Tag: FinCEN

Corporate Transparency Act— Nationwide Injunction Update and Key Considerations

On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide injunction halting enforcement of the Corporate Transparency Act (“CTA”).1 In response, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) confirmed it will comply with the injunction while also appealing the decision. FinCEN also states on its website that reporting companies are not required to file beneficial ownership information during the injunction and will not incur penalties for failing to do so.

For so long as the injunction remains in place, it is safe not to make CTA filings. On the other hand, it is impossible to know whether and when the injunction may be lifted. And if it is lifted, there may be limited time for filings to be made before penalties accrue. Filers who choose not to file now may wish to assemble their information so they are ready to file on short notice should the need arise. We also recommend that filers who do not have particular privacy or other concerns consider filing notwithstanding the injunction to ensure that they are compliant no matter the outcome of the lawsuit.2 Ultimately, the decision to file is a personal and business decision that will vary by client.

Below are key points to consider:

  1. If you have already applied for a FinCEN Identifier, your sensitive information is already submitted, so there is less risk in proceeding with the filing.
  2. If privacy and business concerns are minimal, consider filing now to avoid a potential rush if the injunction is lifted and filings become due immediately.
  3. For entities formed in 2024 with a non-12/31 filing deadline, consider filing if privacy is less of a concern. Although FinCEN may provide an extension in these situations, penalties remain steep and the outcome is uncertain.

1See Texas Top Cop Shop, Inc., et al. v. Merrick Garland, et al.

2We previously published some advisories on the general application of the CTA and its specific application for those with entities for estate planning purposes and the rules and guidelines are largely unchanged.

Copyright 2024 Goulston & Storrs PC.
For more on the CTA, visit the NLR Corporate Business Organizations section

Federal District Court Issues Nationwide Preliminary Injunction Barring Enforcement of Corporate Transparency Act

In Texas Top Cop Shop, Inc., et al. v. Garland, et al., a federal district court judge issued a nationwide preliminary injunction barring enforcement of the Corporate Transparency Act (“CTA”), finding that the CTA likely exceeds Congress’s powers. Therefore, at present, a reporting company is not obligated to comply with the CTA and the government is enjoined from enforcing the CTA’s reporting requirements. As expected, on December 5, 2024, the government entered a notice of appeal of the preliminary injunction and may still seek a stay of the preliminary injunction pending the appeal. If a stay is granted by the Court of Appeals, the reporting obligations would once again be in effect. The Court of Appeals could also decide to keep the preliminary injunction in place while an appeal is pending.

At this time, companies are not required to file Beneficial Ownership Information (“BOI”) reports, although they are free to do so should they choose. Indeed, the Financial Crimes Enforcement Network (“FinCEN”) issued guidance after the entry of the notice of appeal, stating as much: “In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.” (available at https://www.fincen.gov/boi.)

At present, it is unknown how long companies would be given to file if the preliminary injunction is stayed, modified or the law is ultimately upheld. However, FinCEN’s statement suggests that a reasonable extension of time for filing can be expected, though that is not a certainty. Of course, if the CTA is ultimately struck down, no filing would be required.

© 2024 Blank Rome LLP
For more on the CTA, visit the NLR Corporate Business Organizations section

BREAKING: Federal Court Enjoins Government from Enforcing Corporate Transparency Act

On December 3, 2024, the U.S. District Court for the Eastern District of Texas granted a nationwide preliminary injunction that enjoins the federal government from enforcing the Corporate Transparency Act (the CTA).

The CTA, which went into effect January 1, 2024, requires “reporting companies” in the United States to disclose information about their beneficial owners — the individuals who ultimately own or control a company — to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

A group of six plaintiffs filed a lawsuit in May 2024 claiming that Congress exceeded its authority under the Constitution in passing the CTA. In a 79-page order issued by United States District Judge Amos L. Mazzant, the Court found that the plaintiffs were likely to succeed on the merits of their claims and, although the plaintiffs sought a preliminary injunction on behalf of only themselves and their members, the Court issued a nationwide injunction instead.

The Court’s order states that neither the CTA nor the implementing rules adopted by FinCEN may be enforced and that reporting companies need not comply with the CTA’s upcoming January 1, 2025 deadline for filing beneficial ownership reports.

The Court’s order is a preliminary injunction only and not a final decision. The Court’s order temporarily pauses enforcement of the CTA on a nationwide basis, but enforcement could resume if the Court’s order is overturned on appeal or the Government ultimately prevails on the merits.

© 2024 Foley & Lardner LLP
For more on the CTA, visit the NLR Corporate Business Organizations section

Disregarded Entity Eligibility for the CTA Large Operating Company Exemption

Summary: As discussed in detail below, the Corporate Transparency Act (CTA) provides an exemption to its reporting requirements for certain large operating companies (the Large Operating Company Exemption or “LOC Exemption”). In order to qualify for the LOC Exemption, a reporting company must, among other requirements, “have filed a Federal income tax or information return in the United States in the previous year demonstrating more than $5,000,000 in gross receipts or sales.” Certain reporting companies are “disregarded entities” (DREs) for Federal tax purposes and, as such, do not themselves directly have a Federal tax filing obligation or ability. However, based upon guidance from FinCEN and the IRS, support exists for the proposition that the Federal tax filing of a DRE’s sole individual owner or sole parent entity constitutes the filing referenced in the LOC Exemption, and that a DRE reporting company is not, per se, disqualified from utilizing the LOC Exemption.

* * * * *

Certain business entities may elect (including through default attribution under the Internal Revenue Code, (IRC) to be treated as “disregarded” from their individual owner or parent entity for U.S. federal income tax purposes. Such entities include limited liability companies (LLCs) who have a single member (unless such an LLC has elected on Internal Revenue Service (IRS) Form 8832 to be taxed as a “corporation”), or certain wholly owned subsidiaries of “S-corporations” where the parent S-corporation has made an election (referred to as a “Q-Sub election”) on IRS Form 8869 to treat the subsidiary as a qualified subchapter S subsidiary (QSub), whereby such Q-Sub is deemed to be liquidated (for federal tax purposes only) into the parent S-corporation.

