New Rules Requiring Entity Beneficial Ownership Disclosure Set to Take Effect January 1, 2024

11/28/2023

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U.S. Treasury Department's Financial Crimes Enforcement Center unit (FinCEN) rules governing the disclosure of beneficial ownership information are currently set to become effective January 1, 2024. The new rules contain ambiguities regarding certain fundamental definitions, and do not definitively resolve issues regarding access to the beneficial owner information reported as well as mechanical aspects of the reporting procedures. However, with the deadline of the effective date quickly approaching, the prior delays in implementing the new rules now seem unlikely to continue past year-end, and these uncertainties may not be clarified through future guidance until after January 1, 2024. Given the potential impact of these rules on many of our clients, it is important that our clients and others be aware of their widespread application.

PURPOSE AND IMPACT OF THE RULES

These new rules will require an estimated 33 million U.S. entities and non-U.S. companies registered to do business in the U.S. (each such legal entity, a “Reporting Company”) to provide certain information to FinCEN for the purpose of compiling a national company registry accessible only by law enforcement, government agencies and other officials. The types of legal entities required to report include corporations, LLCs, general and limited partnerships, and other business entities. This comprehensive database is intended to assist such agencies in revealing intermediary shell companies and anonymous entities facilitating the concealment of ostensible money laundering, tax evasion, terrorism finance and other criminal endeavors. It is anticipated that, in addition law enforcement agencies, personnel in the IRS Criminal Investigations division may seek to access Treasury’s platform for purposes of their own investigations, sanctions proceedings and collection efforts.

REPORTING DEADLINES

Reporting Companies formed or registered before January 1, 2024, generally must file their initial beneficial ownership information report by January 1, 2025. In contrast, Reporting Companies formed or registered on or after January 1, 2024, will have 30 days (which may be extended under proposed rules to 90 days) to file the beneficial ownership information report.

COVERAGE AND EXEMPTIONS

Companies potentially subject to these new rules (and, thus, classified as Reporting Companies) can range from:

• Companies formed for the purpose of a start-up of a new business as an LLC;
• Companies formed to serve as the acquisition vehicle for an existing business;
• Companies formed to hold real estate, and
• A variety of other non-publicly traded entities that do not qualify for an exemption (as outlined below).

There are 23 different types of entities which are exempt from the new reporting requirements. These exemptions include:

• Entities regulated by federal agencies or otherwise obligated to provide beneficial ownership information to a governmental authority, including for example, publicly traded reporting companies, public accounting firms, public utilities, banks, credit unions and similar entities.
• “Large operating companies" that:
  • employ more than 20 full-time U.S. employees,
  • have an operating presence at a physical location within the United States, and
  • have over $5 million in gross receipts in the prior year (as reflected on their most recent tax return).
  • in the case of affiliated entities,
    • the prerequisite of 20 full-time employees would be limited to the entity itself (as opposed to counting employees of subsidiaries or related companies for purposes of qualifying as a large operating company), and
    • the applicable gross receipts threshold (of $5 million) would be measured according to the overall revenues of a group of companies reporting on a consolidated basis for income tax purposes.
• “Inactive companies” which:
  • are not currently engaged in an active business,
  • are not wholly or partially owned by a foreign person (either directly or indirectly),
  • have not undergone a change of ownership in the prior 12 months,
  • have not sent or received funds greater than $1,000 in the prior 12 months, and
  • hold no assets.

DISCLOSURE OF BENEFICIAL OWNERSHIP

Each Reporting Company subject to the new rules will need to disclose certain beneficial ownership information to FinCEN, report information about who created the entity or registered it to do business in the United States, and update previously submitted reports to reflect any change in such information within a specified period.

Beneficial owners who must be identified under these rules are those individuals who, directly or indirectly, either:

• (i) exercise “substantial control” over a Reporting Company,
  • “substantial control” under the rules, albeit somewhat subjective, includes those individuals who:
    • serve as a senior officer (e.g., president, chief executive officer, chief financial officer or general counsel) of a company,
    • can exercise influence over the company by way of possessing the authority to appoint or remove certain officers or a majority of directors, or
    • have certain discretion over important matters such as compensation arrangements and incentive programs for senior officers, effecting major transactions (such as, as sale of the principal assets, a reorganization or merger), issuing additional equity and incurring debt and amending governance documents.
  • A reporting company can have multiple beneficial owners, and will always have at least one person that is reportable under the “substantial control” prong of the beneficial owner tests.
• (ii) own or control at least twenty-five percent of the “ownership interests” of a Reporting Company.
  • Rights to convert into an ownership interest, such as options, warrants, and convertible notes are treated as if converted or exercised when calculating ownership for this purpose (subject to the very limited exceptions).

