Deadline Approaches: FinCEN’s Rules For Beneficial Ownership Reporting Under The Corporate Transparency Act – Corporate and Company Law – Corporate/Commercial Law

The Corporate Transparency Act (the “CTA”) requires a
range of entities, primarily smaller, otherwise unregulated
companies, to file a report with the U.S. Department of the
Treasury’s Financial Crimes Enforcement Network
(“FinCEN”) identifying the entities’ beneficial
owners—the persons who ultimately own or control the
company—and provide similar identifying information about the
persons who formed the entity. The CTA also authorizes FinCEN to
disclose this information to authorized government authorities and
to financial institutions in certain circumstances.

FinCEN’s Beneficial Ownership Information Reporting
Requirements (the “Reporting Rule”) requires certain
domestic and foreign entities to submit a “beneficial
ownership information” (“BOI”) report to FinCEN. The
Reporting Rule describes who must file a BOI report, what
information must be reported, and when a report is due. The
Reporting Rule went into effect on January 1, 2024, and Reporting
Companies that were created (or first registered in the U.S.) in
2024, are required to file the required information within 90 days,
unless an exemption applies. Reporting Companies created
before January 1, 2024, have until January 1, 2025, to
file the required information. As the reporting deadline
for these companies is fast approaching, businesses must take
action now to determine whether they are exempt from reporting and,
if necessary, register with FinCEN.

Who is Required to Report?

Any entity that is a corporation, a limited liability company
(“LLC”), a limited partnership or an entity created by
filing with a Secretary of State or any similar office under the
law of a State or Indian tribe is required to comply with the
Reporting Rule. Federal agencies are not “similar
offices”, and domestic entities that are created by State or
Federal charter are outside the scope of the CTA. Any corporation,
LLC, limited partnership, or other entity that is formed under the
laws of a foreign country and is registered to do business in any
State or tribal jurisdiction is also subject to the Reporting
Rule.

Accordingly, the rule requires the following types of entities
to file reports, unless they fall within an exemption (each, a
“Reporting Company”):

• U.S. corporations




• U.S. LLCs




• U.S. limited partnerships




• Other similar U.S. entities such as business trusts/statutory
  trusts that are created by a filing with a secretary of state or
  similar office




• Non-U.S. corporations, LLCs, limited partnerships and other
  similar entities that are registered to do business with a
  secretary of state or similar office in the United States

Are There Any Exemptions?

The Reporting Rule lists 23 types of entities that are exempt
from the definition of Reporting Company and consequently are not
required to file reports under the Reporting Rule. These include
governmental authorities, banks, credit unions, money services
businesses, registered broker dealers, exchanges and clearing
agencies, insurance companies, accounting firms, public utilities,
certain tax-exempt entities, and entities assisting tax-exempt
entities, among others.

• There are also exemptions for large or public companies:
  

  • Large operating companies that meet certain employment and tax
    reporting criteria are exempt; specifically, any entity that (1)
    employs more than 20 full-time employees in the U.S., (2) in the
    previous year filed a U.S. federal income tax return demonstrating
    more than $5,000,000 in gross receipts or sales in the aggregate
    (on a consolidated basis, if applicable), excluding gross receipts
    or sales from sources outside the U.S., and (3) has an operating
    presence at a physical office within the U.S. that is owned or
    leased by the entity

  
  

  • Publicly traded companies that are issuers of securities and
    registered under Section 12 of the Securities Exchange Act of 1934
    (the “Exchange Act”) or otherwise required to file
    supplementary and periodic information under Section 15(d) of the
    Exchange Act are exempt




• In addition, fund-related exemptions include:
  

  • SEC registered investment advisors and registered investment
    companies

  
  

  • Venture capital fund advisers that have made certain filings
    with the SEC

  
  

  • Commodity pool operators and commodity trading advisors that
    are registered with the CFTC

  
  

  • Pooled investment vehicles (investment companies or funds
    relying on Section 3(c)(1) or 3(c)(7) of the Investment Company Act
    of 1940 and listed on the applicable adviser’s Form ADV) that
    are operated or advised by a bank, Federal or State credit union,
    SEC registered broker-dealer, SEC registered investment company or
    investment adviser, or venture capital fund adviser