These entities, often referred to simply as “disregarded entities” do not, as a distinct, juridical person, file a federal income tax return per se. Instead, DREs have their taxable income and loss reflected, on an aggregated basis, on the federal income tax return of their individual owner or (direct or indirect) parent entity. In fact, when reporting the taxpayer identification number (TIN) of a DRE on an IRS Form W-9 (Request for Taxpayer Identification Number and Certification), the DRE provides the federal employer identification number (FEIN) of a parent entity or a social security number (SSN) of an individual owner, rather than a TIN of the DRE itself. This is true even if the DRE has filed for, and has received from the IRS, its own FEIN.

Further to this point, some DREs do not, and are not required to, file for their own FEIN. As such, not all DREs possess their own FEIN or other entity distinct TIN.

The Financial Crimes Enforcement Network (FinCEN), in its Frequently Asked Question F.13 issued July 24, 2024, acknowledged this fact as follows:

“An entity that is disregarded for U.S. tax purposes—a “disregarded entity”—is not treated as an entity separate from its owner for U.S. tax purposes. Instead of a disregarded entity being taxed separately, the entity’s owner reports the entity’s income and deductions as part of the owner’s federal tax return. …

Consistent with rules of the Internal Revenue Service (IRS) regarding the use of TINs, different types of tax identification numbers may be reported for disregarded entities under different circumstances:

  • If the disregarded entity has its own EIN, it may report that EIN as its TIN. If the disregarded entity does not have an EIN, it is not required to obtain one to meet its BOI reporting requirements so long as it can instead provide another type of TIN….
  • If the disregarded entity is a single-member limited liability company (LLC) or otherwise has only one owner that is an individual with a SSN or ITIN, the disregarded entity may report that individual’s SSN or ITIN as its TIN.
  • If the disregarded entity is owned by a U.S. entity that has an EIN, the disregarded entity may report that other entity’s EIN as its TIN.
  • If the disregarded entity is owned by another disregarded entity or a chain of disregarded entities, the disregarded entity may report the TIN of the first owner up the chain of disregarded entities that has a TIN as its TIN.

As explained above, a disregarded entity that is a reporting company must report one of these tax identification numbers when reporting beneficial ownership information to FinCEN.”i

While the above FAQ is not offered by FinCEN specifically in the context of the LOC Exemption, this FAQ does have important implications for the LOC Exemption. In stating that a DRE is not required to obtain an FEIN merely for purposes of having such a number for purposes of filing a beneficial ownership information report (BOIR) under the CTA, and acknowledging that a DRE may provide a SSN of an individual owner, or an FEIN of a parent entity, in satisfaction of the DRE’s requirement to provide a tax identification number as required in FinCEN’s form for filing BOIRs, FinCEN has recognized that the same TIN required by the IRS to be disclosed on a Form W-9 in respect of a DRE is recognized by FinCEN as an appropriate TIN in respect of the DRE for purposes of such entity’s BOIR filing.

As such, the federal tax return filing associated with such a TIN is, therefore, the tax return associated with the DRE reporting such TIN on its BOIR filing. In other words, the fact that an individual owner or a parent entity has made a prior year’s federal tax return filing, which filing includes the U.S. generated gross receipts or sales of the DRE, should be sufficient to satisfy the DRE’s prior year’s federal tax return filing status with respect to such revenue.

As stated in FAQ F.13 above, “a DRE—is not treated as an entity separate from its owner for U.S. tax purposes…, the entity’s owner reports the entity’s income and deductions as part of the owner’s federal tax return…”

* * * * *

With this background, we next analyze the associated implications to a DRE that may qualify for the LOC Exemption.

For purposes of clarity, the requirements for an entity to qualify for the LOC Exemption is that the entity satisfy all three parts of the following three-part test:

“[A]n entity must have more than 20 full-time employees in the United States, must have filed a Federal income tax or information return in the United States in the previous year demonstrating more than $5,000,000 in gross receipts or sales, and must have an operating presence at a physical office in the United States.”ii

The CTA itself provides more specificity in this regard. The CTA provides that the term “reporting company” does not include any entity that:

“(I) employs more than 20 employees on a full-time basis in the United States; (II) filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of (aa) other entities owned by the entity; and (bb) other entities through which the entity operates; and (III) has an operating presence at a physical office within the United States.”iii

Although FinCEN has, to date, issued no formal acknowledgment or interpretation with regard to the applicability of the above “revenue prong” specifically in the DRE context, for the reasons outlined above, a reasoned and supported proposition in the DRE situation may be that the “filed Federal income tax or information return” referenced in the LOC Exemption is the federal tax return filing of the reporting company’s individual owner or parent entity, as applicable.

Further to the revenue prong, it appears that if the DRE itself generates U.S. generated gross receipts or sales in excess of five million dollars as reported on the prior year’s federal tax return filing, that the DRE meets the revenue prong of the LOC Exemption. However, based on the above analysis, it may also be a colorable position that the DRE MAY be able to assert that ALL of the U.S. generated gross revenue appearing on the individual owner’s or parent entity’s federal tax return filing may be attributable to the revenue test prong of the LOC Exemption, because all of such revenue is associated with that tax return. This situation is notionally similar to FinCEN’s interpretation that all members of a consolidated corporate taxed group (including each subsidiary) may share in credit for the aggregated gross receipts or sales of the entire group in meeting each of their respective, individual revenue requirements under the LOC Exemption. Here, both the individual and DRE or the parent entity and disregarded subsidiary would be relying upon the same federal tax return, in the individual or partnership tax context.

* * * * *

For purposes of clarity and completeness, we acknowledge a countervailing position espoused by some commentators in the marketplace. That position holds that a DRE is ab initio ineligible to qualify for the LOC Exemption merely because of such reporting company’s status as a DRE (i.e., that it, itself, as a business entity, does not directly cause the filing of its own, independent federal tax return). For the reasons outlined herein, we find this position less compelling than the proposition that disregarded entities have a filed Federal income tax or information return when filed by their individual owner or parent entity.

