Summary
The new Corporate Transparency Act (CTA) was enacted to prevent and combat the illegal use of shell companies to launder funds, evade taxes, and commit other financial crimes. To accomplish its mission, the CTA requires certain entities to report to the Financial Crimes Enforcement Network (FinCEN) regarding its organization and owners.
If you or a trust with which you are connected is involved with an entity such as a corporation, partnership, or LLC, there may be a reporting requirement. This alert necessarily simplifies the rules under the CTA, so it is important that you consult with the attorney and/or accountant who assists you and the entity regarding potential reporting obligations. For entities that are connected to your estate plan or a trust, we would be glad to consult with you to help determine appropriate reporting.
Reporting Companies and Beneficial Owners
The CTA lays out which entities have a reporting obligation. These "reporting companies" include corporations, LLCs, or similar entities that are created by filing a document with the state's Secretary of State or similar office or that are formed under a foreign country's laws and are registered to do business in the US with a state's secretary of state or similar office. Domestic LLPs, LPs, LLCs, and statutory trusts, including business trusts, will also generally be considered reporting companies. Domestic general partnerships and nonstatutory trusts will generally not be considered reporting companies. That said, there are a number of defined exceptions under which an entity that would otherwise be a reporting company is exempt from having to file a beneficial ownership report, including tax-exempt organizations as defined in section 501(c) of the Internal Revenue Code. The other exemptions are outlined on the FinCEN website and generally cover entities that have other public or governmental oversight and other avenues by which they report beneficial ownership information.
The CTA requires that a reporting company disclose its "beneficial owners." Beneficial owners are individuals who, directly or indirectly, either (1) exercise "substantial control" over a reporting company or (2) own or control 25% or more of the ownership interests of the reporting company. All beneficial owners must be reported, and FinCEN expects that each reporting company will have at least one beneficial owner. There are a number of exceptions to the definition of beneficial ownership that must be analyzed on a case-by-case basis.
An individual exercises substantial control over a reporting company if the individual (1) serves as a senior officer, (2) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body), (3) directs, determines or has substantial influence over important decisions or (4) has any other form of substantial control.
Equity, stock or similar instrument, capital or profit interests, instruments convertible into any of the foregoing, and warrants, rights, options, or privileges to acquire or sell a share or interest in a reporting company are all considered in determining who owns or controls 25% or more of the ownership interests in a reporting company. Furthermore, an individual will be deemed a beneficial owner even if he or she indirectly owns or controls 25% or more of the ownership interests, including as a trustee, beneficiary, or, in certain cases, grantor of a trust holding 25% or more of the ownership interests.
Time, Manner, and Information to be Reported
Reporting companies created or registered prior to January 1, 2024, must file an initial report no later than January 1, 2025. Reporting companies created or registered on or after January 1, 2024, and before January 1, 2025, must file an initial report within 90 calendar days of the reporting company's formation or registration. Reporting companies created or registered on or after January 1, 2025, must file an initial report within 30 calendar days of the reporting company's formation or registration.
A reporting company must also file an updated report within 30 calendar days of any change in its beneficial ownership information, including a change in beneficial owners or any change to a beneficial owner's name, address, or unique identifying number. For example, if a reporting company hires a new CEO or if a beneficial owner obtains a new driver's license or other identifying document that includes a changed name or address, an updated report will have to be filed.
In addition to information pertaining to the reporting company, such as the name, address, jurisdiction of formation, and taxpayer identification number, the following information must be reported with respect to each beneficial owner:
- Full legal name
- Date of birth
- Residential street address
- Unique identifying number and the issuing jurisdiction of a nonexpired US passport, driver's license, or other identification document issued by a state, local, or tribal jurisdiction; if none of these are available, a nonexpired passport issued by a foreign jurisdiction
- An image of the document from which the unique identifying number was obtained
Trust and Estate Considerations
Closely Held Businesses
Many closely held businesses will fall within the definition of a
reporting company. Small family companies, LLCs formed to hold real
estate, and many other entities formed for succession planning,
liability protection, or other estate-planning purposes may be
subject to reporting requirements. Therefore, you should review
your holdings and assess whether any entity in which you have an
interest or serve as manager is a reporting company for which
information may need to be reported. More careful analysis may be
required where ownership interests are held in trust.
Beneficial Ownership of Interests Held in
Trust
Identification of the beneficial owners can be more difficult when
substantial control over a reporting company is exercised by, or
the ownership interests are held by, the trustees of a trust. In
such circumstances, the following individuals may be considered
beneficial owners:
- Trustees: If a trust owns 25% or more of the beneficial ownership interests in a reporting company, each trustee, as well as any other person with authority to dispose of trust assets, will generally be considered a beneficial owner. For example, a distribution adviser or trust protector may be considered a person having ownership or control over the trust assets.
- Beneficiaries: A beneficiary who is the sole permissible beneficiary of trust income and principal or who has the legal right to withdraw or compel the distribution of substantially all trust assets will generally be considered a beneficial owner. This does not include a beneficiary who may receive distributions solely at the discretion of the trustees. Similarly, a beneficiary who can only receive trust property in the future or at trust termination would not be considered a beneficial owner.
- Grantor or settlor: A grantor or settlor having the right to revoke the trust or withdraw trust assets will generally be considered a beneficial owner. A grantor or settlor having the right to substitute assets of equal value for assets held in the trust (a common provision in irrevocable trusts intended to be grantor trusts for income tax purposes) may also be considered a beneficial owner.
Trustees should review trust holdings to determine whether there are any interests in a reporting company that may qualify the trustees, beneficiaries, and/or the settlor or grantor as beneficial owners. The trustees may need to serve as intermediaries between the reporting companies and the beneficiaries of the trusts holding such interests, as the reporting company may look to the trustees to identify the beneficial owners and collect their information to be reported. Trustees should also familiarize themselves with the circumstances that require an updated report to be filed so they may notify the reporting company of the change. For example, if a trustee, the settlor or grantor, or any trust beneficiary deemed a beneficial owner changes his or her address, the reporting company should be notified, and the company will have to file an updated report.
Additional Resources
For more information, please consult the following resources:
- Goodwin Corporate Transparency Act resource page:
https://www.goodwinlaw.com/en/resource/corporate-transparency-act - FinCEN Small Entity Compliance Guide:
https://www.fincen.gov/boi/small-entity-compliance-guide - FinCEN Frequently Asked Questions:
https://www.fincen.gov/boi-faqs
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.