In the last few months, word is slowly spreading about the federal governments new requirements under the Corporate Transparency Act (CTA) that business must disclose information about the beneficial ownership structure of corporations, limited liability companies, limited partnerships, and other entities. Prior to this new law, a corporation or entity could be created and registered to do business without disclosure of the ownership structure. To combat money laundering, the federal government is requiring that this information must be disclosed to the Financial Crimes Enforcement Network. Failure to provide the information can result in significant penalties of $500 per day for up to a total of $10,000. It is estimated that this new law will apply to over thirty-two million entities in 2024. This article will outline what you need to know to start complying with the new law.

WHO HAS TO COMPLY WITH THIS REGISTRATION?

Every new business entity that is created by filing documentation with one of the fifty states will now have to provide information to the Financial Crimes Enforcement Network (“FinCen.”)  What this means is that every time an entity such as a corporation, limited liability company, limited partnership, etc. is created after January 1, 2024, certain information must be provided so that a new federal database of beneficial owners will be created.

EXCLUDED AND EXEMPT ENTITIES

Under the new statute, there are twenty-three businesses that are determined to be “highly regulated” and as such they do not have to register. These include inter alia, banks, credit unions, investment advisors registered with the SEC, Venture capital Fund Advisors, insurance companies, public accounting firms, public utilities, and money transmitting businesses In addition, a large operating company, which is defined as a domestic corporation (i.e. one formed in the United States and operating at a physical location in the United States) that has at least twenty 20 (twenty) employees and tax returns that show more than five million dollars ($5,000,000) in gross receipts or sales. Because this law only applies to entities that are created by filing a document with a state or tribal filing agency, this can apply to a business that is registered in another country that then registers to do business in one of the United States or a tribe. Further, certain entities are not considered entities under the statute and do not have to register, including:

Some of the entities that will NOT have to register with FinCen include:

• Public Companies with securities registered under the Securities Act of 1934.
• Non-profits and other organizations formed under Internal Revenue Code 501(c).
• Accounting firms.
• General Partnerships.
• Limited Liability Partnerships.
• Massachusetts Business Trusts (but note that a Delaware statutory trust will have to register); and
• Realty, Revocable and Irrevocable Trusts.

While these entities appear to be excluded or exempt, it may not be that simple; to the extent that one of the above entities has a direct or indirect ownership interest or a control relationship in an entity that does have to file, the entity that has to file the BOI may have to list the individuals in the above entities as being beneficial owners.

WHAT TO REPORT & HOW TO REPORT

When a new entity is created, the following information has to be provided: 1. The full legal name, trade name or doing business name, 2. The business’ address of the company, the state, tribe, or non-U.S. jurisdiction of formation and registration and 3. Taxpayer identification number (e.g. the employer identification number or applicable non-US tax identification number. For each beneficial owner, the following information must be provided: 1. The full name of the person or people who are the beneficial owner of the entity 2. the date of birth of the persons who are the beneficial owners of the entity; 3. The current residential street address of the person(s) and 4. an identification number from an acceptable identification document of the owner(s) (i.e., a valid passport number, driver’s license or other state, local or tribal identification number). Finally, if the company applicant (i.e. a third party individual who filed or was responsible for filing the paperwork that created the company, (which could be the attorney, accountant, etc.) the filing must include their name, address, date of birth and their Taxpayer Identification number or other unique identifying number (which may include a FinCen assigned number).

As for existing entities, under the new law, the beneficial owner of an entity that is required to register, they have ONE YEAR from January 1, 2024, to register with FinCen.

Further, once this registration is completed, any time the beneficial owner changes or any of the information on file with FinCen changes (i.e., address change, identification card numbers have been renewed, updated, or changed, etc.), FinCen must be notified of the change within one year of the change.

The way these reports, known as Beneficial Ownership Information reports, are to be made is through a mandatory online platform. See https://www.fincen.gov/boi. Once the website is up and operational, there will be a questionnaire format to be completed. The website requires that images of the government identification used be provided.

WHEN TO REPORT

As noted above, any new entity formed after January 1, 2024, must register this information within ninety (90) days of the entity being formed. (Note that after January 1, 2025, the timeline shrinks to thirty (30) days.) For entities that existed before January 1, 2024, this information must be filed with FinCen on or before January 1, 2025. And, if any of the information filed with FinCen changes in the future, the filing must be updated within one year of the change.

