We previously reported that, as a result of the enactment of the Corporate Transparency Act, many corporations, limited liability companies, and other entities that are not subject to any other beneficial ownership reporting (referred to herein as reporting companies) will be required to submit beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). Recently, final rules were released providing additional clarification on which types of entities these reporting requirements apply to and the type of information being requested of their owners.
The final rules provide for exemptions from being considered a reporting company. For instance, if a company has more than 20 full-time employees and more than $5 million in gross receipts or sales, such company is exempt from the reporting requirements. Additionally, companies in heavily regulated areas, such as banking and securities brokers, securities reporting issues, insurance companies, and public utilities are also exempt.
Under the final rules, a beneficial owner is an individual who meets at least one of two criteria:
i. The individual exercises “substantial control” over the reporting company.
ii. The individual owns or controls at least 25 percent of the ownership interest in the reporting company.
The rules provide several indicators of substantial control, including service as a senior officer; authority over the appointment or removal of any senior officer; and direction, determination, or decision of, or substantial influence over, important matters affecting a reporting company. Most notably, the definition of beneficial ownership captures limited liability company managers with the ability to vote on decisions despite not necessarily holding any ownership in the company and, therefore, will be subject to the reporting requirements.
The following five types of individuals are exempt from the definition of beneficial ownership:
i. Minor children
ii. Nominees, intermediaries, custodians, and agents
iii. Employees
iv. The inheritor of a future interest
v. Creditors
These reporting requirements will take effect for a newly formed entity after January 1, 2024. Each new reporting company will need to pull together the required information and obtain a TIN within the prescribed 30-calendar-day window. Reporting companies formed prior to January 1, 2024, will have until January 1, 2025, to file their initial reports. Finally, once in effect, reporting companies will have 30 days to report changes to previously provided information from the time when the reporting company becomes aware of the inaccuracy.
The reporting requirements will require all reporting companies to be diligent not only in initial reporting but in reporting any changes in their beneficial ownership.
If you have questions regarding the content of this alert, please contact Jim Canfield, Corporate Practice Area co-chair, at jcanfield@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or another member of the firm’s Corporate Practice Area.