* * * * *

With respect to exemptions from the reporting obligations under the CTA, each such exemption is “self-executing.” In other words, if an exemption applies to a reporting company, that reporting company has no filing obligation to FinCEN under the CTA. As such, there is no BOIR filing on record documenting that the DRE is relying on its individual owner’s SSN or its parent entity’s FEIN, and, derivatively, the associated federal tax return filing, in establishing compliance with the revenue prong of the LOC Exemption test. We recommend that each DRE making such a reliance-based exemption determination maintain a record of their CTA diligence, analysis and exercise of business judgment made upon a fully informed basis, that underpins the substantiation of the DRE’s satisfaction of all parts of the LOC Exemption test.iv Such substantiation may be needed in the future if FinCEN or one of the DRE’s financial institutions requests substantiation of the DRE’s asserted position that such DRE is not required to file a BOIR under the CTA.

* * * * *

Conclusion. The compliance requirements under the CTA went live on January 1, 2024, and you have only the remainder of this year to take any action to prepare for your compliance position. Now is the time to discuss the CTA with your Polsinelli legal team for guidance.

[i] See FinCEN CTA FAQs F.13 (issued July 24, 2024)(https://www.fincen.gov/boi-faqs)

[ii] See FinCEN CTA FAQs L.7 (issued April 18, 2024)(https://www.fincen.gov/boi-faqs)

[iii] U.S.C. § 5336 (a)(11)(B)(xxi).

[iv] Note that there are other factors of the LOC Exemption that must be met in order to rely on that exemption, and such other factors are required to be met directly by the DRE. This discussion is not intended to suggest that the DRE may rely, for example, on employee counts of affiliated entities or impermissible U.S. physical address locations in qualifying for the LOC Exemption.

© Polsinelli PC, Polsinelli LLP in California
For more on the Corporate Transparency Act, visit the NLR Corporate Business Organizations section

How to Prepare for the Upcoming Filing Deadline Under the Corporate Transparency Act (CTA)

The January 1, 2025 filing deadline under the CTA for filing beneficial ownership information reports (BOI reports) for reporting companies formed prior to January 1, 2024 is rapidly approaching.

January 1, 2025 Filing Deadline

The CTA became effective on January 1, 2024. If you have filed a BOI report in the last 11 months, it may have been in connection with BOI reporting requirements for entities formed in 2024, because any reporting company formed on or after January 1, 2024 is required to submit its initial BOI report within 90 days of the filing of formation documents. However, the CTA’s BOI report requirements also apply to entities formed before 2024 (as well as to entities formed in 2025 and beyond), and the deadline for filing BOI reports for these entities is fast approaching. BOI reports for entities formed before 2024 must be filed by January 1, 2025, and as further discussed below, BOI reports for entities formed on or after January 1, 2025 must be filed within 30 days of the filing of formation documents.

Compliance with the Corporate Transparency Act

Below are several initial steps to take to prepare for this upcoming deadline:

1. Exemptions. Assuming your entity was formed by the filing of a document with a secretary of state or any similar office under the law of a State or Indian Tribe, your entity may be a reporting company subject to the CTA. If so, review the 23 exemptions to being a reporting company and confirm if any of these exemptions apply to any of your entities.

  • An entity formed as noted above that qualifies for any of these 23 exemptions is not required to submit a BOI report to the Financial Crimes Enforcement Network (FinCEN).
  • An entity formed as noted above that does not qualify for any exemption is referred to as a “reporting company” and will be required to submit a BOI report to FinCEN.

2. Entity Records. Review the entity records for each reporting company and confirm that these records reflect accurate, up to date information with respect to the ownership percentages, management, etc. of each entity within the structure.

3. Determine Beneficial Owners. There are two types of reporting company beneficial owners: (i) any individual (natural person) who directly or indirectly owns 25% or more of a reporting company, and (ii) any individual (including any individual who owns 25% or more of the reporting company) who directly or indirectly exercises substantial control over the reporting company. FinCEN expects that every reporting company will be substantially controlled by at least one individual, and therefore will have at least one beneficial owner. There is no maximum number of beneficial owners who must be reported.

4. FinCEN Identifiers. Once the individual(s) who qualify as beneficial owners of any of your reporting companies have been identified, you may obtain FinCEN identifiers for these individuals. Although this step is not required, obtaining a FinCEN identifier will allow you to report an individual’s FinCEN identifier number in lieu of his or her personal beneficial ownership information in the BOI report filed for the reporting company in which he or she has been determined to be a beneficial owner. If/when any beneficial ownership information changes for that individual, the individual will be required to update the beneficial ownership information associated with his or her FinCEN identifier, but each reporting company which this individual is a beneficial owner of will not be required to file a corresponding update (unless an update is required for a separate reason).

5. Prepare to File BOI Reports Sooner Rather than Later. With the January 1, 2025 filing deadline fast approaching and over 32 million entities expected to be impacted by the CTA, we recommend taking the steps to prepare and file BOI reports for your reporting companies as soon as possible. While awareness of the CTA and its requirements continues to grow, people still have questions and concerns regarding how their personal information will be handled, and it can take time to collect the necessary information. Accordingly, identifying any beneficial owners and requesting their beneficial ownership information as soon as possible will help to avoid any last-minute scrambles to prepare and file your reporting companies’ BOI reports. Some have questioned whether BOI reports are subject to disclosure under the Freedom of Information Act (FOIA). FinCEN has pointed out that these reports are exempt from disclosure under FOIA.

6. Reach Out With Questions. We have a team of attorneys, paralegals and support staff that would be happy to help guide you through this process.

The Corporate Transparency Act in 2025 and Beyond

In addition to reporting requirements for reporting companies formed before 2024 and during 2024 as outlined above, all entities formed in 2025 and beyond that qualify as reporting companies will be required to submit BOI reports within 30 days of the filing of formation documents. This is a significantly shorter filing window than what was imposed on entities formed before and during 2024. Accordingly, moving forward, for entities formed in 2025 and beyond, the CTA should be viewed as an additional step in the entity formation process.

The CTA also imposes requirements for updating BOI reports following any changes to the beneficial ownership information reported on a BOI report. Any changes to the beneficial ownership information must be reflected in an updated BOI reports filed with FinCEN no later than 30 days after the date on which the change occurred (note, the same 30-day timeline applies to changes in information submitted by an individual in order to obtain a FinCEN identifier).

© 2010-2024 Allen Matkins Leck Gamble Mallory & Natsis LLP
For more on the CTA, visit the NLR Corporate Business Organizations section.

