US Department of the Treasury Proposes New Beneficial Ownership Reporting Requirements

The Corporate Transparency Act (CTA), enacted into law in 2021, requires certain types of domestic and foreign entities, called “reporting companies,” to submit certain types of beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN). The requirement that reporting companies submit BOI takes effect on the date regulations are finalized by the US Department of the Treasury. The information required to be submitted would not be public but would be shared with other governmental entities, financial institutions, and regulators.  

On December 7, 2021, the US Department of the Treasury proposed regulations to implement the CTA requirement that FinCEN establish a beneficial ownership database, aimed at preventing unlawful movement of funds through shell companies. The rules target smaller, more lightly regulated entities that may not be subject to any other BOI reporting requirements. As a result, the proposed rules will catch many small corporations, limited liability companies, and other entities that are engaged in perfectly legal and legitimate businesses.  

Generally, a reporting company is defined as a corporation, limited liability company, or other similar entity that is either: 

1. Created by filing with a secretary of state or a similar office under the law of a state or Indian Tribe or 
2. Formed under the law of a foreign country and registered to do business in the United States

As a result, most corporations, limited liability companies, and limited partnerships will be subject to the new rules, regardless of size, unless an exemption is applicable. 

For most closely held business entities, there are only three possible exceptions that might be applicable: 

1. Any entity that: 
   1. Employs more than 20 employees on a full-time basis (over 35 hours per week) 
   2. Had more than $5 million in gross receipts reported on its prior year’s tax return
   3. Has a physical office in the United States. It should be noted that a physical office does not    include a home office. In measuring the $5 million of gross receipts, there is taken into account other entities owned by the entity under consideration (i.e., subsidiary entities) 
2. Any entity that:
   1. Has been in existence for over one year 
   2. Has never engaged in an active business 
   3. That is not owned directly or indirectly by a foreign person 
   4. Has not experienced a change in ownership or sent or received funds in excess of $1,000 through its financial account in the past 12 months 
   5. Does not own or otherwise hold any kind or type of assets
3. Certain entities that are tax exempt under the US Internal Revenue Code 

While there are also exemptions for some specific types of businesses, such as banks, credit unions, investment advisors, and public accounting firms registered in accordance with Section 102 of the Sarbanes-Oxley Act, most corporations, limited liability companies, or other entities with less than 20 employees or less than $5 million of receipts will be subject to the registration requirements. 

The rule would require the reporting entity to submit the full legal name, date of birth, current residential address, and a unique identifying number from an acceptable identification document, such as a passport, for each beneficial owner and each “company applicant.” However, company applicants that provide a business service as a corporate or formation agent are required to list their business address as opposed to residential addresses of employees. The person filing the report must certify that the report is accurate and complete.

In the case of a domestic reporting company, the “company applicant” is the individual or entity (e.g., a law firm) that formed the entity as well as the person that directed that person to form the entity. In the case of a foreign reporting entity, the company applicant is the individual or entity that files the document that first registers the entity to do business in the United States. The rule defines a beneficial owner as any individual: 

1. Exercising “substantial control” over the reporting company or 
2. Owning or controlling at least 25 percent of the ownership interest of the company

According to the proposal, following the regulations’ effective date, new companies will be required to file their initial report with FinCEN within 14 calendar days after the company is created or registered. Existing entities formed before the regulations’ effective date will have up to one year to file their initial reports. Additionally, reporting companies will be required to update information submitted in prior reports no later than one year after the date on which there is a change to the previously reported BOI.

The regulations are set to be finalized after the 60-day comment period expires on February 7, 2022.  

If you have questions regarding the content of this alert, please contact Danielle Katz, associate, at dkatz@barclaydamon.com; Caitlyn Ford, associate, at cford@barclaydamon.com; or another member of the firm’s Corporate Practice Area.