Corporate Transparency Act — Year-End Updates and Compliance Deadlines
09/24/2024As we head into the fourth quarter of 2024, the deadline for certain entities to comply with the beneficial ownership disclosure requirements of the new law is quickly approaching. For additional background on the new “Corporate Transparency Act” (“CTA”) disclosure rules, please see our prior Client Alert.
Background
The CTA is intended to combat perceived money laundering activity ostensibly conducted through opaque shell companies. Under the new law, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has established an entity ownership registry (in a secure, confidential database accessible to law enforcement and national security officials) to identify and target those entities who obscure the flow of illicit funds and seek to evade anti-money laundering laws and economic sanctions.
Over 32 million domestic and foreign companies are anticipated to be subject to the new rules to report information about their beneficial owners to FinCEN. The new beneficial ownership requirements apply to both domestic and foreign entities (“Reporting Companies”). U.S. Reporting Companies include corporations, limited liability corporations or any other entity (such as, a limited partnership) created by filing a document with a secretary of state or similar office. Foreign Reporting Companies also include entities registered to do business in the U.S.
The reporting deadlines for filing the beneficial ownership disclosure depend on the related date of formation, organization or registration of the Reporting Company, and are as follows:
| Formation Date | Compliance Deadline |
| Before 2024 | January 1, 2025 |
| From 1/1/2024 to 12/31/2024 | 90 days after formation/organization/registration |
| After 2024 | 30 days after formation/organization/registration |
In addition to the initial reporting, entities must update their beneficial ownership interest reports within 30 days of certain changes in the disclosed beneficial ownership information (including, for example, a change in the name or address of a beneficial owner, the appointment of a new CEO or a loss of exemption status, such as no longer being treated as a “large operating company” defined below).
The willful failure to report complete or updated beneficial ownership information to FinCEN can trigger civil penalties of $500 per day for each day a violation is outstanding (up to a maximum of $10,000) and criminal penalties of up to two years’ imprisonment.
The new reporting rules require specific personal identification information regarding “beneficial owners” – a term very broadly defined to include any individual who (i) exercises “substantial control” over a Reporting Company or (ii) owns or controls at least 25% of the ownership interests of a Reporting Company.
An individual will be deemed to exercise “substantial control” if, in connection with the Reporting Company, such person is or possesses:
- a senior officer (i.e., a CEO, President, COO, CFO, general counsel etc.)
- authority to appoint or remove senior officers or a majority of the board of directors;
- an “important decision-maker” (that is, able to direct, determine or have substantial influence over the business, finances and/or organization structure); or
- any other form of substantial control over the reporting company.
While the term “beneficial ownership” is commonly understood to reflect equity ownership, percentage ownership (as further described below) and “substantial control” are two separate (albeit overlapping) prerequisites of beneficial ownership that can be satisfied in the alternative. In other words, a person can be deemed to have substantial control without possessing any equity or derivative equity interest in a Reporting Company.
Ownership interests in a Reporting Company for purposes of determining a beneficial owner of 25% or more of the equity is broadly defined to include the following interests:
- equity, stock, or voting rights in a corporation;
- capital or profits interest in an LLC or partnership;
- an instrument convertible into equity, stock, or voting rights or capital or profit interests whether or not anything needs to be paid to exercise the conversion;
- options including a put, call or straddle; and
- any other instrument, contract, arrangement, understanding, relationship or mechanism used to establish ownership.
For purposes of calculating the 25% ownership threshold, ownership interests are measured on a “fully-diluted basis”, so that any options, warrants and convertible instruments are considered fully exercised. In the case of a partnership or LLC, capital and profits interests are calculated as a relative percentage of the total outstanding capital and profits interests of the company. With respect to corporate ownership, relative percentage interests are determined based on the greater of (i) the total combined voting power of all classes of ownership interests of the holder as a percentage of total outstanding voting power of all classes of equity entitled to vote, or (ii) the total combined value of the ownership interests of the holder as a percentage of the total outstanding value of all classes of equity in the corporation.
Certain Reporting Companies may have capital structures that are not straightforward or easily distilled into straightforward percentage interest calculations for purposes of measuring relative voting power or value. For example, the waterfall provisions of an LLC or partnership could have differing tranches, based on varying liquidation preferences. In addition, a corporation could have conducted convertible debt and SAFE instrument capital raises and/or have a senior class of super voting stock. In each such case, a special measurement rule applies under which the Reporting Company must identify each class or different type of ownership interests and determine whether an individual can be deemed to own or control at least 25% of any such class or type of equity interest, and thus, be considered a beneficial owner.
