Back in February, we issued a three-part series on the Corporate Transparency Act (CTA). The series of articles outlined the details and implications of the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) Dec. 8, 2021 rule proposal to establish a centralized beneficial ownership information (BOI) reporting requirement for certain domestic and foreign entities. FinCEN’s rule is aimed at preventing anonymous shell companies from conducting illegal activity in the U.S.
FinCEN received more than 240 comments. After reviewing the submissions, FinCEN published a final rule on Sept. 30, 2022 to implement the BOI reporting requirement. This new, refreshed series of articles will provide an overview on the key components of the final rule, including new guidance from FinCEN.
In line with FinCEN’s initial proposal, the final rule specifies that, subject to some exemptions, any entity that meets the definition of a “reporting company” must file a BOI report.
There are two types of reporting companies: domestic and foreign companies.
Domestic and foreign companies are those formed by a filing with a secretary of state or similar office. In particular, the final rule clarifies that domestic and foreign companies will include, for example:
- Limited liability companies
- Limited liability partnerships
- Limited liability limited partnerships
- Business trusts
- Limited partnerships
Under this rule, most companies will be required to file and update BIO reports.
If your business qualifies as a reporting company, it must file a report identifying each beneficial owner and any changes in its beneficial owners.
Generally, beneficial owners of a reporting company are those who, either directly or indirectly:
- Exercise substantial control, or
- Own or control at least 25% of the ownership interests of the company.
FinCEN’s final rule gives greater detail on “substantial control” and “ownership interests.” Specifically, the final rule says an individual with substantial control is one who:
- Serves as a senior officer
- Has authority over the appointment or removal of senior officers or a majority of the board of directors (or similar body)
- Directs or determines important matters such as dissolution, merger or reorganization
- Has any other form of substantial control
The final “catchall” provision is expected to help prevent efforts from reporting companies to sidestep the final rule when it comes time to report.
Moreover, FinCEN makes it clear with its 25 percent ownership threshold requirement that majority ownership is not solely indicative of beneficial ownership. In addition, FinCEN’s commentary in the final rule says that legal or tax professionals’ ordinary advisory services would not be considered the exercise of substantial influence over a reporting company.
FinCEN’s retooled definition accounts for the wide diversity and less conventional ownership structures that reporting companies may adopt. Essentially, reporting companies who have simple ownership structures should find it straightforward to identify and report their beneficial owners. On the other hand, unless an exemption applies, reporting companies that are structured with a more complex chain of ownership structure will likely have multiple levels of beneficial owners to disclose.
The exceptions to the definition of beneficial owner include:
- Minor children (if a parent or guardian is identified)
- Nominees, intermediaries, custodians or agents
- Individuals whose interests are associated with a right of inheritance
- Entities that are not created by a filing with a governmental entity, such as common trusts
Reporting companies must also identify their company applicants. Company applicants are those that either:
- Directly file the document that creates the entity or, in the case of a foreign reporting company, the document that first registers the entity to do business in the United States; or
- The individual who is primarily responsible for directing or controlling the filing of the relevant document by another.
FinCEN clarified that the number of company applicants is limited to one or two individuals.
Reporting companies that already exist or are registered as of the rule’s effective date do not need to report company applicants. Newly created reporting companies will need to report company applicants but will not need to update the information. These rules are aimed at avoiding any challenges that could arise if the reporting company does not have a direct or ongoing relationship with a company applicant.
In Part 2 of our series revisiting the CTA, we will reexamine and expand on the information that a reporting company must disclose related to its beneficial owners and company applicants, and we will review exemptions. Part 3 will explore the final timeframe for disclosures (Jan. 1, 2024 and Jan. 1, 2025 are the key dates for your business to note now), what the timing means for current versus new businesses and the likelihood of additional rulemakings from FinCEN.
In light of FinCEN’s final rule, companies should proactively review the CTA’s requirements and start to gather information on those key players in the business that could be beneficial owners and company applicants. A robust understanding of reporting requirements and the rule’s effect on your business will be vital as we prepare to see the CTA rolled out over the next couple of years. Please contact KJK Corporate & Securities attorneys Alex Jones (AEJ@kjk.com; 216.736.7241) or Samantha Cira (SMC@kjk.com; 216.736.7232) for more information.