Last month, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking to implement the beneficial ownership information reporting provisions that were included in the Corporate Transparency Act (CTA) passed by Congress in January 2021.

The CTA mandates that “reporting companies” file a report with FinCEN containing personal identifying information about the company’s beneficial owners and applicants. This includes data such as an individual’s full legal name, birth date, current address and a unique identifying number from an acceptable document such as a non-expired passport, government-issued ID document, or driver’s license. For reporting companies, there’s no shortage of pressure to get this right. It is unlawful for any person to willfully provide false or fraudulent beneficial ownership information or to willfully fail to report complete or updated beneficial ownership information. 

Still, FinCEN has only announced a proposed rule and is continuing to solicit comments - meaning that changes can still be made and there is no reporting requirement locked into place yet. But in the meantime, companies should see whether they are a “reporting company” or qualify for exempt status as defined by the CTA and proposed regulation. Based on the proposed rule announced last month, definitive action may need to be taken to avoid falling out of compliance once reporting begins. 

New entities and foreign (non-US) companies 

Business owners planning on a new entity formation on or after the effective date of the regulations (which is still to be determined by FinCEN), domestic companies that have been formed before the effective date, foreign (non-US) companies that will register to do business in a US state on or after the effective date, and foreign (non-US) companies that were registered to do business before the effective date will need to determine if the entity meets the definition of either a “domestic reporting company” or a “foreign reporting company”.

A domestic reporting company is defined by the proposed regulation as any entity that is a corporation, limited liability company, or other entity that is created by the filing of a document with a Secretary of State or similar office under the law of a state or Indian tribe. A foreign reporting company is any entity that is a corporation, limited liability company, or other entity that is formed under the law of a foreign country and registered to do business in the US by the filing of a document with a Secretary of State or similar office under the law of a state or Indian tribe. 

New and existing domestic and foreign entities will also need to determine if they qualify for one of the 23 reporting exemptions designated under the CTA and proposed regulation. If so, they will not be considered a reporting company. Most of those exemptions are reserved for companies that are subject to substantial federal or state regulation under which their beneficial ownership may already be known. This includes, among others, entities that file reports with the SEC, banks, credit unions, depository institutions, investment advisors, securities brokers and dealers, tax-exempt entities, insurance companies and accounting firms. 

Non-exempt reporting companies 

Once it is determined that a company is a reporting company it needs to locate and obtain the required personal information of every individual who meets the definition of “beneficial owner.” A beneficial owner is an individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25% of its ownership interests. FinCEN’s proposed rule makes exceptions under this definition for a minor child, an agent of another individual, an employee acting solely as an employee, an individual whose only interest in a reporting company is a future interest through a right of inheritance and a creditor of the reporting company.   

Once companies have identified all beneficial owners, the same steps need to be taken for “company applicants”, who are defined by the proposed regulation as any individual who files the document that creates a domestic reporting company or registers a foreign reporting company, including any individual who directs or controls the filing of such a document by another person.

Beneficial owners and company applicants also have the option of obtaining a FinCEN identifier. A FinCEN identifier is a unique number issued by FinCEN to individuals and reporting companies. An individual may submit an application for a FinCEN identifier that contains all of the personal information that would otherwise have to be set forth in the initial report.

Once an identifier has been issued, a beneficial owner or company applicant can submit it to the reporting company, which in turn can use the FinCEN identifier in a report as substitute for the information otherwise required. The format of the report will be determined by FinCEN at a later date, but the proposed regulation does say that an initial report must be filed within 14 days of formation or registration for companies formed or registered on or after the effective date and within one year for existing companies. After filing the initial report, reporting companies must file an updated report within 30 days of a change in any of the information previously reported. A corrected report must be filed within 14 days of learning that information previously reported was incorrect. 

Exempt companies 

Companies that were exempt from filing an initial report must file an initial report within 30 days of a change that results in the company no longer being exempt from reporting. 

It's worth noting that there is also an exemption for a “large operating company,” which is defined as any entity that employs more than 20 full-time employees in the US, has an operating presence at a physical office within the US and filed a federal income tax or information return for the previous year demonstrating more than $5m in gross receipts or sales. 

Sandra Feldman is a publications attorney at the Corporation Trust Company, a subsidiary of Wolters Kluwer that provides software and services for legal professionals.