Beginning in 2024, almost all companies will have to start filing reports under the Corporate Transparency Act with the Financial Crimes Enforcement Network aka FinCEN, which is part of the Department of the Treasury (website is at fincen.gov). Basically, any organization which has to file something with the Secretary of State (or equivalent governmental office in the jurisdiction where the organization was formed) has to report. There are MAJOR PENALTIES FOR FAILURE TO COMPLY.
First, many thanks to Steve Akers, Senior Fiduciary Council with Bessemer Trust Company in Dallas, and to John Strohmeyer, Strohmeyer Law PLLC in Houston, and their papers presented at the 47th Annual Advanced Estate Planning and Probate course of the State Bar of Texas held in Dallas June 7-9, 2023, which serve as the basis for most of the info provided in this newsletter.
Key thing – the corporation, limited liability company, limited partnership, limited liability partnership and any other that is formed by filing with the Secretary of State, has to file, if the rules apply to it. A general partnership probably doesn’t have to file a report.
Generally speaking, ALL companies have to file. A company that has to file is a Reporting Company. There are only a few exceptions that really matter to the people on this mailing list (so your company that is registered on the NY Stock Exchange doesn’t have to report, and neither does your bank, registered investment company or registered investment advisory company, etc) – in other words, the kinds of companies that already have to report all of this kind of info are probably exempt.
For you who are professionals and have a professional corporation, professional limited liability company, professional association, etc., your PC, PLLC, PA, etc. will have to file.
There is an exemption for “large operating companies” which: (A) employ 20 or more employees on a full-time basis in the United States; (B) have filed in the previous year federal income tax returns in the United States demonstrating more than $5 million in gross receipts or sales in the aggregate; and (C) have an operating presence at a physical office in the United States.
For entities formed before 2024, you have a year to file, that is until the end of December 2024.
For entities formed in 2024 and beyond, you have 30 days after formation to report.
Reporting Companies have to report info about the company AND the Beneficial Owners* AND the Company Applicants**. Key is that the Reporting Company has the obligation to report: (1) its full name; (2) any trade-names or DBAs; (3) the business street address (no PO boxes, PMBs, etc.); (4) the jurisdiction of formation; and (5) the company’s taxpayer ID number; as well (6) info about the Beneficial Owners; and (7) info about the Company Applicants.
*Beneficial Owners is a term that is very broad. It includes the owners you would normally consider (shareholders, members, partners, etc.), if they own 25% or more of the ownership interests in the Reporting Company. It also includes those who exercise substantial control, directly or indirectly, like some officers. It may not include holders of options to buy ownership interests, especially since the Reporting Company may not know that such option holders exist. Consider whether it’s better to err on the side of caution (that is, to over-report), if you can get the info at all. Remember, that gifts, deaths, trust distributions, trust terminations, etc. where ownership or control shifts, as well as changes in officers, etc., can change who is considered to be a Beneficial Owner.
The objective is to get to the flesh and bone people who benefit from the existence of the Reporting Company. So if the Reporting Company is owned by other companies, then simply reporting the names of those companies may not be sufficient. The owners of those companies may have to be reported. Also, if those companies are owned by more companies, you may have to dig through those to get to the ultimate ownership. OBVIOUSLY, that can be a problem, because many companies, especially those formed for investments on a one-time basis such as in an apartment project, drilling venture, etc., never know (before now) the ultimate owners of the owner-companies that invest. Getting that information could be difficult. You may want to start work on that now.
Consider this: as you form new companies, be sure that there is some sort of an arrangement whereby the owners affirmatively agree to provide the needed information, and agree to update the info timely, so that it can be reported to FinCEN.
If a trust is the owner, you have to report the trust and the trustee, if the trust owns 25% or more of a Reporting Company. Trustees “or other individual (if any) with the authority to dispose of trust assets” are included (Steve Akers asked whether that includes investment advisors or distribution advisors or those who hold a veto power over any of the above). For trusts, reporting includes the beneficiaries who are permissible recipients of income and principal or who can demand distributions of or withdraw trust assets.
