Beneficial Ownership Reporting – Now a Reality for Most Small Businesses
FinCEN Issues Final Rules on CTA Reporting Requirements
What Changed From The Proposed Rules?
On September 30, 2022, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury released Part 1 of three sets of rules relating to implementation of the Corporate Transparency Act (CTA) for reporting of beneficial ownership or control of many common types of business entities used by small business. We summarized the proposed rules in our prior article: CTA and Small Businesses. The final rules, while largely tracking the rules proposed by FinCEN earlier this year, make some important changes that small businesses must be aware of. This article will summarize some of the more important changes made to the proposed rules.
Reporting Deadlines
First, the final rules require all reporting companies not subject to an exemption that were created prior to January 1, 2024 to file their initial beneficial ownership report by no later than January 1, 2025. Reporting companies include (a) domestic reporting companies: any corporation, limited liability company, or other entity created by a filing of a document with a Secretary of State or similar office under the law of a State or Indian tribe, and (b) foreign reporting companies: any corporation, limited liability company, or other entity which is formed under the law of a foreign country and registered to do business in any State or tribal jurisdiction by the filing of a document with a Secretary of State or similar office under the law of a State or Indian tribe.
Second, the final rules require all reporting companies not subject to an exemption that are created after January 1, 2024 to file their initial report within 30 days of the earlier of: (a) the date the reporting company receives actual notice of its creation (or registration for foreign reporting companies) or its filing has become effective, or (b) the date on which a secretary of state or similar office first provides public notice that the reporting company has been created (or registered for foreign reporting companies). The final rules moved the compliance period from the original 14 days to 30 days. Interestingly, reporting companies are not required to file an updated report if they dissolve or cease to exist.
Third, the final rules make important changes to the timeframes for changes or corrections. Under the final rules, a company will have 30 days (up from 14) to file updated reports and corrections.
Exemptions From Reporting
The final rules largely adopted the proposed rules for entities exempt from reporting beneficial ownership. For most reporting companies, the two most important exemptions – the public company or public reporting company, and the large operating company – the final rules were unchanged. The final rules continue to require for the large operating company exemption that the reporting company have an operating presence at a physical office within the United States that it owns or leases and that is physically distinct from the place of business of any other unaffiliated entity. This means that a company that uses a shared office space with other non-affiliated companies or operates out of residence will not qualify as a large operating company even if they meet all the other requirements (e.g., 20 full-time employees, and more than $5 million in gross receipts or sales in the United States for the prior year, as evidenced in applicable IRS filings). Also, the final rules require any reporting company that ceases to be exempt must file their beneficial ownership report within thirty calendar days after the date that it no longer meets the criteria for the exemption.
Reporting Obligations
First, the final rules make clear that reporting information on its beneficial owners is the company’s and the senior officers’ obligation. While a beneficial owner that provides false information to the company may be held liable under the final rules, the rules make clear that the government will hold the company and its senior officers responsible for a failure to report a company’s beneficial owners even if that failure is the result of a beneficial owner’s refusal or failure to provide the necessary information. This creates a serious dilemma for a company and its senior officers when faced with a refusal or failure of a beneficial owner to provide the necessary information. Further, while the final rules do not require a knowledge or due diligence requirement, the company and its senior officers will nonetheless be responsible for certifying the information on the filings is it “true, correct, and complete.”
Second, the final rules made slight changes to who is considered a senior officer required to be disclosed as a beneficial owner (and also liable in the event that there is an error or lack of information in a beneficial ownership filing). The final rule defines senior officer as the president, chief financial officer, general counsel, chief executive officer, or “any other officer, regardless of official title, who performs a similar function.” The final rules recognize that corporate secretaries and treasurers typically have ministerial and not control functions, so unless they also perform a function similar to the named senior officers or otherwise exert substantial control (through ownership or otherwise and not solely as an employee), they will not need to be listed.
Third, while the final rules retained the proposed rules requirement that reporting companies report on the company applicant, it made several important changes. It eliminated the requirement to list the company applicant for reporting companies in existence prior to January 1, 2024. Also, the final rules make clear that the individuals required to be listed for company applicants is the person who actually makes the filing and the person who directs it be done. FinCEN anticipates that, for example, in a law firm that would be the lawyer who directs the filing and the person (most likely a paralegal) who actually files the application. The final rules also eliminate the requirement that the company update company applicant information if it changes after the filing.
Information Required
First, the final rules make some important changes to the information required from beneficial owners and when changes must be filed. Like the proposed rules, the final rules require reporting companies to list the full legal name, date of birth, a complete current address of the beneficial owner, a unique governmental identifier and an image of the document that the unique governmental identifier is from. However, the final rules abandon the proposed rules requirement of a tax residential address for beneficial owners. Instead, the reporting company will need to list the beneficial owner’s residential street address. The final rules also clarify what changes to the imaged document require an updated report. The final rules require the image to be updated (and an updated report filed) only if the name, date of birth, address, or unique identifying number of the imaged document changes and does not need to be updated for changes in expiration date or photograph.
Second, with respect to information required in connection with the reporting company, the final rules continue to require the full legal name of the reporting company, any doing business as name, company address, jurisdiction of formation, and a unique company identifier. However, the final rules made some important changes. First, the company address for domestic reporting companies is the street address of the company’s principal place of business in the US and, for foreign reporting companies, the street address of the primary location in the US where the company conducts business. Second, the final rules require the unique company identifier for domestic reporting companies to be the company’s taxpayer identification number (EIN) and has eliminated the ability to use a DUNS or LEI. For foreign reporting companies, the final rules allow the foreign reporting company to provide a foreign tax identification number and the relevant jurisdiction as an alternative to an EIN/TIN.
Beneficial Owner Definition
First, the final rules calculation of beneficial ownership requirement largely track the proposed rules. However, recognizing that in some instances it may be difficult to calculate the percentage of a beneficial owners’ ownership in the reporting company, the final rules include a catch-all requirement that an individual is deemed to hold 25 percent or more of the total ownership interests in the reporting company if the individual owns to controls 25% or more of any class of type of ownership interest. This could mean that an individual owning of 25% or more of a series of preferred stock which as a series is less than 25% of the total ownership of the company may need to be reported as a beneficial owner of the reporting company. Also, with respect to creditors, the final rules clarify that so long as a creditor only retains rights that are intended to secure repayment or enhance the likelihood of repayment (such as loan covenants), they will not be considered a beneficial owner. However, to the extent that a creditor can convert into equity or has other equity-like rights, they may be considered a beneficial owner.
Second, the final rules largely adopt the proposed rules “substantial control” elements, the final rules do make one important change. The final rules make clear that every reporting company will need to identify at least one individual who exercises substantial control over the entity even if everyone else is exempt. What this means in a practical sense is that since the final rules require the chief executive officer, president, general counsel or chief financial officer to be identified as a beneficial owner, every entity will have to list at least one officer.
What to Do Now
FinCEN in the final rules also states that it plans to create an on-line tool to be used to allow reporting companies to file their initial report and updated reports.
While the effective date of the rules is over a year away, companies should begin the process of gathering the information required to make the filings and design and implement systems to update that information as it may change. We have prepared a checklist that a reporting company can use to begin the process of determining whether that will need to file an initial report and the information that they will need to gather. You can get a copy of that checklist here.
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This article has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please consult your attorneys in connection with any fact-specific situation under federal law and the applicable state or local laws that may impose additional obligations on you and your company. © 2022 Klemchuk LLP