New Beneficial Ownership Reporting Requirements for Small Businesses
Starting on January 1, 2024, certain small businesses will be required to disclose information about their beneficial owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The new requirements, implemented by the Corporate Transparency Act and related Treasury regulations, are meant to combat money laundering and other illicit activity by making it difficult for bad actors to hide their identities through the creation of shell companies.
The beneficial ownership reporting requirements will apply to entities formed after January 1, 2024, as well as to existing businesses.
Which Companies Must Disclose Beneficial Ownership Information?
“Reporting Companies” are entities that must make beneficial owner disclosures to FinCEN. Reporting Companies include:
- domestic entities that are created by filing a document with a secretary of state or similar office; and
- foreign entities that are registered to do business in any state or tribal jurisdiction through the filing of a document with the secretary of state or similar office.
Exemptions
There are 23 exemptions from the Reporting Company definition listed at 31 CFR §1010.380(c)(2), which generally exempt entities that are already subject to similar reporting requirements. For example, entities that file reports with the Securities Exchange Commission are exempt, as are banks, insurance companies, registered Investment Advisors and pooled investment vehicles managed by registered Investment Advisors. Tax exempt entities, including charitable and split-interest trusts described in §4947(a) of the Internal Revenue Code, are also exempt.
Additionally, there is an exemption for “large operating companies.” To fall under this exemption, the company must:
- employ more than 20 full-time employees in the United States;
- have an operating presence at a physical office in the United States; and
- have more than $5 million in gross receipts or sales in the United States, as reflected on a United States income tax return.
Finally, a wholly owned or controlled subsidiary of most exempt entities will also be exempt from the definition of Reporting Company.
Trusts
Although trusts are not explicitly exempt from the Reporting Company definition under the regulations, other than charitable or certain split-interest trusts, most trusts do not meet the definition of Reporting Company as they are not created by the filing of a document with the secretary of state or any similar office. However, the trustee, grantor and/or beneficiary of a trust may be considered a Beneficial Owner and subject to the reporting requirements, as discussed below.
Who Qualifies as a Beneficial Owner?
A “Beneficial Owner” is any individual who either (i) owns or controls at least 25% of the ownership interests of a Reporting Company or (ii) who, directly or indirectly, exercises substantial control over a Reporting Company.
Ownership or Control of Ownership Interests:
To determine whether an individual owns or controls at least 25% of the company’s ownership interests, the Reporting Company should consider equity, and any instruments that convert into equity, to be ownership interests that are held, directly or indirectly, by the relevant individual. Additionally, Reporting Companies should treat all options as presently exercised when determining whether an individual meets the 25% threshold.
As discussed further below, in some situations, the ownership interests held by an entity may be imputed to the individual holding interests in such entity.
Substantial Control:
The regulations incorporate a very broad definition of “substantial control.” For instance, control can be exercised through board representation, ownership of a majority of the voting power of a Reporting Company or other relationships or contracts. The regulations indicate that an individual has substantial control over a Reporting Company if such person:
- serves as a senior officer of the Reporting Company;
- has authority over the appointment or removal of senior officers or a majority of the board;
- directs, determines, or has substantial influence over important decisions of the company; or
- has any other form of substantial control over the Reporting Company.
What if an Individual Holds Ownership Interests of a Reporting Company though an Intermediate Entity or Multiple Intermediate Entities?
An individual may indirectly own or control an ownership interest in a Reporting Company through “any contract, arrangement, understanding, relationship or otherwise.” In particular, an individual might indirectly own or control an ownership interest in a Reporting Company through ownership or control of one or more intermediary entities which separately or collectively own or control ownership interests of the Reporting Company. For example, an individual who holds a 30% interest in a Reporting Company through a limited liability company that is wholly owned and controlled by the individual will be deemed a Beneficial Owner of the Reporting Company.