The CTA Filing Deadline is Approaching. Is Your BOIR Filed Yet?

The clock is ticking—just 49 days remain until the one-year filing deadline for the Corporate Transparency Act (CTA)! Entities established before January 1, 2024, must submit a beneficial owner information report (BOIR) by December 31, 2024.

The CTA is a new reporting requirement that came into effect on January 1, 2024. The CTA requires any entity created by or registered to do business by the filing of a document with a secretary of state, or another similar office, to report its information and its beneficial owners to the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the United States Treasury. The goal is to decrease money laundering and fraud.

We previously published advisories on the general application of the CTA and its specific application to entities created for estate planning purposes. The rules and guidelines about which we previously reported are largely unchanged. A reporting company still needs to report its legal name, all trades and d/b/a names, address, and beneficial owners. Beneficial owners are those with substantial control or who own or control 25% or more of the reporting company, directly or indirectly. The reporting company needs to report each beneficial owner’s name, date of birth, residential address, and an identifying number and image from one of four acceptable identification documents.

Although the CTA was declared unconstitutional by a federal district court in Alabama, the ruling only prevents the CTA’s enforcement on the parties directly involved in the case. The court did not issue a nationwide ruling to prevent the law from being enforced. Thus, other companies are expected to continue filing BOIRs. The Alabama case is currently on appeal and oral arguments were held at the end of September 2024.

FinCEN has been periodically updating its Frequently Asked Questions to provide some clarification since the CTA became effective. We outline the most relevant guidance below:

General Updates:

  1. Entities that are created before January 1, 2024, even if dissolved sometime in 2024 before the December 31, 2024, deadline, must still report their information and beneficial owners by December 31, 2024.
  2. Entities that are created in 2024 have 90 days to file the BOIR. Entities created on or after January 1, 2025, will have 30 days to file the BOIR. Entities that are created in 2024 but are wound up, dissolved, or otherwise cease to exist must still file the BOIR with FinCEN.
  3. Beneficial ownership is determined in the aggregate. This means that companies need to analyze each beneficial owner to determine if he or she indirectly/directly substantially controls or owns 25% or more of a reporting company. For example, Individual X owns 10% of Company Y. Individual X is also trustee of a trust that owns 20% of Company Y. Individual X needs to be reported as a beneficial owner because he owns an aggregate 30% of the company.
  4. Beneficial owners may now apply for a FinCEN Identifier here. This allows the beneficial owners to report their information to FinCEN directly, obtain an Identifier number, and simply provide the Identifier to those reporting companies of which he or she is a beneficial owner. This prevents a beneficial owner from having to share personal and sensitive information with a company. This also streamlines the process for any change in the beneficial owner’s information. Each beneficial owner can log into FinCEN and simply update the information within 30 days of the change rather than first providing it to the reporting company and then the company filing a new BOIR to update the information.

a. In order to create a FinCEN Identifier, an individual will have to create a login.gov account. This is the account that the federal government is using to streamline many of its services, such as, global entry and applying for federal jobs.

5. Reporting companies may complete and submit a BOIR online here. A company could also submit a PDF of the report at the same link if it chose to complete a paper copy. There is no fee to submit online. There are also many vendors offering a service to assist with the process and submit the report for a fee.

Real Estate/Corporate Updates:

6.FinCEN clarified that the subsidiary exemption applies when a subsidiary’s ownership interests are entirely controlled or wholly owned, directly, or indirectly, by any of the following types of exempt entities: (1) Securities reporting issuer; (2) Governmental authority; (3) Bank; (4) Credit union; (5) Depository institution holding company; (6) Broker or dealer in securities; (7) Other Exchange Act registered entity; (8) Investment company or investment adviser; (9) Venture capital fund adviser; (10) Insurance company; (11) State-licensed insurance producer; (12) Commodity Exchange Act registered entity; (13) Accounting firm; (14) Public utility; (15) Financial market utility; (16) Tax-exempt entity; or (17) Large operating company. Further, if a reporting company’s ownership interests are controlled or wholly owned by more than one exempt entity, the reporting company may still qualify for the subsidiary exemption if the entities are unaffiliated; however, every controlling or owning entity must itself be an exempt entity in order for the reporting company to qualify for the subsidiary exemption.

Trusts and Estates Updates:

7.If there is a corporate trustee, the reporting company will be reporting those individual beneficial owners that indirectly own or control at least 25% of the ownership interests of the reporting company through the ownership in the corporate trustee. This will be determined by multiplying the percentage of ownership of the corporate trustee with the trust’s ownership/control of the reporting company. For example, if Individual A owns 70% of the corporate trustee of a trust, and that trust holds 30% of the reporting company, Individual A holds or controls 21% of the reporting company (70% x 30 = 21). If Individual A owned 90% of the corporate trustee, then it would own/control 27% of the reporting company (90% x 30 = 27) and the company must report Individual A as a beneficial owner. There may be other beneficial owners if someone else at the corporate trustee exercises substantial control over the reporting company.

A reporting company may submit the corporate trustee’s information in lieu of each beneficial owner’s information only if all of these conditions are met:

a. The corporate entity is an exempt entity from the reporting requirements.

b. The individual owns or controls 25% of the reporting company only through the corporate trustee.

c. The individual does not exercise substantial control over the reporting company.

A company can obtain its own FinCEN Identifier when it submits an initial BOIR for its beneficial owner(s). This way, such company may be reported as a beneficial owner, such as a corporate trustee that meets the above requirements. For example, when LLC A reports Individual A as its beneficial owner, LLC A has the option of clicking a button to obtain its own FinCEN Identifier.

8. An individual who has the power to remove a trustee, remove and replace a trustee, and/or appoint an additional trustee is deemed to have substantial control through the power to change the person who makes decisions for the trust, and thereby, the reporting company. While this is not explicit in the Frequently Asked Questions, it is consistent with FinCEN’s position that someone who has the power to remove a senior officer of a reporting company is a beneficial owner.

While this is an extensive list, it is by no means an exhaustive list, and various circumstances not discussed above may change how the CTA applies in a particular case.