ISSUES AND CONCERNS ABOUT THIS NEW LAW

Like many new laws, there are a number of concerns with the law. First, many of the terms utilized in the new statute are undefined. The statute talks about a “beneficial owner” being every individual who owns or controls at least twenty-five percent (25%) of the entities ownership interest or exercises substantial control. However, there is no definition as to what is meant by “owning” or “controlling.” It is not clear whether officers, directors or managers might be beneficial owners because they have substantial control, even if they are not owners, shareholders, or members of the entity.

Also, as noted above, certain entities with over twenty employees and gross receipts/sales of over $5,000,000 are exempt. Because of the way the statute is written, a new entity that is formed is going to have to register in year one because the gross receipts or sales will not be known until the end of year one. Further, the 20-employee requirement does not contain a definition of employee, so it is unclear if this covers only full-time employees, part-time employees, whether members of a limited liability company are deemed employees, etc. The exemption also talks about an entity operating at a physical location in the united states however there is no definition as to what constitutes a “physical office” for purposes of this statute.

The statute references applicants who appear to be persons who file documents on behalf of clients to form an entity. Attorneys and accountants often create entities for their clients, but it is unclear if attorneys or accountants would be applicants and therefore must disclose their personal information such as their name, address, date of birth, and identifying information. Until further clarification is given, many attorneys and accountants may not want to be in the position of qualifying as an applicant.

Once this new database is created, this information will be made available to any federal agency engaged in national security, intelligence, or law enforcement. Further, local, state, and tribal agencies involved in law enforcement may be able to access this information if a Court authorizes release of this information in either a criminal or civil investigation. Foreign law enforcement agencies, judges, etc. may be able to obtain access as well if a United States federal agency requests that information. Finally, a financial institution may also be able to obtain this information for customer due diligence purposes.

Given the breadth of the entities and agencies who may have access, one of the most immediate concerns involves immigration enforcement. Immigration agencies can have access to this information and one of the concerns is that foreign individuals who are here on visas that do not permit the individual to work while in the United States may be flagged if they create an entity. In turn, this could lead to customs and immigrations excluding students from returning to the United States or revoking their visa and expelling them from the United States.

IMPACT AND PUNISHMENT

Under the new law, FinCen can impose steep fines and penalties against individuals and entities that fail to comply with the new law and those that file incorrect or incomplete information with FinCen. Specifically, the civil penalty can be $500 per day for each day that the information is not filed or filed incorrectly or incompletely. If the violation is found to be willful or fraudulent, the criminal penalty can be $500 per day for up to a total of $10,000 and subject a person or entity with imprisonment for up to two years.

CONCLUSION:

This new law has broad ramifications for corporations, limited liability companies and other entities that are created under state law in the United States or are registered to do business in the United States. Unless the entity is excluded or exempt, entities are going to have to disclose to FinCen some important information about the person or persons who own and control the entity, including their name, address, identifying information As this is going to impact a significant number of businesses and there is the potential for significant monetary fines for non-compliance, we encourage you to reach out to Attorney Allison Lane and the team at Orsi Arone Rothenberg Turner, LLP to learn what you need to do to comply with this new law. Our team is prepared to assist you in complying with this new law and navigate the many unclear issues that this statute poses.

About Allison R. Lane

Attorney Allison R. Lane has over twenty-five years of experience in real estate, finance, and business law. She has a strong background in complex commercial real estate and has represented commercial lenders in high value financing transactions, including drafting loan documents, contracts and leases, and conducting due diligence.

Her experience includes a wide range of knowledge and skill in commercial and residential real estate transactions and commercial lending. She has worked with many clients ranging from individuals to nonprofits to for-profit institutions. Allison has extensive knowledge and experience in the areas of condominium law as well as complex title and survey matters.

She has also represented both lenders and borrowers in private lending as well as traditional financing matters and regularly works to secure corporate financing in preparing corporate documents concerning acquisitions, sales, and financing.

If you have questions for Allison about Commercial Financing or if you would like to schedule a meeting with her please reach out to the firm at 781-239-8900.