New Reporting Required 2024: File US Entities in 2023!

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On January 1, 2021, Congress enacted the Corporate Transparency Act (“CTA”), which is aimed at better enabling critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity. The Act is poised to take effect on January 1, 2024, and will immediately impose new disclosure duties, including the disclosure of beneficial ownership information (“BOI”), to the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) whenever a new entity is formed. Anyone planning to form a new entity should do so in 2023 if possible, as all entities in existence as of December 31, 2023, will have until January 1, 2025 to make their initial disclosures. Alternatively, any new Reporting Company formed in the US, or registering to do business in the US, will typically have to file their initial reports within 30 days of the date they receive notice that its creation has become effective.

On November 29, 2023 FinCEN published the final rule. Of note in the changes was the extension of time for companies formed in 2024 to file their initial report from 30 days (which will still be the time period companies formed beginning January 1, 2025 have to file) to 90 days. This extension was granted to give new Reporting Companies more time to become familiar with FinCEN’s guidance and to resolve any questions that may arise in the reporting process. While the American Institute of Certified Public Accountants (“AICPA”) has asked for implementation to be delayed until 2025, it is probable that the reporting requirements will still begin January 1, 2024. Therefore, to ensure CTA compliance and avoid any penalties, it is imperative for companies to know whether they are required to file an initial report and the process of doing so.

What is a Reporting Company

Only entities that fall within the requirements of “Reporting Companies”, as defined by the CTA, are subject to the reporting requirements. The CTA applies to domestic and foreign entities. 31 C.F.R. § 1010.380(c)(1).  A “Domestic Reporting Company” is defined as a corporation or limited liability company that is organized pursuant to state law. 31 C.F.R. § 1010.380(c)(1)(i). A “Foreign Reporting Company” is a company that is organized under the laws of a foreign jurisdiction and registered to do business in the US. 31 C.F.R. § 1010.380(c)(1)(ii). Thus, absent an exemption, if you are a domestic or foreign entity registered to do business in the US, then you are subject to the statute’s reporting obligations. Upon our research we have discovered that there are alternative methods for certain entities to avoid submitting BOI to FinCEN, other than falling within one of the exemptions listed below.

Concept of Beneficial Owner

Once it is established that an entity meets the requirements of a Reporting Company and does not fall within any of the exemptions, then such entity will need to identify its beneficial owners in order to provide their information in the initial report. Under the CTA, the term beneficial owner is defined as any individual who, directly or indirectly, (1) exercises substantial control over a Reporting Company, or (2) owns or controls at least 25 percent of the ownership interests of a Reporting Company. US. 31 C.F.R. § 1010.380(d).

An individual exercises substantial control over a Reporting Company if such individual (a) serves as a senior officer of the company, (b) has authority to appoint or remove any senior officer or a majority of the board of directors, (c) directs, determines, or has substantial influence over important decisions made by the Reporting Company, or (d) has any other form of substantial control over the Reporting Company.  U.S. 31 C.F.R. § 1010.380(d)(1)(i). An individual may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a Reporting Company through (a) board representation, (b) ownership or control of a majority of the voting power or voting rights of the Reporting Company, (c) rights associated with any financing arrangement or interest in a company, (d) control over one or more intermediary entities that separately or collectively exercise substantial control over a Reporting Company, (e) arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees, or (f) any other contract, arrangement, understanding, relationship, or otherwise. U.S. 31 C.F.R. § 1010.380(d)(1)(ii). In order to determine beneficial owner status, the CTA looks beyond mere ownership, to evaluate the actual influence that an individual may exert over an organization. Thus, compliance managers will want to ensure that those with power to influence the corporation are accurately accounted for and reported.

The definition of beneficial owner also includes individuals who possess at least 25 percent of the ownership interests of a Reporting Company. Under the CTA, the term ownership interest is broadly defined to include (a) stock and other equity, (b) a capital or profits interest in an entity, (c) convertible equity instruments, (d) any put, call, straddle, or other option, or (e) any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership. U.S. 31 C.F.R. § 1010.380(d)(2)(i).  Such ownership may occur through (a) joint ownership with one or more other persons of an undivided interest in such ownership interest, (b) another individual acting as nominee, intermediary, custodian, or agent on behalf of such individual, (c) a trust, or (d) through ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the Reporting Company. U.S. 31 C.F.R. § 1010.380(d)(2)(ii). In the process for determining what individuals meet the 25 percent ownership interest requirement, there is ambiguity in the final rule on whether attribution of ownership between spouses, children, or other relatives should apply. In the final rule, FinCEN decided not to provide any further clarity on the issue, stating that “the terms ‘ownership interest’ and ‘substantial control’ are sufficiently comprehensive and other references are likely to be over-inclusive and create significant burden on reporting companies.” 87 CFR 59498(C)(II).