Copyright 2024 Goulston & Storrs PC.
For more on the CTA, visit the NLR Corporate Business Organizations section

The Corporate Transparency Act Requires Reporting of Beneficial Owners

The Corporate Transparency Act (the “CTA”) became effective on January 1, 2024, requiring many corporations, limited liability companies, limited partnerships, and other entities to register with and report certain information to the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury (“Treasury”). The CTA marks a substantial increase in the reporting obligations for many U.S. companies, as well as for non-U.S. companies doing business in the United States.

IN SHORT:
Most corporate entities are now required to file a beneficial ownership information report (“BOI Report”) with FinCEN disclosing certain information about the entity and those persons who are “beneficial owners” or who have “substantial control.” BOI Reports for companies owned by trusts and estates may require significant analysis to determine beneficial ownership and substantial control.

The CTA imposes potential penalties on entities that fail to file BOI Reports with FinCEN by the prescribed deadline. For entities formed prior to January 1, 2024, a BOI Report must be filed by January 1, 2025. For entities formed on or after January 1, 2024, but prior to January 1, 2025, a BOI Report must be filed within 90 days of the entity’s formation. For entities formed on or after January 1, 2025, a BOI Report must be filed within 30 days of the entity’s formation.

Entities formed after January 1, 2024, must also report information regarding “company applicants” to FinCEN. If certain information within a BOI Report changes, entities are required to file a supplemental BOI Report within 30 days of such change.

While Winstead’s Wealth Preservation Practice Group will not be directly filing BOI Reports with FinCEN, our attorneys and staff will be available this year, by appointment, to answer questions regarding reporting requirements if scheduled by Friday, November 22, 2024. We strongly recommend that company owners begin analyzing what reporting obligations they may have under the CTA and schedule appointments with their professional advisors now to ensure availability.

BACKGROUND:
Congress passed the CTA in an effort to combat money laundering, fraud, and other illicit activities accomplished through anonymous shell companies. To achieve this objective, most entities operating in the United States will now be required to file BOI Reports with FinCEN.

The CTA applies to U.S. companies and non-U.S. companies registered to operate in the United States that fall within the definition of a “reporting company.” There are certain exceptions specifically enumerated in the CTA, which generally cover entities that are already subject to anti-money laundering requirements, entities registered with the Securities and Exchange Commission or other federal regulatory bodies, and entities that pose a low risk of the illicit activities targeted by the CTA.

REPORTING OBLIGATIONS:
Entity Information. Each reporting company is required to provide FinCEN with the following information:

  1. the legal name of the reporting company;
  2. the mailing address of the reporting company;
  3. the state of formation (or foreign country in which the entity was formed, if applicable) of the reporting company; and
  4. the employer identification number of the reporting company.

Beneficial Owner and Applicant Information. Absent an exemption, each reporting company is also required to provide FinCEN with the following information regarding each beneficial owner and each company applicant:

  1. full legal name;
  2. date of birth;
  3. current residential or business address; and
  4. unique identifying number from a U.S. passport or U.S. state identification (e.g., state-issued driver’s license), a foreign passport, or a FinCEN identifier (i.e., the unique number issued by FinCEN to an individual).

DEFINITIONS:
Reporting Company. A “reporting company” is defined as any corporation, limited liability company, or any other entity created by the filing of a document with a secretary of state or any similar office under the law of a State. Certain entities are exempt from these filing requirements, including, but not limited to:

  1. financial institutions and regulated investment entities;
  2. utility companies;
  3. entities that are described in Section 501(c) of the Internal Revenue Code;
  4. inactive, non-foreign owned entities with no assets; and
  5. sizeable operating companies that employ more than 20 full-time employees in the United States that have filed a United States federal income tax return in the previous year demonstrating more than $5,000,000 in gross receipts or sales.

A reporting company that is not exempt must register with and report all required information to FinCEN by the applicable deadline.

Beneficial Owner. A “beneficial owner” is defined as any individual who, directly or indirectly, (i) exercises substantial control over such reporting company or (ii) owns or controls at least 25% of the ownership interests of such reporting company.

Substantial Control. An individual exercises “substantial control” over a reporting company if the individual (i) serves as a senior officer of the reporting company, (ii) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or the similar body governing such reporting company), or (iii) directs, determines, or has substantial influence over important decisions made by the reporting company, including by reason of such individual’s representation on the board (or other governing body of the reporting company) or control of a majority of the reporting company’s voting power.

Company Applicant. A “company applicant” is any individual who (i) files an application to form the reporting company under U.S. law or (ii) registers or files an application to register the reporting company under the laws of a foreign country to do business in the United States by filing a document with the secretary of state or similar office under U.S. law.

DEADLINES:
Entities Formed Before January 1, 2024. A reporting company that was formed prior to the effective date of the CTA (January 1, 2024) is required to register with FinCEN and file its initial BOI Report by January 1, 2025.

Entities Formed After January 1, 2024, but Before January 1, 2025. A reporting company that was formed after the effective date of the CTA (January 1, 2024), but before January 1, 2025, must register with FinCEN and file its initial BOI Report within 90 calendar days of formation.
Entities Formed After January 1, 2025. A reporting company formed after January 1, 2025, will be required to register with FinCEN and file its initial BOI Report within 30 calendar days of formation.

Supplemental BOI Reports. If any information included in a BOI Report changes, a reporting company must file a supplemental report with FinCEN within 30 days of such change. This includes minor changes, such as an address change or an updated driver’s license for a beneficial owner or someone who has substantial control over the reporting company.

PENALTIES FOR NON-COMPLIANCE:
The CTA and Treasury regulations impose potential civil and criminal liability on reporting companies and company applicants that fail to comply with the CTA’s reporting requirements. Civil penalties for reporting violations include a monetary fine of up to $500 per day that the violation continues unresolved, adjusted for inflation. Criminal penalties include a fine of up to $10,000 and/or two years in prison.