• Subsidiaries
  

  • Subsidiaries the ownership interests of which are entirely
    controlled or 100% wholly owned, directly or indirectly, by certain
    exempt entities are also exempt from the reporting requirements of
    the Reporting Rule

  
  

  • The subsidiary exemption does not extend to subsidiaries of
    money services business, pooled investment vehicles, or entities
    assisting a tax-exempt entity by virtue of ownership

  
  

  • Entities registered in a State or tribal jurisdiction that are
    subsidiaries of large foreign companies that do not qualify for the
    large operating company exemption because of insufficient U.S.
    presence or gross receipts will be required to report BOI under the
    Reporting Rule, absent another applicable exemption

Despite the large number of exemptions, the Reporting Rule has a
significant impact on private investment funds and other entities
structured to facilitate investment by a group. While registered
investment advisers are exempt from the reporting requirements
under the Reporting Rule, private fund advisers, foreign private
advisers, and family offices are not exempt. Additionally, although
the Reporting Rule exempts entities the ownership interests of
which are directly or indirectly entirely controlled or wholly
owned by registered investment companies, there is no such blanket
exemption for subsidiaries of private funds. Some feeder fund
vehicles, AIVs, other subsidiaries of private funds, and holding
company entities that are not otherwise eligible for an exemption
will be subject to the Reporting Rule. Certain kinds of pooled
investment vehicles, such as real estate vehicles relying on the
Section 3(c)(5)(c) exemption under the Investment Company Act of
1940 (the “1940 Act”), certain commodity pools (even if
advised by a registered commodity trading advisor and operated by a
registered commodity pool operator), and certain foreign pooled
investment vehicles are not exempt from the Reporting Rule.
Finally, while private fund clients of registered investment
advisers relying on the 3(c)(1) and 3(c)(7) exemptions under the
1940 Act are exempt from the definition of Reporting Company under
the Reporting Rule, subsidiaries of those private fund clients may
not be exempt.

The final rule authorizes the Secretary of the Treasury to
exempt additional entities, but FinCEN expressed reluctance to
expand the exemptions beyond those enumerated in the CTA. Such an
expansion would require a finding that the relevant entity’s
submission of a BOI report would not serve the public interest and
would not be highly useful in furthering the objectives of the
CTA.

Additional FinCEN Guidance

Subsidiary Exemption

FinCEN has released a number of FAQs¹ in response to
questions received regarding compliance with various aspects of the
Reporting Rule. In response to questions relating to the exemption
available to subsidiaries that are “controlled or wholly
owned” by certain categories of exempt entities, FinCEN
clarified that a subsidiary’s ownership interests must be
“fully, 100 percent² owned or controlled
by an exempt entity (or exempt entities).” FinCEN further
stated that “control of ownership interests” means that
the exempt entity (or exempt entities) “entirely
controls” all of the ownership interests of the
subsidiary in the same way that an exempt entity must wholly own
all of a subsidiary’s ownership interests to qualify for a
subsidiary exemption. Note that a subsidiary the ownership
interests of which are owned or controlled by more than one entity
can qualify for the subsidiary exemption, if each owning or
controlling entity is one of the types of exempt entities that the
Reporting Rule designates as an eligible owning or controlling
entity (such as a registered investment advisor, a publicly traded
company, or a large operating company). These owning or controlling
entities do not need to be affiliated with each other for the
subsidiary to qualify for this exemption. If any portion of a
subsidiary’s ownership interests cease to be wholly owned or
entirely controlled by eligible exempt entities, the subsidiary
will not qualify for the subsidiary exemption.

Multiple Changes to Exemption
Status

On April 18, 2024, FinCEN further clarified whether a Reporting
Company whose size fluctuates above and below one of the thresholds
for the large operating company exemption needs to file a BOI
report with each change. A Reporting Company will need to file a
BOI report whenever it “otherwise meets the definition of a
reporting company and does not meet the criteria for the large
operating company exemption (or any other exemption).” If a
Reporting Company files a BOI report and later becomes exempt, that
company should file a “newly exempt entity” BOI report.
If at a later date the Reporting Company no longer meets the
criteria for an exemption, the Reporting Company will need to file
an updated BOI report within 30 calendar days of the occurrence of
the change.

