US: New rules require beneficial ownership reporting to FinCEN

New rules under the Corporate Transparency Act (CTA) now require many corporations, limited liability companies and other entities to report beneficial ownership and other information to the Financial Crimes Enforcement Network (FinCEN). Impacted companies should contact legal counsel with expertise in this area and other service providers directly involved in the formation or registration of legal entities to assist in timely complying with the CTA’s new beneficial ownership reporting requirements.1

Background

The CTA was enacted as part of the Anti-Money Laundering Act in the 2021 National Defense Authorization Act. The CTA is intended to combat money laundering, terrorism financing, organized crime, and other financial crimes by requiring many corporations, limited liability companies (LLCs), and other entities formed or registered in the U.S. to timely report information about their beneficial owners and company applicants to FinCEN. The CTA authorizes FinCEN to maintain a centralized, nonpublic database of beneficial ownership information (BOI), accessible to law enforcement agencies, national security agencies, and financial institutions. The BOI reporting rules are generally effective as of Jan. 1, 2024.

Reporting companies

“Reporting companies” are required to file BOI reports with FinCEN within specified timeframes. There are two categories of reporting companies: domestic reporting companies and foreign reporting companies. Domestic reporting companies include corporations, LLCs, and any other entity created by the filing of a document with a secretary of state or similar office or Indian tribe. Foreign reporting companies include corporations, LLCs, or other entities formed under the law of a foreign country that are registered to do business in any state or tribal jurisdiction.

The reporting rule includes over 20 exemptions from BOI reporting for certain types of entities. Many of the exemptions are for entities that are already subject to significant regulation by federal or state government agencies. The BOI reporting rules are complex and raise many legal issues regarding the scope and interpretation of the various definitions and exemptions.

Beneficial owners

A “beneficial owner” includes any individual who, directly or indirectly, exercises substantial control over a reporting company. An individual exercises “substantial control” over a reporting company if the individual meets any of four general criteria:

The individual is a senior officer
The individual has authority to appoint or remove certain officers or a majority of directors of the reporting company
The individual is an important decision-maker
The individual has any other form of substantial control over the reporting company
No ownership interest in the reporting company is required. There is also no limit on the number of individuals who may be treated as exercising substantial control over a reporting company. An Individual can exercise substantial control, directly or indirectly, over a reporting company, including through contracts, arrangements, understandings, intermediary entities or other relationships.

A “beneficial owner” also includes any individual who, directly or indirectly, owns or controls at least 25% of the ownership interests of a reporting company. A reporting company may have multiple types of ownership interests. Examples of ownership interests include equity, stock, or voting rights, a capital or profit interest, convertible instruments, options or other non-binding privileges to buy or sell any of the foregoing, and any other instrument, contract, or mechanism used to establish ownership.

Due to the complexity and expansiveness of the relevant definitions and terms, many companies will require legal advice and guidance in determining their beneficial owners, particularly in the case of organizations with complicated capital or governance structures or where interests are held indirectly through one or more tiers of entities or through trusts.

Company applicants

A reporting company is also generally required to report information about its company applicants. A “company applicant” is generally defined as (1) for domestic reporting companies, the individual that files the document forming the domestic reporting company, (2) for foreign reporting companies, the individual that files the document that first registers the foreign reporting company to do business in any state or tribal jurisdiction, and (3) whether a domestic or foreign reporting company, the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document. However, a reporting company is not required to report its company applicants if it is a domestic reporting company that was created before Jan. 1, 2024, or a foreign reporting company that first registered to do business in the U.S. before Jan. 1, 2024.

Reporting timelines

As stated above, the new reporting rules are effective as of Jan. 1, 2024. Importantly, due dates are not fixed dates and do not coincide with any tax filings. Instead, due dates generally follow a short time after an entity is formed or registered, or there are corrections or changes to prior BOI reports.

Reporting companies created or registered on or after Jan. 1, 2024, and before Jan. 1, 2025, will have 90 calendar days from the date they receive actual or public notice that their company’s creation or registration is effective to file their initial BOI reports.

Reporting companies created or registered on or after Jan. 1, 2025, will have 30 calendar days from the date they receive actual or public notice that the company’s creation or registration is effective to file their initial BOI reports.

Existing companies, that is, reporting companies that were created or registered before Jan. 1, 2024, have a full year, until Jan. 1, 2025, to file their initial BOI report.

Once an initial report has been filed, both new and existing companies will have to file updates within 30 days of a change in their BOI.

Reach out to legal counsel

The CTA reporting requirements are fundamentally non-tax, legal provisions. They are not tax reporting requirements (Title 26), but are instead intended to address money laundering, terrorist financing, and other illicit activity (Title 31). They are also distinct from FBAR filings, which are considered an integral part of U.S. tax compliance and are enforced by the IRS.

The BOI reporting requirements are complex and necessitate legal guidance and direction. They require not only legal interpretations of the many definitions, exemptions, and other provisions under the CTA itself, but in many cases require legal interpretations under state, local or foreign law of organization documents, ownership interests, and other legal instruments or agreements. Grant Thornton is not a law firm, does not practice law and does not perform legal services such as assisting with the formation or registration of legal entities. As such, we are not able to prepare or electronically submit BOI reports or consult on any technical questions related to the BOI reporting requirements.

Impacted companies should reach out as soon as possible to legal counsel with expertise in this area and other service providers directly involved in the formation or registration of legal entities to assist in timely complying with the CTA’s new BOI reporting requirements. Note that failure to comply with the BOI reporting requirements may result in significant civil or even criminal penalties. In addition to compliance with the BOI reporting requirements, legal counsel may recommend and assist with revisions to an organization’s operative agreements and other legal documents to include provisions related to the BOI reporting requirements such as representations, covenants, and indemnification clauses.