REPORTING REQUIREMENTS RELATED TO TRUSTS AND ESTATES:
When a trust or estate owns at least 25% of a reporting company or exercises substantial control over the reporting company, the BOI Report must generally include (i) the fiduciaries of the trust or estate (i.e., the trustee or executor), (ii) certain individual beneficiaries, and (iii) the settlor or creator of the trust. If the trust agreement gives other individuals certain rights and powers, however, such as a distribution advisor, trust protector, or trust committee member, the reporting company may also be required to disclose such individuals’ information in the BOI Report. Similarly, if a corporate trustee or executor is serving, the BOI Report must contain the names and information of the employees who actually administer the trust or estate on behalf of the corporation. Due to these nuances, it is often necessary to engage in additional analysis when a trust or estate is a beneficial owner of or has substantial control over a reporting company.

CONCLUDING REMARKS:
The CTA and its BOI Report filing requirement are still relatively new, and although FinCEN continues to publish additional guidance, many open questions remain. All companies formed or operating in the United States should carefully review whether they are required to file an initial BOI Report in accordance with the CTA, and take further steps to identify all individuals who must be included in such BOI Report.

© 2024 Winstead PC.
For more news on Corporate Transparency Act Reporting Requirements, visit the NLR Financial Institutions Banking section.

Filing Requirements Under the Corporate Transparency Act: Stealth Beneficial Owners

The Corporate Transparency Act (“CTA”) requires most entities to file with the Financial Crimes Enforcement Network (“FinCEN,” a Bureau of the U.S. Department of the Treasury) Beneficial Ownership Information (“BOI”) about the individual persons who own and/or control the entities, unless an entity is exempt under the CTA from the filing requirement. There are civil and criminal penalties for failing to comply with this requirement.

A key issue: WHO are the Beneficial Owners?

FinCEN has issued a series of Frequently Asked Questions along with responses providing guidance on the issue of who the beneficial owners are.

Question A-1, issued on March 24, 2023, states that “[BOI] refers to identifying information about the individuals who directly or indirectly own or control a company.”

Question A-2, issued on Sept. 18, 2023: Why do companies have to report beneficial ownership information to the U.S Department of the Treasury? defines the CTA as “…part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.”

Question D-1, updated April 18, 2024: Who is a beneficial owner of a reporting company? states that “A beneficial owner is an individual who either directly or indirectly (i) exercises substantial control over a reporting company” and, in referring to Question D-2 (What is substantial control?), “owns or controls at least 25 percent of a reporting company’s ownership interests.”

Question D-1 goes on to note that beneficial owners must be individuals, i.e., natural persons. This guidance is extended by Question D-2 on Substantial Control, where control includes the power of an individual who is an “important decision-maker.” Question D-3 (What are important decisions?) identifies “important decisions” with a pictorial chart of subject matters that FinCEN considers important, such as the type of business, the design of necessary financings, and the structure of the entity. Question D-4 explores ownership interests (again with a pictorial) including equity interests, profit interests, convertible securities, options, or “any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.”

Who, in FinCEN’s view, has “substantial control”?

Question D-2 lists four categories of those who have substantial control:

  1. A senior officer, including both executive officers and anyone “who performs a similar function;”
  2. An individual with “authority to appoint or remove certain officers or directors;”
  3. An individual who is an important decision-maker; or
  4. An individual with “any other form of substantial control.”

“Silent partners” and/or other undisclosed principals, including some who may be using the reporting company for nefarious purposes, might be discussed here, but that is not the intended subject of this writing. Rather, this piece is intended to warn businesspersons and their advisers of potential “stealth beneficial owners” – those whose status as beneficial owners is not immediately obvious.

First, consider the typical limited liability company Operating Agreement for an LLC with enough members and distribution of ownership interests so that no member owns over 25% of the LLC’s equity. If the LLC is manager-managed, then the manager(s) is/are Beneficial Owners, but the other members are not. But what if the Operating Agreement requires a majority or super-majority vote to approve certain transactions? Assuming that those transactions are “important” (as discussed in Question D-3), then possessing a potential veto power makes EACH member a beneficial owner. Such contractual limitations on executive power necessarily raise the issue of “beneficial ownership” in corporations, in limited liability companies, and even in limited partnerships where the Limited Partners have power to constrain the general partner (who clearly is a beneficial owner).

Second, consider the very recent amendments to the Delaware General Corporation Law (“DGCL”) in response to the Delaware Chancery Court’s holding in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co (“Moelis”) Feb. 23, 2024. In Moelis, the CEO had a contract with the Company that materially limited the power of the Board of Directors to act in a significant number of matters. Vice Chancellor Travis Laster issued a 133-page opinion finding the agreement was invalid, as it violated the Delaware Law that placed management and governance responsibilities in the Board. Because such arrangements are frequently used in venture capital arrangements as part of raising capital for new enterprises, the Delaware Legislature and the State’s Governor enacted amendments to the DGCL that expressly authorize such contracts. In the Moelis situation itself, Ken Moelis was a major owner and CEO so he would have had to be disclosed as a Beneficial Owner if Moelis & Co. had not been exempt from the filing requirements of the CTA because it is a registered investment bank.

But what of a start-up venture entity where a wealthy venture investor owns a 10% interest in the entity, but has a stockholder agreement that gives him substantial governance rights including the ability to veto or even overrule board decisions? Is that venture investor not a “beneficial owner”? Somewhat even more Baroque, what about the private equity fund controlled by a dominant investor, say William Ackman or Nelson Peltz? If that fund invests in the same start-up entity and holds a 10% interest, but also has a stockholder agreement giving the fund substantial governance rights, isn’t the controlling owner of the fund a “beneficial owner” of the start-up?

Finally, consider financing with a “bankruptcy remote entity” where the Board of that entity includes a contingent director chosen by the finance source. The contingent director does not participate in any part of the governance of the entity unless the entity finds itself in financial distress. The organizational documents of the entity provide that at that point, the contingent director can veto any decision to file for bankruptcy protection. At that point, the contingent director apparently becomes a “beneficial owner” of the entity, with the CTA filing requirements applicable. A more interesting question is whether the contingency arrangement in the organizational documents makes the contingent director a “beneficial owner” from the inception of the financing. Further, with respect to bankruptcy, key questions remain unanswered, such as whether the trustee in a Chapter 7 bankruptcy proceeding or a liquidating trustee in a Chapter 11 bankruptcy proceeding has a reporting obligation under the CTA.

This piece is not intended to identify all the situations that may give rise to “Stealth Beneficial Owners.” Rather, its intent is to raise awareness of the complexities involved in answering the initial question – WHO is a “beneficial owner”?