Dissolved Entities

On July 8, 2024, FinCEN clarified that entities that ceased to
exist before January 1, 2024, are not required to file a BOI
report. Reporting Companies that existed for any period of time on
or after January 1, 2024, and were not formally and irrevocably
dissolved before that date are required to file. This is the case
even if the entity formally dissolved before its initial BOI report
was due.

What Information is Required to be Reported?

Each Reporting Company is required to report:

• Entity name (and any alternative trade or d/b/a names)




• Business street address




• Jurisdiction of formation and, for foreign entities, the State
  or Tribal jurisdiction of registration




• A unique identification number (such as TIN, EIN, LEI, etc.)
  and, for a disregarded entity, the EIN of its regarded owner

If a Reporting Company does not have a principal place of
business in the United States, then the company must report its
address to FinCEN as the primary location in the United States
where it conducts business, or, if none, the address of any of
those locations where the Reporting Company receives important
correspondence. If a Reporting Company has no principal place of
business in the United States and does not generally conduct
business functions at any location in the United States, then its
primary location is the address in the United States of the person
that the Reporting Company, under State or other applicable law,
has designated to accept service of legal process on its
behalf.

The Reporting Rule also requires Reporting Companies to identify
their beneficial owners and, for certain Reporting Companies, the
“company applicants” who directly file, and who are
primarily responsible for filing, or directing or controlling the
filing of, the entity’s formation documents (the “Company
Applicants”). The identifying information required to be
reported for beneficial owners and Company Applicants includes:

• Full legal name




• Date of birth




• Current residential or (for Company Applicants) business street
  address




• A unique identifying number from an acceptable identification
  document (such as a State issued ID or passport) along with an
  image of the document

For beneficial owners who hold their ownership interests in a
Reporting Company “exclusively through
multiple exempt entities”, the Reporting Rule allows
the names of all of those exempt entities to be reported to FinCEN
instead of the individual beneficial owner’s information. This
rule does not apply when an individual owns or controls ownership
interests in a Reporting Company through both exempt and non-exempt
entities. In that case, the Reporting Company must report the
individual as the beneficial owner (if no exemption applies), but
the exempt companies do not need to be listed in the BOI
report.

FinCEN will issue a FinCEN identifier upon request following
provision of the above information, which can be included on BOI
reports in lieu of the required information. Note that beneficial
owners have a duty to update this required information within 30
days of any changes (see below, “When Do I Need to
Report?“), but that such information only needs to be
updated via the FinCEN identifier portion of FinCEN’s website
and not also at the level of individual BOI reports. As a result, a
Reporting Company should request that its beneficial owners obtain
and use FinCEN identifiers whenever possible to eliminate the
burden of updating its report if a particular beneficial
owner’s information changes.

Who is a Beneficial Owner?

The Reporting Rule defines a beneficial owner as any
individual who, directly or indirectly, either (1) exercises
substantial control over a Reporting Company; or (2) owns
or controls at least 25% of the ownership interests of a Reporting
Company. The Reporting Company should not report a corporate entity
that acts as an intermediate company for individual persons. If the
beneficial owners of the Reporting Company and an intermediate
company are identical, a Reporting Company may report the FinCEN
identifier and full legal name of an intermediate company through
which the individuals own the Reporting Company.

Substantial Control

Under the Reporting Rule, an individual exercises substantial
control over a Reporting Company if the individual:

• Serves as a senior officer of the Reporting Company; the rule
  defines “senior officer” to include any individual
  holding the position or exercising the authority of president, CEO,
  CFO, COO, general counsel, or any other officer performing a
  similar function;




• Has authority over the appointment or removal of any senior
  officer or a majority of the board of directors (or similar body)
  of the Reporting Company;




• Directs, determines or has substantial influence over important
  matters of the Reporting Company (including, for example, the
  reorganization, dissolution or merger of the Reporting Company, the
  selection or termination of business lines or ventures or the
  amendment of any governance documents); or




• Has any other form of substantial control over the Reporting
  Company.

The last prong is a catch-all provision for substantial control
that is exercised in less conventional ways and for entities with
atypical governance structures. This provision is designed to
capture anyone who can make important decisions on behalf of the
entity.

