The Financial Crimes Enforcement Network’s final rule implementing the Corporate Transparency Act’s beneficial ownership information reporting requirements will become effective on January 1, 2024. Small and medium businesses should prepare for compliance with the requirements.
On January 21, 2021, the Corporate Transparency Act (CTA) was enacted into federal law in the United States. The CTA directs the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury and the US financial intelligence unit, to establish a national registry of beneficial ownership information (BOI) for the beneficial owners of most entities created or registered to do business in the United States (Reporting Companies). The CTA is primarily an anti-money laundering law to fight against bad actors that seek to use anonymous shell companies to facilitate money laundering, financing of terrorism, tax fraud, and other illegal acts.
On September 30, 2022, FinCEN published a final rule that implements the CTA’s BOI reporting requirements (Final Rule). The Final Rule requires Reporting Companies to disclose certain personal information of each “beneficial owner” and “company applicant” to FinCEN. The effective date of the Final Rule is January 1, 2024.
We prepared a comprehensive overview of the CTA’s implementing regulations available in a previous report. Key takeaways of the CTA and the Final Rule are detailed below.
The foregoing highlights are not an exhaustive discussion of the details surrounding the application of the CTA and the Final Rule and their accompanying compliance obligations. Further, FinCEN still needs to finalize additional rulemakings (as discussed in a January 11 and January 31 LawFlash) regarding (1) the form that will be used to submit information; (2) who may receive access to the BOI information and for what purposes; and (3) safeguards required to protect BOI in accordance with the CTA’s strict security and confidentiality requirements.
In addition, FinCEN must amend the customer due diligence requirements of financial institutions to conform them with the requirement of the CTA and the Final Rule and develop the infrastructure to administer the Final Rule’s reporting requirements.
Unless subject to an exemption, every new LLC, limited partnership, limited liability partnership, corporation, or other business entity will have a filing obligation with FinCEN. This will capture the vast majority of small and medium businesses in the United States, and it will be incumbent on persons to track their various business organizations and ensure that reports are filed with FinCEN in a timely manner.
In addition, as small and medium companies grow, and expand their business lines, they will need to be mindful to update FinCEN with any changes, including new owners over threshold, new investors, and any new business lines operating under a different trade or DBA name. Notably, in the Final Rule, FinCEN made clear that responsibility for the accuracy of the information rests with the Reporting Company, itself.
Small or medium businesses that do not anticipate that an exemption will apply to their business may consider forming new entities before the January 1, 2024 effective date. In doing so, the newly formed entity will have until January 1, 2025 before compliance with the CTA is required. A small or medium business may also elect to restructure to qualify for the large operating company or subsidiary exemptions.
Similar to the CTA, certain states have begun to pass or propose statutes that in certain ways mirror the federal provisions in order to create state-level databases of BOI. For example, the New York state legislature recently passed the LLC Transparency Act, which is awaiting Governor Kathy Hochul’s signature. Under the New York LLC Transparency Act, both current and newly established LLC’s will be required to disclose BOI information of its owners with the Department of State. However, unlike the CTA, which limits public access to the BOI information stored in its database, the New York bill will make the information largely available to the general public.
California has followed suit and proposed its own version of the CTA particularly aimed at corporations not formed in California or LLCs registered to do business in California to report BOI information with the secretary of state. The proposed bill would require these companies to disclose BOI information to do business in California or risk being guilty of a misdemeanor for noncompliance.
Morgan Lewis will continue to monitor these state developments as they arise.
If you have any questions or would like more information on the issues discussed in this LawFlash, please reach out to your contact at Morgan Lewis, who can coordinate with the firm’s Corporate Transparency Act Task Force to provide tailored advice. Please also visit our firm’s resource center for further information and insights on the US Corporate Transparency Act.
[1] FinCEN issued a final rule on November 29, 2023, extending the deadline from 30 calendar days to 90 calendar days for Reporting Companies created or registered only during 2024, and confirming that the deadline will remain 30 calendar days for Reporting Companies created or registered on or after January 1, 2025.
[2] The $5,000,000 threshold may also be demonstrated on a consolidated return for an affiliated group of entities; however, the 20 fulltime employee threshold does not similarly apply across an affiliated group of entities.