For many years, Congress and law enforcement officials have recognized that organized crime, terrorists, and various other bad actors have utilized legally created entities to engage in and finance illegal activities and to launder revenues from those activities. After numerous false starts, on January 1, 2021 Congress passed the Corporate Transparency Act (“CTA”), to be administered by the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). Final rules providing more background and operational details, which become effective on January 1, 2024, were passed on September 30, 2022. The CTA will apply to entities currently in existence and to those created after the rules become effective, requiring non-exempt “reporting companies” to provide the personal information of specified individuals to FinCEN. The nature of the entities to which the CTA will apply leads us to conclude that a substantial percentage of New Hampshire businesses will be required to file with FinCEN.
The CTA defines a “reporting company” as a corporation, limited liability company, or other similar entity created by the filing of a document with a secretary of state or similar office, or created in a foreign country and registered to do business in the United States. To date, the rules provide little guidance as to which types of entities fall within the definition of “other similar entity”. It appears clear that sole proprietorships will fall outside, with private trust instruments likely to as well, while limited partnerships created by a filing with a secretary of state are likelier to fall within it. Until the effective date, practitioners should monitor whether additional guidance has been provided concerning “other similar entities”.
The CTA identifies twenty-three types of entities exempt from the definition of “reporting company” and thus from its filing requirements. These consist primarily of tax-exempt entities and entities engaged in regulated businesses, such as insurance companies, banks, credit unions, and securities brokers, dealers, and investment advisors. In addition, and possibly of greater importance to New Hampshire practitioners, entities with more than twenty full-time employees, more than $5,000,000 of annual gross receipts, and a physical office in the United States will be exempt.
DEADLINES FOR INITIAL FILINGS AND INFORMATION TO BE SUBMITTED
Reporting companies in existence as of the CTA’s January 1, 2024 effective date will be required to file an initial report with FinCEN on or before January 1, 2025, while reporting companies created on or after the effective date will be required to file an initial report within thirty days after creation. The initial report must provide information about the company itself and also personal information about its “beneficial owners”. Entities created after the effective date will be required to submit, in addition to company and beneficial owner information, personal information of the “applicant” who formed the entity.
WHO IS A BENEFICIAL OWNER?
When dealing with CTA filings, practitioners should remain mindful that the focus of the CTA is to identify ownership by humans, not by entities, of interests in reporting companies. The CTA defines a beneficial owner as any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests of the reporting company. The final rule promulgated under the CTA states that an individual exercises substantial control over a reporting company if: he or she serves as a senior officer of the reporting company; has authority over the appointment or removal of any senior officer or a majority of the board of directors; or directs, determines, or has substantial influence over important decisions made by the reporting company, including those described in a list set forth in the rule.
WHO IS AN APPLICANT?
An applicant is any individual who files the documents required to form a reporting company or who files an application of a reporting company formed in a foreign country to do business in the US,
REPORTING COMPANY, BENEFICIAL OWNER, AND APPLICANT INFORMATION
A reporting company’s initial report must be submitted on a form to be prescribed by FinCEN, and must provide the following company information: full legal name and any trade name or “doing business as” name; street address of principal place of business or, for non-US entities, the primary location in the US where it conducts business; its jurisdiction of formation or, for non-US entities, the US jurisdiction where it first registers to do business; and its IRS taxpayer identification number or, for non-US entities, a tax identification number issued by a foreign jurisdiction.
In addition, a reporting company’s initial report must include the following information concerning all of its beneficial owners (and, if formed after January 1, 2024, the company applicant): full legal name; date of birth; a residential street address or, in the case of an applicant who registers the entity in the course of his or her business, the street address of the business; and the unique identifying number and jurisdiction of issuance of a non-expired US passport, non-expired identification document issued by a state or local government, non-expired driver’s license, or non-expired foreign passport, in each case accompanied by an image of the document showing the unique identifying number.
The CTA provides reporting companies, beneficial owners, and applicants with an opportunity to be issued a “FinCEN Identifier” by providing all of the information otherwise required to be submitted to FinCEN. Thereafter, the identifier can be used in lieu of submitting each piece of information that would otherwise be required.
UPDATING OF INFORMATION
If reporting company or beneficial owner information contained in a reporting company’s filing changes, the reporting company will be required to submit an updated report within thirty days of the change. Updating is not required when an applicant’s information changes.
LIMITED AVAILABILITY OF SUBMITTED INFORMATION
A concern that practitioners and members of the public alike might share is whether beneficial ownership information will be publicly available. It will not. Rather, it will be available only to law enforcement agencies, certain regulators, and, in some narrow circumstances, financial institutions upon request to FinCEN.
The CTA will undoubtedly present some practical and logistical challenges for practitioners. With sufficient notice to and education of clients, and by compiling reporting company, beneficial owner, and applicant well before the effective date, practitioners should be able to begin filing in 2024 with a minimum of difficulty and disruption for their practices.
The author would like to acknowledge the assistance of Patrick C. Closson, Esq., Chair of McLane Middleton’s Corporate Department, in the writing and editing of this article.