Ownership Interest

The Reporting Rule defines “ownership
interest” as any instrument, contract, arrangement,
understanding, or mechanism used to establish ownership (such as
any equity, stock, capital, or profit interest) An individual may
own or control an ownership interest of a Reporting Company in a
variety of ways directly or indirectly, including through joint
ownership, certain trust arrangements, or acting as an
intermediary, custodian, or agent on behalf of another. The rule
provides that convertible instruments, warrants, and other rights
to purchase, sell, or subscribe to an ownership interest are
included, regardless of whether they are characterized as debt or
equity. Puts, calls, and other options to buy or sell ownership
interests are also included in the definition of ownership
interest, except to the extent created and held by a third party
without the knowledge or involvement of the Reporting Company.

“Beneficial owner” does not include minor children (so
long as a parent or legal guardian’s information is reported),
individuals acting as nominees, intermediaries, custodians, or
agents, employees acting solely as employees and not as senior
officers, individuals whose only interest in a Reporting Company is
a future interest through a right of inheritance, or creditors of a
Reporting Company (unless the creditor otherwise meets the
definition of beneficial owner by exercising substantial control or
by owning or controlling 25% or more of the entity’s ownership
interests). In States with community property laws, the spouse of a
beneficial owner could also be considered a beneficial owner if the
State’s community property laws dictate that both spouses own
or control 25% or more of the entity’s ownership interests.

Do I Need to Report a Company Applicant?

The Reporting Rule also requires new companies created or
registered on or after the Reporting Rule’s effective date of
January 1, 2024, to provide the identifying information of Company
Applicants. Reporting Companies created or registered prior to
January 1, 2024, are not required to report their Company
Applicants. If applicable, the Reporting Company must provide a
business address for Company Applicants who create or register
companies in the course of their business (a residential address is
required for beneficial owners).

When Do I Need to Report?

Reporting Companies created before January 1, 2024,
have until January 1, 2025, to file the required information. These
companies are required to submit information about their beneficial
owners but are not required to report information about their
Company Applicants. If a Reporting Company created before January
1, 2024, was previously exempt from the Reporting Rule but then
loses its exempt status in 2024, that Reporting Company must file a
BOI report within either one of two timeframes, whichever is
longer: (1) the remaining days left in the one-year filing period
for existing companies; or (2) the 30-calendar-day period
for companies that lose their exempt status.

Reporting Companies created on or after January 1,
2024, but before January 1, 2025, are required to file the required
information within 90 days after receiving notice of an effective
formation or registration. Reporting Companies created on or
after January 1, 2025, are required to file the required
information within 30 days after receiving notice of an effective
formation or registration. Companies formed or registered after the
effective date of the Reporting Rule are required to include
information on both Company Applicants and beneficial owners.

Any change to the information previously reported concerning a
Reporting Company or its beneficial owners must be reported to
FinCEN within 30 days of the date of the change. No updates are
required with respect to Company Applicant information. Any
inaccuracies must be reported within 30 days of when the Reporting
Company becomes aware of the inaccuracy. It is important to note
that any time there is a change in an entity’s ownership,
whether or not the entity is a Reporting Company prior to the
change in ownership, the entity may be required to file a BOI
report or update an existing report.

Conversions from one company type to another (e.g., an LLC to a
corporation) may need to be reported to FinCEN. If the conversion
results in a new Reporting Company, such new Reporting Company must
file a BOI report. If the conversion does not create a new
Reporting Company but changes the name of an existing Reporting
Company (e.g., “Company, Inc.” to “Company,
LLC”), such Reporting Company will be required to submit an
updated BOI report within 30 days of the date of the conversion.
Note that a Reporting Company that changes its jurisdiction of
formation will also be required to submit an updated BOI report
within 30 days of such change. A Reporting Company does not need to
file an additional BOI report each time it registers to do business
in a new jurisdiction.

Who Has Access to Reported Information?

The CTA authorizes FinCEN to disclose BOI to:

• U.S. government agencies




• Certain foreign agencies and authorized persons




• Financial institutions using the information for certain KYC
  purposes

The information reported to FinCEN under the Reporting Rule will
not be accessible to the public and is not subject to Freedom of
Information Act requests.