©2024 Norris McLaughlin P.A., All Rights Reserved

FinCEN Publishes Updated FAQs

Entities terminated in 2024 are required to file Corporate Transparency Act beneficial ownership information reports, as are administratively dissolved entities.

The Financial Crimes Enforcement Network (“FinCEN”) recently published updates to its list of Frequently Asked Questions (“FAQs”) to assist entities in complying with the beneficial ownership reporting requirements of the Corporate Transparency Act (“CTA”).

Principal among these updates was FinCEN’s clarifying requirement that business entities terminated in the year 2024 (whether existing prior to 2024 or formed in 2024) are required to file beneficial ownership information reports (BOIR) under the CTA.

This filing requirement also expressly includes BOIR filings for administratively dissolved entities.

Each of these concepts were the subject of debate as to their applicability under the CTA prior to this FAQ release, with some conjecture that terminating an entity’s existence prior to its BOIR filing deadline would alleviate the need to make a BOIR filing – a position now refuted by FinCEN.

As Polsinelli has consistently advised, the obligation to file under the CTA has accrued for all entities in existence in 2024, only the deadline for filing the BOIR has not yet arrived. Entities are advised to file their BOIR prior to consummating their termination process.

The July 8 FAQs also included clarification on beneficial owner disclosure scenarios involving an entity fully or partially owned by an Indian Tribe.

FinCEN expects to publish further guidance in the future. The updated FAQs can be accessed here.

* * * * *

Several of the updates bear special note:

1. FAQ C. 12. – Reporting Company Status

Do beneficial ownership information reporting requirements apply to companies created or registered before the Corporate Transparency Act was enacted (January 1, 2021)?

FinCEN stated “Yes.” Beneficial ownership information reporting requirements apply to all companies that qualify as “reporting companies”, regardless of when they were created or registered. Companies are not required to report beneficial ownership information to FinCEN if they are exempt or ceased to exist (i.e., are formally terminated with the Secretary of State) as legal entities before January 1, 2024.

2. FAQ C. 13. – Reporting Company Status

Is a company required to report its beneficial ownership information to FinCEN if the company ceased to exist before reporting requirements went into effect on January 1, 2024?

A company is not required to report its beneficial ownership information to FinCEN if it ceased to exist as a legal entity (i.e., was formally terminated with the Secretary of State) before January 1, 2024. This means that the entity entirely completed the process of formally and irrevocably dissolving (i.e., was formally terminated with the Secretary of State). A company that ceased to exist as a legal entity before the beneficial ownership information reporting requirements became effective January 1, 2024, was never subject to the reporting requirements and thus is not required to report its beneficial ownership information to FinCEN.

Although state or Tribal law may vary, a company typically completes the process of formally and irrevocably dissolving by, for example, filing dissolution paperwork with its jurisdiction of creation or registration, receiving written confirmation of dissolution, paying related taxes or fees, ceasing to conduct any business, and winding up its affairs (e.g., fully liquidating itself and closing all bank accounts).

If a reporting company continued to exist as a legal entity for any period of time on or after January 1, 2024 (i.e., did not entirely complete the process of formally and irrevocably dissolving (i.e., terminating) before January 1, 2024), then it is required to report its beneficial ownership information to FinCEN, even if the company had wound up its affairs and ceased conducting business before January 1, 2024.

Similarly, if a reporting company was created or registered on or after January 1, 2024, and subsequently ceased to exist, then it is required to report its beneficial ownership information to FinCEN—even if it ceased to exist before its initial beneficial ownership information report was due.

A company that is administratively dissolved or suspended—because, for example, it failed to pay a filing fee or comply with certain jurisdictional requirements—generally does not cease to exist as a legal entity unless the dissolution or suspension becomes permanent. Until the dissolution becomes permanent, such a company is required to report its beneficial ownership information to FinCEN.

3. FAQ C. 14. – Reporting Company Status

If a reporting company created or registered in 2024 or later winds up its affairs and ceases to exist before its initial BOI report is due to FinCEN, is the company still required to submit that initial report?

FinCEN stated “Yes.” Reporting companies created or registered in 2024 must report their beneficial ownership information to FinCEN within 90 days of receiving actual or public notice of creation or registration. Reporting companies created or registered in 2025 or later must report their beneficial ownership information to FinCEN within 30 days of receiving actual or public notice of creation or registration. These obligations remain applicable to reporting companies that cease to exist as legal entities—meaning wound up their affairs, ceased conducting business, and entirely completed the process of formally and irrevocably dissolving—before their initial beneficial ownership reports are due.

It bears note that, if a reporting company files an initial beneficial ownership information report and then ceases to exist, then there is no requirement for the reporting company to file an additional report with FinCEN noting that the company has ceased to exist.

4. FAQ D. 17. – Beneficial Owner

Who should an entity fully or partially owned by an Indian Tribe report as its beneficial owner(s)?

An Indian Tribe is not an individual, and thus should not be reported as an entity’s beneficial owner, even if it exercises substantial control over an entity or owns or controls 25 percent or more of the entity’s ownership interests. However, entities in which Tribes have ownership interests may still have to report one or more individuals as beneficial owners in certain circumstances.

Entity Is a Tribal Governmental Authority. An entity is not a reporting company—and thus does not need to report beneficial ownership information at all—if it is a “governmental authority,” meaning an entity that is (1) established under the laws of the United States, an Indian Tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States, and that (2) exercises governmental authority on behalf of the United States or any such Indian Tribe, State, or political subdivision. This category includes tribally chartered corporations and state-chartered Tribal entities if those corporations or entities exercise governmental authority on a Tribe’s behalf.

Entity’s Ownership Interests Are Controlled or Wholly Owned by a Tribal Governmental Authority. A subsidiary of a Tribal governmental authority is likewise exempt from BOI reporting requirements if its ownership interests are entirely controlled or wholly owned by the Tribal governmental authority.