If the intermediary entity is exempt from the definition of Reporting Company under the regulations, then an individual who would qualify as a Beneficial Owner of the Reporting Company exclusively by virtue of such person’s ownership interests in such exempt entity does not need to be listed as a Beneficial Owner of the Reporting Company. Instead, the name and information of the exempt entity can be listed. Notably, this exemption from Beneficial Ownership reporting does not apply to individuals who exercise substantial control over the Reporting Company. In that case, the individual would still need to be listed as a Beneficial Owner of the Reporting Company.
What if an Individual Holds Ownership Interests of a Reporting Company through a Trust?
A trustee, beneficiary and/or grantor of a trust may indirectly own or control ownership interests of a Reporting Company held by a trust.
In particular, the trustee of a trust will be considered to own or control any ownership interest in a Reporting Company that is held in the trust.
The beneficiary of a trust will be deemed to control any ownership interests held by the trust if the beneficiary:
- is the sole permissible recipient of trust income and principal; or
- has the right to demand a distribution of or withdraw substantially all of the trust assets.
A grantor or settlor of a trust who has the right to revoke the trust or otherwise withdraw trust assets will also be deemed to control any ownership interest held by the trust.
Even if a trust is designed in such a way that the beneficiary or grantor does not legally control the relevant ownership interests, such person may have substantial control over the Reporting Company, triggering the reporting requirement. Substantial control can be direct or indirect and can arise from “contract, arrangement, understanding, relationship, or otherwise.” So if a beneficiary is using its relationships with trustees to control the actions of the Reporting Company, such beneficiary’s information may still need to be reported to FinCEN.
When do Reporting Companies Need to Make Filings with FinCEN?
If a Reporting Company is formed on or before December 31, 2023, then the entity must file a report with FinCEN between January 1, 2024 and January 1, 2025. If a new Reporting Company is formed on or after January 1, 2024, that entity must make a filing within 30 days of creation of the business (for domestic Reporting Companies) or within 30 days of registration within the United States (for foreign Reporting Companies).[1]
As described below, Reporting Companies must disclose information about the company itself as well as the Beneficial Owners of the company. If any of the disclosed information related to the Reporting Company or Beneficial Owners changes after a filing is made, an updated filing must be made with FinCEN within 30 days of the change.
What Will be Disclosed to FinCEN?
Reports made to FinCEN will include basic information about the Reporting Company: its name (including any trade or DBA name), address, jurisdiction of formation or registration and tax identification number. It will also include the name, date of birth, and residential address of the Beneficial Owners as well as a unique identifier from a U.S. passport, state driver’s license, state, tribe or other government identification document or a foreign passport. All Beneficial Owners will also be required to submit a copy of the document from which the unique identifier was obtained.
The same information required of Beneficial Owners will also be required for each “Company Applicant” of Reporting Companies formed on or after January 1, 2024. The Company Applicant is the individual who (i) directly files the document which creates or registers the entity and (ii) if different from the person described in (i), the person who is primarily responsible for the filing of the document that creates or registers the entity If the disclosed information related to the Company Applicant changes after the initial filing is made, the Reporting Company will not be required to submit an updated filing to FinCEN.
Who Can View the Information Disclosed to FinCEN?
Reports made to FinCEN are held in a secure database that can only be accessed by certain Federal and state agencies. The agencies must make a specific request and follow special procedures to view the beneficial ownership information collected by FinCEN. Financial institutions can also view beneficial ownership information if the Reporting Company consents to such access.
Penalties for Violations
It is unlawful for a Reporting Company to fail to file a report with FinCEN, and it is also unlawful to report incorrect information. Any person that refuses to provide required information, fails to file a report or reports incorrect information may be subject to civil fines of $500 for each day of noncompliance and could be fined up to $10,000 or imprisoned for two years, or both.
For further information please contact:
[1] On September 27, 2023, FinCEN issued proposed rule RIN 1506-AB62 that would extend the 30-day initial filing requirement to a 90-day requirement, but only for entities formed in the 2024 calendar year. Public comments.
Ecovis cooperates with Pryor Cashman LLP (www.pryorcashman.com), a full-service, US-based law firm with offices in New York City, Los Angeles and Miami.