**Company Applicants are the people who create the company at the outset. The definition is very broad. It can be the person who hired the lawyer to draft the documents, as well as the lawyer, as well as the paralegal/secretary, as well as the service company personnel who actually did the footwork, or the CPA, and his/her people. It’s expansive enough to cover anyone who was “primarily responsible for directing or controlling such filing.”
Just FYI: according to John Strohmeyer, it’s not necessary to disclose the Company Applicant of an entity created or registered before January 1, 2024. He also said that the rules limit the number of Company Applicants to two, being the individual who made the filing and the individual who “is primarily responsible” for directing the filing.
By the way, there is the statute and then there are the “rules.” Technically, they are not regulations. However, everyone refers to the rules as regulations. If you are really interested in reading the rules, and if you do it now before the website changes/gets updated, you can go to the FinCEN website, click on the horizontal blue bar (right under the green bar) that stretches across most of the page which says “Learn more about the Beneficial Information Reporting Rule – January 1, 2024.” That will take you to a webpage and if you scroll down, you’ll find a link to “Final Rule (September 30, 2022)” among other links. I’d provide the link but many of you have links disabled in your incoming emails for digital hygiene reasons.
INDIVIDUAL’S info is what FinCEN wants, not the names of organizations (other than that of the Reporting Company). So, for example, the Company Applicant can’t just be the name of the law firm, CPA firm, or corporate services company. The Company Applicant(s) are the flesh and blood human beings involved.
Individual info includes his/her full legal name, date of birth, current residence address and a unique identifying number. The “unique” ID number can come from a non-expired US passport, other ID document issued by a State, local government or Indian tribe, including a driver’s license, or a foreign passport if one of the others isn’t available. The rules also require that the Reporting Company also get an image (photocopy, photograph, etc.) of the identifying document and provide that with the other info.
If an individual does not want to provide all of that information to a Reporting Company (you may be a Company Applicant for a lot of different companies), an individual can supply that information directly to FinCEN in exchange for a FinCEN identifier, which is a unique identifying number assigned by FinCEN. The FinCEN identifier can be supplied to the Reporting Company. However, if you get a FinCEN identifier, it’s up to YOU to keep the info up-to-date. This is a BIG exception to the rule that only the Reporting Company has to worry about keeping info up-to-date.
Speaking of, ALL of this info has to be kept up-to-date. The Reporting Company must file initially and must keep their filing up-to-date. If they discover an error, they have to correct inaccurate reports. When things change, the Reporting Company has to update its info. As noted just above, individuals with FinCEN identifers have to keep their info up-to-date.
If a company was not a Reporting Company because it qualified for an exception, but later finds itself outside of that exception, it has to file its initial report within 30 days after it no longer meets that exception. As John Strohmeyer points out, if a company is a large operating company with 20 or more employees, and enough die, retire, quit or get laid off to reduce the number to below 20, or the company revenue drops below $5 million, the company has to file, plus it has to file within 30 days.
The reports will be filed online with FinCEN. FinCEN is not ready to start receiving reports, so if you go to the FinCEN website, you’ll find links for other things, but not for Corporate Transparency Act files – yet. If you click on that blue bar mentioned above, and scroll down to the bottom (or almost bottom) you’ll see a heading for Beneficial Ownership Information Collections with links to published suggested info forms.
The info reported will not be public. It will be accessible only by law enforcement. There are severe penalties for exposing this info to those not allowed to have it.
For what it’s worth, most of the rest of the developed world has been doing this kind of reporting for 10-15-20+ years with similar government organizations in their countries.
For you who are professionals who have clients who own or control those Reporting Companies, you probably should consider whether to contact your clients to let them know that this is coming. There are mighty penalties for failure to report. No one wants to be on the wrong end of a massive penalty (like $500 per day you are late AND up to two years in prison).
PLEASE REMEMBER – this is just a very quick, rough summary of the rules. There is a lot more to this than is reported in this newsletter. You are going to need to contact a lawyer or CPA for more help on how to take care of this. Fortunately, you have time.