As of January 1, 2024, a new Federal law titled the “Corporate Transparency Act” (CTA) will be in effect. The CTA aims to require disclosure of corporate beneficial ownership with a stated goal of enhancing national security, preventing illicit activities and crimes, and enhancing data collection. The CTA affects entities that meet the definition of a “Reporting Company”, and such qualifying entities will be responsible for filing the reports required by the CTA. Reporting Companies include corporations (including both C and S corporations), limited liability companies, and other types of entities that are required to file with the state’s Secretary of State (or an American tribal jurisdiction) in order to be formed. It is vital to understand that the law is broad and will apply to a vast number of companies created for legitimate purposes, with severe penalties for not accurately and timely reporting required information to the government through an online reporting system created by Financial Crimes Enforcement Network (“FinCEN”), a department of the United States Treasury.
What information must be reported?
As set forth below, every Reporting Company must file an initial report online with FinCEN that discloses the full legal name and any trade or “doing business as name” for the reporting company, a complete address of the reporting company, including street address of the principal place of business (No P.O. Box or the address of the attorney who formed the entity), state of formation, and the Taxpayer Identification Number for the reporting company. Additionally, the report must include personal information regarding each “Beneficial Owner” and each company applicant of such Reporting Company. The information required includes:
- Full legal name
- Date of birth
- Current residential address
- Unique identifying number (non-expired passport, driver’s license, etc.).
In addition to the initial reports, if there is any change to the reported information relating to a Reporting Company or its Beneficial Owners, then a report, setting forth the information that has changed, must be filed within the time frame set forth below. Some changes that FinCEN notes will require a filing are:
- A change to the name or address of the Reporting Company;
- A change in the Beneficial Owners; and
- A change to the personal information of any Beneficial Owner.
Who are “Beneficial Owners”?
Subject to certain limited exclusions, a Reporting Company’s Beneficial Owners include anyone who falls in either of the following two categories: – Any individual who, either directly or indirectly, controls at least 25% of the ownership interests of the reporting company; or – Any individual who, either directly or indirectly, exercises “substantial control” over the Reporting Company. The key phrases above, including, “directly or indirectly,” “substantial control,” “ownership interests,” are defined in the final FinCEN rule for Beneficial Ownership Information Reporting Requirements and generally results in a very broad series of rules intended to catch as many people as possible who could potentially influence the operation of the entity. In addition, this detailed report required for Beneficial Owners must also be filed for a “Company Applicant” of any company formed or registered after January 1, 2024. A “Company Applicant” is the person who “directly files the document” that created the Reporting Company.
Trusts under the CTA
While Trusts are not considered a Reporting Company, the CTA has a special set of rules that apply to trusts in their capacity as owners of a Reporting Company. If a trust holds an ownership interest in a Reporting Company, the determination of beneficial ownership will require an analysis of the trust provisions. Under the CTA rules, the beneficial owner can be:
- Any trustee with the authority to dispose of trust assets;
- Any beneficiary who is either the sole permissible recipient of income and principal from the trust; or has the right to demand a distribution of or withdraw substantially all of the assets; or
- Any settlor who has the right to revoke the trust or otherwise withdraw assets from the trust.
These provisions could implicate a number of individuals who hold an interest in a trust, and also include others associated with the trust, such as a trust protector, depending on the powers granted to these individuals under the trust agreement or applicable law. Beneficiaries of trusts may have the power to withdraw assets via what are commonly known as “Crummey” powers or powers of appointment and, depending on the circumstances of the trust, they too may be deemed to be beneficial owners. Given the wide array of powers that may spread throughout a trust instrument to achieve specific estate and gift tax planning goals, a reporting company that has trusts in the ownership or control structure will need to plan ahead to first determine which individuals might be deemed to be beneficial owners of the entity as a result of their interests in or powers over the trust, and second to gather all the information which may need to be reported on those individuals.
Exceptions to the CTA
There are exceptions to the reporting requirements of the CTA, notably for non-profits (but not including an entity owned by the non-profit), banks, and large companies with more than 20 employees and gross receipts in excess of $5 million as shown on an income tax return filed with the Internal Revenue Service the prior year. These types of entities are generally subject to sufficient regulation that Congress exempted them from the new CTA requirements. In addition, if a minor is a beneficial owner, the minor’s parents’ information may be reported instead of the minor child’s information.
When to File Reports with FinCEN
Beneficial Ownership Information Reports that are required by the CTA must be filed with FinCEN. All Reporting Companies created before January 1, 2024, must file their initial report by January 1, 2025. Reporting Companies created after January 1, 2024, and before January 1, 2025, must file their report within 90 days after receipt of notice that the creation of the entity is effective. For any Reporting Companies created on or after January 1, 2025, they must file their report within 30 days after receipt of notice that the creation of the entity is effective. Any report required as a result of a change in information (after the initial report has been filed) must be filed within 30 days of the date of the change.
Penalties for failure to comply with requirements
Failure to comply with the required reporting requirements may result in civil penalties of $500 for each day that the violation continues with a maximum fine of $10,000, as well as criminal sanctions and even incarceration in more severe or intentional cases.
NYS LLC Transparency Act
On December 26, 2023, Gov. Kathy Hochul signed into law a new set of rules that require limited liability companies to disclose their beneficial owners, but lawmakers have agreed to keep that information from being listed publicly. Currently, individuals and businesses in New York don’t have to provide their personal information to create an LLC. Instead, an outside organizer can file the paperwork with the state and only disclose the LLC name, county where it is located, and a post office address. This NYS legislation was modeled after the CTA. However, New York’s law only applies to LLCs, while the CTA applies to other entities as well. Like the CTA, the NYS LLC Transparency Act requires a filing if there is any change of a beneficial owner of an LLC. It should be noted that filing any required NYS disclosure form does not satisfy the FinCEN BOI reporting obligation. Reporting companies still must report beneficial ownership information directly to FinCEN as well. In addition, State or local governments, financial institutions, and other federal agencies, such as the IRS, may separately require entities to report certain beneficial ownership information. However, by law, those requirements are not a substitute for reporting beneficial ownership information to FinCEN.
DISCLAIMER: None of the information contained on this notice should be interpreted as legal advice and it should not be considered as a substitute for consulting an attorney. The legal information and content are for general informational purposes only. Attorneys at this firm are licensed to practice in the State of New York and any legal information contained on this notice may not be applicable in other jurisdictions. Prior results do not guarantee a similar outcome.
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