Entity Is Partially Owned by a Tribe (and Is Not Exempt). A non-exempt entity partially owned by an Indian Tribe should report as beneficial owners all individuals exercising substantial control over it, including individuals who are exercising substantial control on behalf of an Indian Tribe or its governmental authority. The entity should also report any individuals who directly or indirectly own or control at least 25 percent or more of the ownership interests of the reporting company. (However, if any of these individuals own or control these ownership interests exclusively through an exempt entity or a combination of exempt entities, then the reporting company may report the name(s) of the exempt entity or entities in lieu of the individual beneficial owner.)

© Polsinelli PC, Polsinelli LLP in California

FinCEN’s Proposed Streamlined SAR — The Real Estate Report

On February 16, 2024, the Financial Crimes Enforcement Network (“FinCEN”) issued a proposed rule addressing “Anti-Money Laundering Regulations for Residential Real Estate Transfers.” The proposed rule would, among other things, require certain persons involved in real estate closings to maintain records regarding non-financed residential real estate transfers and to submit “streamlined SARs” (suspicious activity reports), called Real Estate Reports, to FinCEN. “The persons subject to these reporting and recordkeeping requirements would be deemed reporting persons for purposes of the proposed rule and . . . [t]he information required to be reported in the Real Estate Report would identify the reporting person, the legal entity or trust to which the residential real property is transferred, the beneficial owners of that transferee entity or transferee trust, the person that transfers the residential real property, and the property being transferred, along with certain transactional information about the transfer.”

As FinCEN describes in the Federal Register notice including the proposed rule, the Bank Secrecy Act has generally required that real estate transaction information falls within the categories of transactions that are subject to appropriate money laundering controls since 1970. However, “for many years, FinCEN has exempted such persons from comprehensive regulation under the BSA and has issued a series of time-limited and geographically focused ‘geographic targeting orders’ (“GTOs”) to the real estate sector in lieu of more comprehensive regulation.” In particular, in 2016, FinCEN specifically extended a Residential Real Estate GTO to “require title insurance companies to file reports and maintain records concerning non-financed purchases of residential real estate above a certain price threshold by certain legal entities in select metropolitan areas.” As a result of that 2016 GTO, the information received has indicated to FinCEN that more comprehensive regulation is necessary, when it comes to non-financed real estate transactions. The goal of this permanent rule would be to “connect non-financed residential real property purchases by certain legal entities with the true beneficial owners making the purchases, thereby decreasing the ability of criminals to hide their identities while laundering money through real estate.”

Effectively, the proposed rule would require that at least one person involved in the real estate transaction would have to submit the Real Estate Report. And, that one person would not need to exercise any discretion regarding whether to file the Real Estate Report (unlike when traditional SARs are filed) and the proposed rule would not require confidentiality to be maintained by any of the persons involved in the filing of the Real Estate Report (again, unlike the confidentiality covered institutions must maintain regarding whether they have filed a SAR). While there is a hierarchy in terms of which person would, under the rule, be obligated to submit the Real Estate Report, the parties may also sign a “designation agreement” that would designate a particular person identified in the hierarchy as being the reporting person. Primarily, that person should be “the person listed as the closing or settlement agent on a settlement (or closing) statement.” If there is no agent on the closing statement, then the person that has prepared the closing statement should submit the Real Estate Report. If there is no closing statement, then the person that underwrites the title policy should submit the Real Estate Report. And, if there is no title policy underwritten, then reporting should be done by the “person that disburses the greatest amount of funds in connection with residential real property transfer”, meaning disbursement from an escrow account, a trust account or from a lawyer’s trust account, but excluding direct transfers between transferees. If there is no person disbursing on behalf of the transferees, then the person who prepares an evaluation of the title should submit the Real Estate Report. And, if all else fails, then the person that prepares the deed for the transaction should submit the Real Estate Report. This so-called “reporting cascade” is designed to “capture both sales of residential real estate and non-sale transfers of residential real estate . . . to ensure uniform coverage of non-financed transfers and to ensure that nominees do not purchase homes for criminal actors and then transfer the title on free of charge to a legal entity or trust.”

There are three elements that determine whether a transaction is a “reportable transaction”:

1) Is the kind of property involved in the transaction covered by the rule?

2) Is any transferee considered a “transferee entity” or “transferee trust”?

3) Is the transaction not covered by any of the following exceptions?

  1. Transaction is financed;
  2. Transaction is low-risk because it involves an easement, death, divorce or bankruptcy; or
  3. Transaction involves transfer directly to an individual person.

In terms of the transactions that would be subject to being reported through the Real Estate Report, FinCEN cast an intentionally broad net. “The proposed rule is meant to broadly capture residential real property such as single-family houses, townhouses, condominiums, and cooperatives, as well as apartment buildings designed for one to four families. These properties would be captured even if there is also a commercial element to the property, such as a single-family residence that is located above a commercial enterprise.” Further, many kinds of land-only transactions would be reportable.

In terms of the types of transferees involved, as mentioned, any transfer directly to an individual, even if that transfer was not financed and was not deemed to be low-risk, would not result in a reportable transaction. But, if the transferee is any person other than an individual and that transfer is not financed or is not low-risk, then the transfer would most likely be deemed a reportable transaction. The definition of “transferee entity” generally means “any person other than a transferee trust or an individual.” The definition of “transferee trust” generally means “any legal arrangement created when a person . . . places assets under the control of a trustee for the benefit of one or more persons . . . or for a specified purpose, as well as any legal arrangement similar in structure or function[,] whether formed under the laws of the United States or a foreign jurisdiction.” There are specific exemptions to both of these transferee definitions, including statutory trusts and trusts that are securities reporting issuers, and for the most part, FinCEN points to protocols described in its rules under the Corporate Transparency Act (“CTA”), especially its Beneficial Ownership Reporting Rule, as being applicable to defining which entities and trusts may or may not be exempt from these transferee definitions. Having said that, the inclusion of most trusts involved in non-financed transactions is especially interesting.

In addition to the proposed rule provisions, FinCEN lists no less than 50 questions for comment from interested parties. These questions include everything from how likely “designation agreements” are likely to be used to concerns that may arise in transactions that are partially non-financed to whether concerns relating to non-financed real estate transactions extend to commercial real estate, as well. Comments are due to FinCEN on or before April 16, 2024.

© Copyright 2024 Cadwalader, Wickersham & Taft LLP
For more on FinCEN, visit the NLR Financial Institutions & Banking section.