On December 16, 2022, FinCEN proposed the Beneficial Ownership
Information Access and Safeguards, and Use of FinCEN Identifiers
for Entities rule providing access to BOI directly from the FinCEN
database to three types of U.S. government agencies:

• Federal agencies engaged in national security, intelligence,
  and law enforcement activity (which includes both civil and
  criminal enforcement activity)




• Department of the Treasury officials and employees in the
  course of their official duties, including tax administration




• State, local and Tribal law enforcement agencies in connection
  with criminal or civil investigations

Federal agencies will need to provide FinCEN with a brief
justification for their request, while State, local and Tribal
agencies will need to provide a court document authorizing the
agency to access the BOI from FinCEN’s database.

Foreign law enforcement agencies, judges, prosecutors, central
authorities and competent authorities will not have direct access
to FinCEN’s BOI database. These authorized foreign requestors
will need to submit a request to a federal agency to act as an
intermediary to retrieve the BOI information from FinCEN’s
database. The federal agency may only provide BOI to a foreign
requestor in response to a request for assistance in an
investigation or prosecution by such foreign country where there is
an applicable treaty or similar international agreement. The
foreign requestor must limit the use of BOI in a manner consistent
with the treaty or similar agreement under which the request was
made.

FinCEN may also disclose BOI to financial institutions to assist
with AML compliance only where the Reporting Company has provided
its consent to such disclosure.

Violations

Consistent with the CTA’s penalty framework, willful
violations of the Reporting Rule may lead to civil or criminal
penalties, including up to two years in prison. However, FinCEN
stated that it “intends to prioritize education and outreach
to ensure that all reporting companies and individuals are aware of
and on notice regarding their reporting obligations.”

Challenges to the CTA

In November 2022, plaintiffs Isaac Winkles, who owns a number of
small businesses in Alabama, and the National Small Business
Association filed a lawsuit against the U.S. Department of the
Treasury seeking an injunction against the implementation of the
CTA as unconstitutional.³ On March 1, 2024, Judge Liles
C. Burke of the U.S. District Court for the Northern District of
Alabama ruled that the CTA is unconstitutional because it
“exceeds the Constitution’s limits on the legislative
branch and lacks a sufficient nexus to any enumerated power to be a
necessary or proper means of achieving Congress’ policy
goals.”⁴ The injunction granted by the court is
limited to the plaintiffs, including all members of the National
Small Business Association as of March 1, 2024, the date of the
injunction. All other Reporting Companies are advised to comply
with the Reporting Rule by the applicable deadline. Since this
ruling, there have been several additional suits filed against the
Department of Treasury in various courts seeking to enjoin or
overturn the CTA, in addition to the Department of Treasury’s
appeal of the Alabama ruling. As of the date of this updated alert,
rulings have not yet been issued in the appeal or any of the
subsequent lawsuits.

Key Takeaways

The CTA and the Reporting Rule established a nationwide
disclosure regime which is intentionally broad in scope and is
designed to deter money laundering, corruption, tax evasion and
other financial crimes. Unless an exemption applies, entities
organized or registered to conduct business in the U.S. are
required to disclose identifying information to FinCEN about those
who formed and ultimately own or control those entities. While
there are a large number of exemptions from the reporting
requirements, and many large operating companies and publicly
traded or otherwise regulated companies will likely meet one or
more of the enumerated exemptions, domestic and foreign commercial
groups with U.S. subsidiaries, private equity and private fund
structures, trusts, and others will need to evaluate their own
particular circumstances to determine whether they qualify for an
exemption under the Reporting Rule. All existing entities that do
not qualify for an exemption will need to file a BOI report by the
applicable deadline, or potentially face civil and criminal
penalties.

You can view the final rule here: Beneficial Ownership Information
Reporting | FinCEN.gov

Footnotes

1. The FAQs released by FinCEN and updated periodically
are available at

2. Emphasis in the original.

3. Nat’l Small Bus. United v. Yellen, No.
5:22-cv-01448-LCB (N.D. Ala. 2022).

4. For more information on the ruling, please see our
client alert, U.S. District Court in Alabama
Finds the Corporate Transparency Act
Unconstitutional.

Deadline Approaches: FinCEN’s Rules for
Beneficial Ownership Reporting under the Corporate Transparency
Act

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.