FinCEN, the Corporate Transparency Act, and What Business Owners Should Know

By Frank Ehman, Esq. © 2023 All Rights Reserved

Last September, the Financial Crimes Enforcement Network (FinCEN), released final rules implementing Section 6403 of the Corporate Transparency Act (CTA), to attempt to combat money laundering, terrorist financing, corruption, tax fraud and other illegal activity. However, the new rules to CTA also resulted in new and cumbersome burdens to business owners, and any investors, managers, directors and professional advisers working with business owners, all of whom now have new and—in many cases—surprising reporting responsibilities.

Beginning January 1, 2024, each of (1) the Reporting Company, (2) its Beneficial Owners, and (3) its Company Applicant, as each of those terms are defined in the CTA, are required to report specified beneficial ownership information (BOI) to FinCEN. These reporting requirements will apply to both domestic and foreign reporting companies, as well as to virtually every type of entity, including corporations, limited liability companies, limited partnerships and certain trusts. It is notable that the CTA reporting obligations appear to trump state law for the jurisdictions of the reporting companies and the other required reporting parties, many of which permit and even arguably encourage confidentiality for beneficial owners of the reporting companies.

The new reporting requirements are not limited to entities formed after January 1, 2024, the effective date of the CTA rules. Instead, every corporation, limited liability company, limited partnership and other entity that has been formed and is in existence in the U.S., regardless of the state of formation, is considered a reporting company and must report its (1) full legal name, (2) assumed name, (3) address, (4) jurisdiction of formation, and (5) taxpayer or employer identification number.

Additionally, each beneficial owner of the reporting company must report: (1) full legal name, (2) date of birth, (3) current residential street address, (4) current U.S. passport, state or local ID, driver’s license or foreign passport and (5) must also provide a copy of the identification document.

Further, each company applicant must disclose nearly all of the same information as the beneficial owners, with the exception that they can use a business address rather than a residential address. Interestingly, the legal professionals representing the new company applicants are not immune to the new reporting requirements of the CTA either. Individuals required to report under the CTA for company applicants include (1) a supervising attorney or other individual overseeing a reporting company’s formation, and (2) a paralegal, associate, or other person who actually files the documents to form the reporting company.  Apparently, the CTA and its new rules are not particularly concerned about a lawyer’s confidentiality obligations imposed by the state bar organizations of the various states and commonwealths.

In addition to the numerous persons required to report, and the substantial amount of information required to be reported for each person, FinCEN gave broad, catchall definitions to the terms “beneficial owner” and “ownership interests” that result in (1) beneficial owners including anyone that could be determined to have substantial influence over important business decisions for the reporting company, including those holding only a minority interest, as well as directors, managers and senior officers and (2) ownership interests including equity, stock, profits interests, options, certain warrants or rights and any other document or arrangement establishing ownership, whether direct or indirect.

The exemptions to a reporting company are interpreted narrowly and are limited to already significantly regulated groups, such as publicly traded companies, banks, insurance companies, pooled investment vehicles, utilities and tax-exempt entities. While existing large operating companies are exempt if they employ more than 20 full-time employees, have a physical operating presence in the U.S. and generate at least $5 million in annual gross receipts or sales from sources inside the U.S., this exemption will generally be impossible to apply to newly formed and newly operating entities.

These rules will apply to newly formed companies, as well as to all companies already in existence.  The final rules require that (1) any reporting company in existence before January 1, 2024, will have until January 1, 2025, to submit its initial report, (2) beginning January 1, 2024, any reporting company formed thereafter must file its initial report with FinCen within 30 days of formation and (3) any changes to any of the reported information must be reflected in an updated or amended filing within 30 days of the changeThe only exception to this requirement is that company applicants for entities created prior to January 1, 2024, are not required to report information with respect to any company applicant.

The logistical implementation for the required filing is still in process, as FinCEN may initially require reporting on paper forms, but has indicated that they expect to eventually utilize an electronic online interface. However, it is unclear at this time if the interface will be ready by January 1, 2024. FinCEN will be required to store and maintain all reported information in the Beneficial Owner Secure System (BOSS), and Congress has also created penalties for the unauthorized disclosure of BOI information.  At this time, with limited exceptions, the information may only be disclosed to government law enforcement, prosecutors, the courts and national security agencies. While this limitation should provide an added layer of privacy and protection to affected reporting companies and the related parties, it will also likely necessitate additional security measures for all parties involved in reporting.

The importance of this new reporting system to FinCEN was made clear under the new rules as both civil and criminal penalties were created for failing to comply with the reporting requirements, including civil penalty fines of $500 per day with a maximum of up to $10,000 for a failure to timely report and up to two years in prison for willfully failing to report or knowingly providing inaccurate information.

Lastly, it is important to note that Texas and Delaware have not implemented any additional reporting requirements as of now, but we will be keeping an eye on these developments as well as the states of New York and Pennsylvania which are in the process of enacting laws imposing reporting requirements on companies similar to the CTA.  As of the date of this alert, California appears to have introduced two bills that are similar to the CTA but these are still in committee.

Our corporate law team at Musgrove Law Firm, P.C. is keeping a close eye on these FinCen and CTA updates and requirements. If you have questions or concerns regarding the implementation of the CTA as it relates to your business, consulting legal counsel should be a priority. We are available to assist you with this and many other complex business and acquisition matters. Contact us today to schedule a consultation.