IMPORTANT NOTICE: NEW FEDERAL LAW REQUIRES DISCLOSURE OF OWNERS OF VIRTUALLY ALL INVESTMENT AND OPERATING ENTITIES; INCLUDING LLCS, AND SUBCHAPTER S CORPORATIONS. NON-COMPLIANCE CARRIES THE POTENTIAL FOR LARGE FINES AND/OR IMPRISONMENT FOR VIOLATORS.

Congress enacted the Corporate Transparency Act (CTA) on Dec. 11, 2020, to combat financial crimes, including money laundering, tax evasion and others, by creating a centralized non-public database of the people who own and operate business entities in the U.S. Final rules implementing CTA reporting requirements were promulgated by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) on Sept. 29, 2022.

Effective Jan. 1, 2024, the CTA rules impose additional requirements beyond the standard procedures routinely used in wealth and estate planning in setting up business or family entities. As a result, setting up an LLC or other entity and creating estate planning strategies will be more expensive, complicated, and time-consuming. The CTA rules will affect every high-net worth individual, family, private trust company, and family office that uses entities to conduct business and hold assets.

General Rule

The CTA requires “reporting entities” to electronically report “certain information” about their “beneficial owners” as well as “company applicants.”  Starting Jan. 1, 2024, all U.S. entities must either qualify for an exemption from the reporting requirements or submit beneficial ownership information to FinCEN. Any changes or updates to the reported information must also be reported within 30 days.

What are the Reporting Entities?

Generally, the term “reporting entity” includes corporations, limited liability companies, limited liability partnerships, or other entities that are either (1) formed under the laws of a State in the United States, or (2) formed under the laws of a foreign country that are registered to do business in a State in the United States.

What Entities are Exempt?

Excluded from the definition of reporting entity are entities that are currently regulated by some government entity, and thus already subject to reporting, and other entities including:

• SEC-regulated entities, including public companies, brokers and dealers, investment advisers, pooled investment vehicles operated or advised by SEC-registered advisers.
• Companies required to comply with the Sarbanes Oxley Act of 2022, such as banks.
• Tax-exempt entities, including Section 501(c) organizations, political organizations, and charitable or split interest trusts.
• Trusts.
• Dormant companies.
• “Large companies” – Entities that employ more than 20 employees on a full time basis in the United States that have filed previous year federal income tax returns of more than $5 million in gross receipts or sales.

While there are 24 exemptions to the CTA rules, a private trust company or a family office that does not meet the “large company” exemption or any other exemption, will be subject to the FinCEN disclosure requirements.

Who are Beneficial Owners of a Reporting Entity?

For disclosure purposes, each reporting entity will be required to disclose certain information with respect to more than one beneficial owner. Beneficial owners are individuals who, directly or indirectly, either (1) own or control 25% or more of the ownership interests of the entity, or (2) exercise substantial control over the reporting entity. The final rules employ broad definitions to capture individuals whose names may not appear on the title or in the formation documents, but who ultimately control all important decisions or financially benefit from the entity.

25% Owners are Beneficial Owners

If an individual or another entity owns 25% of any type of capital or profits interest, or the greater of 25% of voting rights or 25% of stock in a corporation, that individual must disclose certain information to FinCEN within the required guidelines and, for each additional entity involved, the rule drills down to the ultimate individuals who own the structure.

Substantial Control Individuals are Beneficial Owners

The definition of a beneficial owner includes individuals who exercise substantial control over important decisions of a reporting entity.  The final rules list:

• C-suite officers.
• Directors.
• Persons with authority to remove and replace the entity’s management or the board of directors.
• LLC managers.
• Special powerholders that direct or substantially influence important matters of the reporting entity, including:
  • Entity reorganization, dissolution or merger.
  • Selection or termination of business lines.
  • The amendment of any governance documents.
  • Anyone who exerts any other form of substantial control over the reporting entity.

With respect to trusts, if a trust owns 25% or more of a reporting entity or substantially controls important decisions with respect to a reporting entity, then its trustees, certain beneficiaries, certain powerholders, and grantors of revocable trusts, are beneficial owners and must comply with the disclosure rules. Private trust companies and family offices that are reporting entities will be required to disclose the identity of family members who influence the decisions of these entities.

What Information Must Be Disclosed Regarding Beneficial Owners of a Reporting Entity?

Each reporting entity, must electronically submit its legal name, U.S. address and its state or foreign jurisdiction of formation. In addition, the filing must provide each beneficial owner’s:

• Full legal name.
• Date of birth.
• Current residential address.
• Unique identifying number from a non-expired U.S. passport, or a valid state ID or driver’s license, as well as a copy of the identification document.

An individual may submit a one-time FinCEN filing that includes the above-listed information and request a FinCEN ID number that can be used for all required FinCEN filings with respect to any reporting entity.

Is this Information Private?

Yes. FinCEN must maintain the reported beneficial ownership information in a confidential, secure, and non-public database that is expected to be available for filings on Jan. 1, 2024, and will be accessible by government agencies and law enforcement only, but not the general public.

What is the Deadline to Comply For Existing and New Entities?

Because non-compliance carries criminal and financial penalties, investors should be prepared to comply with the CTA reporting requirements within 30 days for all newly created entities starting on Jan. 1, 2024. Reporting entities created or registered before Jan. 1, 2024, will have one year to comply and report beneficial owners. The final regulations create an incentive to form entities before the end of 2023.

What if my Entity Fails to Comply?

If a reporting entity fails to comply with the CTA rules, a criminal fine of up to $10,000, or imprisonment for up to two years, or both, apply for any individual who fails to report complete or updated information to FinCEN or willfully provides a false or fraudulent report. Also, civil and criminal penalties may apply to senior officers of a reporting entity that fails to comply with these rules and to individuals who advise a reporting entity not to file a FinCEN report.

Please contact Taft to assist you in your preparation to comply with FinCEN disclosure requirements.