By Michael Salad and Craig Panholzer
Starting January 1, 2024, business entities will be required to disclose certain information as part of a new Federal law. The Corporate Transparency Act, §§ 6401-6403 of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub.L. No. 116-283 (H.R. 6395), 134 Stat. 338, 116th Cong. 2d Sess. (the “Act”), mandates certain business entities, defined as a “reporting company,” to file, in the absence of an exemption, information about the reporting company’s “beneficial owners” with the Financial Crimes Enforcement Network (“FinCEN”) of the United States Department of Treasury (the “Treasury”). Business entities formed prior to January 1, 2024 have one year to become compliant with FinCEN and the Act while business entities created after January 1, 2024 must be compliant within 90 days of formation or incorporation, as applicable.
The information filed with FinCen will not be publicly available, but FinCEN is authorized to disclose reported information (i) to a United States agency engaged in national security, intelligence, or law enforcement activity, for use in furtherance of such activity; (ii) to a State, local, or Tribal law enforcement agency, if a court of competent jurisdiction, including any officer of such a court, authorized the law enforcement agency to seek the information in a criminal or civil investigation, (iii) to a United States agency requesting on behalf of a law enforcement agency, prosecutor, or judge of another country, including a foreign central authority or competent authority under an international treaty, agreement, convention, or official request made by law enforcement, judicial, or prosecutorial authorities in trusted foreign countries when no treaty, agreement, or convention is available, and (iv) with consent of the reporting company, to financial institutions and their regulators.
Reporting companies under the Act include corporations, limited liability companies (“LLC”), limited liability partnerships, business trusts or any other entity created by filing a document with a secretary of State, Commonwealth or any similar office under the law of a State, Commonwealth or Indian Tribe. A sole proprietorship that does not form a single-member LLC is not considered a “reporting company.”
Exemptions from the disclosure requirements under the Act include securities issuers, domestic governmental authorities, banks, public utility companies, a tax-exempt Internal Revenue Code Section 501(c) corporation, political organization, charitable trust or split-interest trust exempt from tax, an entity that: (i) employs more than 20 employees on a full-time basis in the United States; (ii) filed in the previous year Federal income tax return in the United States reporting more than $5,000,000 in gross receipts or sales; and (iii) has an operating presence at a physical office within the United States. The Act includes a number of exempt entities. Most exemptions applying to entities in the financial services industry and public companies registered with the United States Securities and Exchange Commission. However, most small to mid-size businesses nationwide are likely reporting companies that will be required to comply with FinCen’s filing requirements under the Act. Significantly, the reporting requirements will be applicable even if the owners hold interests in other entities that employ more than 20 employees on a full-time basis.
The Act defines a “beneficial owner” as (i) each individual, if any, who directly or indirectly owns 25% or more of the equity interests of a legal entity; and (ii) a single individual who has substantial control over the reporting company. The term “substantial control” is not defined in the Act. Further guidance on the matter has not been published by the Treasury.
If a trust owns 25% or more of the equity interests of a reporting company or has substantial control over the reporting company, then the individuals who possess an interest in the reporting company through the trust qualify as beneficial owners. Accordingly, one or more of the following individuals will likely need to be reported: (i) the trustee, (ii) a trust beneficiary, (iii) the settlor, and (iv) other individuals named in the trust who have certain powers. The Treasury has not provided further guidance on trust disclosure requirements under the Act.
A beneficial owner or entity applicant filing on behalf of an entity, that is in violation of the Act’s reporting requirements, may be subject to civil penalties of up to $500 for each day that the violation continues and criminal penalties of imprisonment of up to two years and fines of up to $10,000.
If you own a reporting company or are a beneficial owner of a reporting company, consider speaking to a member of Cooper Levenson’s business and tax practice with any questions or to assist you in becoming compliant with FinCen and the Act.
Craig Panholzer is an attorney in Cooper Levenson’s Business & Tax practice group in its Florida office. He concentrates his practice on business transactions, estate planning, special needs planning, probate and tax matters.
Michael Salad is an attorney in Cooper Levenson’s Business & Tax practice group. He concentrates his practice on estate and asset protection planning, special needs planning, business transactions, mergers and acquisitions and tax matters. Michael holds an LL.M. in Estate Planning and Elder Law. Michael is licensed to practice law in Florida, New Jersey, New York, Pennsylvania, Maryland, Connecticut, Georgia, Massachusetts, Alabama and the District of Columbia.
Link to file and more information: https://www.fincen.gov/boi
