients.
Address the CTA in operating agreements, including requiring all members to provide initial and updated BOI.
1 The information contained in this article is provided is for educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication, however, we have no obligation to update, modify or amend this information or to otherwise notify a reader if any information becomes outdated, inaccurate, or incomplete. This material is not intended to be a full and exhaustive explanation of the law in any area. The information discussed herein may not be applicable to, or appropriate for, every investor and should be used only after consultation with professionals who have reviewed a client’s specific situation.
2 The CTA is Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Public Law 116-283 (Jan. 1, 2021) (the “NDAA”). Division F of the NDAA is the Anti-Money Laundering Act of 2020, which includes the CTA. Section 6403 of the CTA, among other things, amends the Bank Secrecy Act by adding to Subchapter II of Chapter 53 of Title 31, United States Code, a new section 5336, titled “Beneficial Ownership Information Reporting Requirements.”
3 BOI will only be available upon request of [i] a federal agency engaged in national security, intelligence or law enforcement, for those purposes; [ii] a state, local or tribal law enforcement agency, but only if authorized by a court in connection with a criminal or civil investigation; [iii] a financial institution for customer due diligence purposes, but only if authorized by the “Reporting Company;” [iv] a federal agency on behalf of a foreign country (if the request is pursuant to a treaty or similar agreement); or [v] a prosecutor, judge or law enforcement agency in a ”trusted” foreign jurisdiction, under certain conditions.
4 The Subsidiary Exemption does not apply if the exempt entity was a money service business, a pooled investment vehicle or an entity assisting a tax-exempt entity.
Kim V. Heyman is a strategic and passionate adviser with over 25 years of experience, providing legacy planning services to ultra-high-net-worth individual and family clients at Veritable, LP. Before moving to provide more holistic planning advice, Kim was a partner in a boutique estate planning law firm in Wayne, Pennsylvania. She sits on the board of the PEPC and she serves as Vice-Chair of the Emotional and Psychological Issues in Estate Planning Committee of the American Bar Association Real Property, Trust and Estate Law Section. Kim has written articles and spoken locally and nationally on estate planning, charitable planning and trust and estate administration topics. Kim received her J.D., cum laude, and her LL.M. in Taxation, both from New York University School of Law, and her B.A. from the University of Pennsylvania.