Notably, while the new rules clarify that both revocable and irrevocable trusts are excluded from the definition of “Reporting Companies”, trusts can be subject to the new rules if they own a Reporting Company. Trusts that own or control at least 25% of a Reporting Company or trustees who exercise substantial control over a Reporting Company will have to file a report(s) of beneficial ownership. Grantors and settlors of revocable trusts may be considered beneficial owners, and the beneficiaries of certain trusts may also fall within the reporting requirements.

The term “beneficial owner” does not include a minor child, individuals acting as a nominee, intermediary, custodian, or agent on behalf of another individual, provided that the actual beneficial owner must still be reported under certain circumstances.

The application of the new rules to trusts can be complex and counsel should be consulted in cases where trusts or similar arrangements exist or are under consideration as a vehicle for holding equity in companies.

INFORMATION REQUIRED TO BE DISCLOSED

The reporting includes information about the beneficial owner(s) and Reporting Company such as:

• the individual’s full legal name, date of birth, current residential address (or business address for a company applicant if in the business of forming entities), and
• an “identifying number” and “image” from a government document such as a US passport, US driver’s license, US identification card or, if no US-issued document is available, a foreign passport.
  • In lieu of acceptable identification documentation, an individual or company who is required to provide information to a Reporting Company may provide a unique identifier assigned by FinCEN (FinCEN Identifier). The use of the FinCEN Identifier (technically, an alphanumeric code that firms can obtain from FinCEN after receiving required information from an individual or legal entity) is intended to streamline and enable less burdensome reporting in the case of multi-entity organization structures and afford additional privacy/protection for individuals so that fewer updated reports need to be filed by Reporting Companies.
• For any company that is formed or registered initially on or after January 1, 2024, the Reporting Company must also provide the information of the person that files the document to form or register the company.

PRACTICAL CONSIDERATIONS

Forming/Dissolving Entities. Clients and others who are considering forming new LLCs, corporations or other entities that are contemplated to be utilized in 2024 prior to year-end may wish to form the entity prior to January 1, 2024, so as defer the deadline imposed for reporting. Similarly, clients and others may wish to dissolve already-dormant companies that do not meet the inactive company test described above to avoid reporting requirements.

Review of Existing Entities’ Organization and Documentation. Owners and senior executives of existing small to medium business entities should consider reviewing their organizational charts and similar materials, including related formation documents, shareholder and operating agreements, trust indentures and other documentation relevant to ownership and control of a potential Reporting Company.

New Contractual Provisions. New contractual provisions may need to be drafted into and negotiated with the counterparty to address the new ownership disclosure requirements, including the apportionment of the relative risk among the counterparties (perhaps in the form of an indemnity) in instances where one party may provide false or fraudulent beneficial ownership information or willfully fail to report complete or updated beneficial ownership information of a Reporting Company. It is also anticipated that lenders and acquirers in M&A deals may scrutinize an entity’s compliance with the new rules.

Ongoing Compliance. Finally, there will be ongoing compliance burdens on Reporting Companies, which will have to update and correct certain changes to beneficial ownership within 30 days.

CONCLUSION

The new FinCEN rules impose reporting requirements on owners, executives and others associated with companies that have never previously existed. Clients and others should understand the impact of these requirements on themselves, their families, co-owners and others participating in their business entities. Our lawyers will be happy to assist our current clients and any others who would need help in understanding how the new rules would apply to their particular situation.

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If you would like assistance or guidance regarding the new FinCEN regulations, please contact Frederick Cummings at fcummings@wbny.com or 212-984-7807), any of the undersigned, or your regular Warshaw Burstein attorney.

Frederick R. Cummings, Jr.
fcummings@wbny.com
212-984-7807

Jason Diener
jdiener@wbny.com
212-984-7797

Marshall N. Lester
mlester@wbny.com
212-984-7849

Stephen W. Semian
ssemian@wbny.com
212-984-7764

Martin S. Siegel
msiegel@wbny.com
212-984-7741

Meryl E. Wiener
mwiener@wbny.com
212-984-7731