Under the application of attribution rules, an individual’s indirect interest in a Reporting Company will be calculated under a “look through” approach. An individual’s ownership percentage in an intermediary holding company will be multiplied by the ownership percentage of the holding company in the Reporting Company under the attribution rules. Similarly, in the case of trust ownership of a Reporting Company, a trustee may be considered a beneficial owner, along with certain specified beneficiaries and settlors and grantors of the trust.
Finally, an individual who may otherwise be classified as a beneficial owner will be excluded from the reporting requirements in the case of: (i) a minor child; (ii) an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual; (iii) an employee of a reporting company, acting solely as an employee (other than a senior employee); (iv) an individual whose only interest in the Reporting Company is a future interest through a right of inheritance; or (v) a creditor of the Reporting Company.
Beneficial owners of a Reporting Company generally must disclose to FinCEN their legal name, date of birth and address, along with a photograph of an identification document (including a driver's license, passport or similar government-issued identification).
FinCEN continues to periodically update its guidance and provide certain additional clarification addressing various aspects of these new reporting rules, including information ranging from the potential application of the requirements to dissolved and liquidated companies, S corporations, entities under trust ownership, homeowners associations, subsidiaries partly owned by exempt entities, to providing reassurances on the security and confidentiality of the beneficial ownership information in its secure database.
The following provides an example that may be of interest to our clients and others.
The Subsidiary Exemption
As we discussed in our prior Client Alert, entities may qualify for exemption as a “large operating company” that (1) employs more than 20 full-time employees in the U.S., (2) has an operating presence at a physical office within the U.S., and (3) shows more than $5 million in gross receipts or sales (excluding gross receipts or sales from sources outside of the United States) on their tax return for the previous year. A subsidiary of a large operating company and any other entity within the enumerated exemptions under the CTA, in turn, will also be exempt from the new reporting requirements. Significantly, this exemption is limited to those entities downstream in an ownership chain from a large operating company. That is, the exemption will NOT apply to parent holding companies, brother-sister entities and other affiliates of a large operating company.
The precise definition of “control” in the context of the application of the subsidiary exemption has been the subject of some uncertainty. Under the plain wording of the statute, a subsidiary under partial control of an exempt entity may be excluded from the reporting requirements. However, FinCEN has narrowed the scope of the exemption in recently-released informal FAQ guidance, stating that: “control of ownership interests means that the exempt entity entirely controls all of the ownership interests in the reporting company, in the same way that an exempt entity must wholly own all of a subsidiary’s ownership interests for the exemption to apply.” Therefore, the exemption may not be available to a subsidiary within an organizational structure involving two or more levels of upper-tier-entity ownership if each entity in the chain of ownership is not a large reporting company (or other exempt entity).
Separate NY Reporting Requirement
New York passed a separate state-level beneficial ownership reporting rule intended to apply to LLCs formed under New York law or authorized to do business in the state. Although limited to LLCs (as opposed to corporations, LPs and similar entities under federal law), the New York legislation is similar to in many respects to, and incorporates much of, the reporting requirements mandated by the Corporate Transparency Act, including the incorporation of the exemptions applicable for federal law purposes and other substantially overlapping aspects. Notably, though, the effective date of the New York LLC reporting requirements has been postponed to January 1, 2026 (and in the case of LLCs in existence prior to the effective date of the New York rules, state-level reporting will not be required under January 1, 2027).
Conclusion
The looming deadline of January 1, 2025, for the submission of the beneficial information disclosure potentially could apply to millions of entities. It is to be expected that, within a sophisticated organizational enterprise with multiple ownership layers, there may be challenges in analyzing ownership interests and ascertaining the existence of substantial control under the new reporting rules, along with the availability of applicable exemptions. We regularly assist clients in navigating through their beneficial ownership reporting obligations, and we continue to closely track the latest developments under the new law.
If you would like to consult with a Warshaw Burstein legal advisor for guidance in complying with the new reporting rules, please contact Jason Diener at jdiener@wbny.com, or 212-984-7797, or Frederick R. Cummings, Jr. at fcummings@wbny.com or 212-984-7807, any of the undersigned, or your regular Warshaw Burstein attorney.