What Information Must be Reported

Once the beneficial owners of a Reporting Company have been identified, the Reporting Company is required to report the specified information about these individuals and the Reporting Company. Each Reporting Company is required to file an initial report. The initial report must include the following information:

Reporting Company

  • Full legal name
  • Any trade name or DBA
  • Current address
  • The state or jurisdiction of formation
  • The jurisdiction of first formation, if a foreign company
  • The IRS EIN/TIN of the company

Beneficial Owners

  • Legal name
  • Date of birth
  • Current Address
  • A driver’s license or passport number
  • Image of the driver’s license or passport

FinCEN issued a final rule on BOI access and safeguards on December 21, 2023. This rule lists each category of authorized users that will be able to obtain access to a company’s BOI. Each category is subject to specific security and confidentiality requirements. The categories are;

  • Federal government agencies
  • State, local, and tribal law enforcement agencies
  • Foreign requesters
  • Financial institutions subject to customer due diligence requirements
  • Federal functional regulators and other appropriate regulatory agencies
  • Treasury personnel

For more information on the new rule regarding BOI access and Safeguards, visit Fact Sheet: Beneficial Ownership Information Access and Safeguards Final Rule | FinCEN.gov.

Company Applicants

Reporting Companies created or registered on or after January 1, 2024 will be required to report information about its company applicants, in addition to the information about itself and its beneficial owners.

Up to two individuals can qualify as company applicants. Those are; (1) the individual who directly files the document that creates, or first registers, the Reporting Company and (2) the individual that is primarily responsible for directing or controlling the filing of the FinCEN documentation. At least for the first year of the entity’s existence, these individuals will need to be identified and reported. For each individual company applicant, a Reporting Company will have to report: (1) the individual’s name, date of birth, and address; (2) a unique identifying number from an acceptable identification document; and (3) the name of the state or jurisdiction that issued the identification document.

Continuing Obligation

Reporting Companies have a continuing obligation to report any changes in the information provided in the initial report regarding the company or its beneficial ownership. An amended report reflecting any new information is due within thirty (30) days of a change occurring. Additionally, Reporting Companies have an obligation to correct any inaccurate information in a previously filed report. After a Reporting Company discovers or has reason to be aware of any inaccuracy, they have thirty (30) days to file an amended report correcting said inaccuracy. If an amended report is not provided within the requisite timeframe, then a Reporting Company could be subject to fines and penalties, as described below.

Fines and Penalties

Failure to report BOI to FinCEN, or the attempt to provide false BOI may result in a civil penalty of $500 for each day of noncompliance, or criminal penalties, including imprisonment for up to two years and/or a fine of up to $10,000. While disclosure of BOI and compliance with the CTA may be burdensome, there is currently no fee associated with filing the reports with FinCEN.

Additionally, the CTA allows for civil and criminal penalties of up to $250,000 in fines or 5 years imprisonment for any person knowingly disclosing or using a company’s BOI in an unauthorized manner.

Statutory Exemptions

The Act provides many exemptions for businesses in certain regulated industries. If your organization falls into one of the following 23 predefined exempt entity types, then it is exempt from the CTA’s reporting requirements and you will not need to submit BOI reports to FinCEN:

  • Securities reporting issuer;
  • Governmental authority;
  • Bank;
  • Credit union;
  • Depository institution holding company;
  • Money services business;
  • Broker or dealer in securities;
  • Securities exchange or clearing agency;
  • Other Exchange Act registered entity;
  • Investment company or investment adviser;
  • Venture capital fund adviser;
  • Insurance company;
  • State-licensed insurance producer;
  • Commodity Exchange Act registered entity;
  • Accounting firm;
  • Public utility;
  • Financial market utility;
  • Pooled investment vehicle;
  • Tax-exempt entity;
  • Entity assisting a tax-exempt entity;
  • Large operating company;
  • Subsidiary of certain exempt entities; or
  • Inactive entity,

To assist in determining whether an entity falls within one of these exemption categories, FinCEN provides the criteria for each specific exempt entity type on their website, in a simple check the box format at fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf. To note, the large operating company exemption may provide some relief to organizations that would not otherwise qualify for the regulated industry exemptions. In order to qualify as a large operating company, a company must (1) employ more than 20 full time employees in the US, (2) have an operating presence at a physical office within the US, and (3) filed a federal tax return for the previous year demonstrating more than $5,000,000 gross receipts or sales. U.S. 31 C.F.R. § 1010.380(c)(2)(xxi).

FinCEN will issue a unique identification number (“FinCEN Identifier”) upon request after individuals or Reporting Companies have provided their BOI. It is not required for a party to obtain a FinCEN Identifier, but doing so can simplify the reporting process. In addition to meeting one of the 23 entity type classifications listed above some entities may avoid being classified as Reporting Companies by reporting another entity or individual’s FinCEN Identifier. Reporting Companies may report another entity’s FinCEN Identifier and full legal name in lieu of providing BOI if:

  • The other entity has obtained a FinCEN Identifier and provided it to the Reporting Company;
  • An individual is or may be a beneficial owner of the Reporting Company by virtue of interest in the Reporting Company that the individual holds in the other entity; and
  • The beneficial owner of the other entity and of the Reporting Company are the same individual.

As the required reporting period begins, attorneys are analyzing the final rule and discovering possible legal strategies and alternatives that may assist certain companies in avoidance of the Reporting Company classification. In the next year, FinCEN estimates there will be approximately 32.6 million Reporting Companies, bringing with them clarity on the requirements for CTA compliance. Attorneys will likely be able to assist certain clients that do not fall into one of the listed exemptions with means for the protection of their privacy and sensitive information.