Business Transactions Blog – Weiss Serota Helfman Cole + Bierman

Client Alert: Corporate Transparency Act Update

Fabio Giallanza — Wed, 04 Dec 2024 17:14:31 +0000

In a significant legal development, the United States District Court for the Eastern District of Texas has issued a preliminary injunction against the enforcement of the Corporate Transparency Act (CTA) and its implementing regulations. This decision came in response to a lawsuit filed by Texas Top Cop Shop, Inc., and other plaintiffs, who contended that the CTA infringed upon constitutional principles by imposing federal oversight on state-registered companies and requiring the disclosure of detailed personal information about their owners.

The court found that the CTA represented an unprecedented federal intrusion into areas traditionally managed by state governments and posed a threat to the anonymity historically afforded to corporate owners. Additionally, the Court found the Plaintiffs’ were likely to succeed in showing these constitutional violations and enforcement of the CTA compliance deadline would cause irreparable harm. The Court stayed the deadline to file a report under the Administrative Procedure Act (APA) § 705.

We are studying the decision and will monitor FinCEN’s response in the next days in order to advise clients on what to do regarding filing before the upcoming December 31st deadline.

The full text of the decision is available here: Bloomberg Law

If you have any questions, please feel free to contact Emma Rodgers at erodgers@wsh-law.com.

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Client Alert – Corporate Transparency Act Litigation Update

Fabio Giallanza — Thu, 18 Apr 2024 16:45:07 +0000

On March 1, 2024, the case of National Small Business United v. Yellen resulted in a federal district court ruling that the CTA exceeds constitutional limits, leading to an injunction against its enforcement for specific plaintiffs.

Despite this, the Financial Crimes Enforcement Network (FinCEN) has expressed its intention to continue implementing the CTA, pending an appeal filed by the Department of the Treasury. This means that, except for the plaintiffs involved in the case, all reporting companies must still comply with the CTA’s requirements.

In light of these events and the potential for the decision to be overturned on appeal, we advise the following:

1. For entities established after January 1, 2024: Continue to file Beneficial Ownership Information (BOI) reports within the 90-day deadline.

2. For entities formed before January 1, 2024: You have until the end of the year to file. However, we recommend not delaying the collection of necessary information and filing of a report.

Our team remains dedicated to assisting clients with their BOI reporting needs. Should you have any questions or require our services to file a BOI report, please do not hesitate to reach out.

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FinCEN Issues Corporate Transparency Act Final Regulations

Fabio Giallanza — Thu, 03 Nov 2022 14:31:10 +0000

On September 29, 2022, FinCEN issued final regulations for the implementation of the Corporate Transparency Act (“CTA”), the law requiring disclosure of beneficial ownership information (“BOI”) by business entities. For background on the CTA, please refer to our previous alert available here. Issuance of the final regulations brings to completion a rulemaking process that was almost two years in the making. The final regulations published by FinCEN, which can be found at this link, will be codified as 31 CFR 1010.380.

The effective date of the final regulations is January 1, 2024. This will give FinCEN a little over a year to finalize development of the Beneficial Ownership Secure System (BOSS), the electronic reporting system for BOI. The public will also have time to prepare for the upcoming changes. Entities formed after January 1, 2024, will have 30 days to report beneficial ownership information. This timeframe was increased from 14 days in the proposed regulations. Entities formed prior to January 1, 2024 will have until January 1, 2025 to file a report. BOI changes will have to be reported within 30 days after the change takes place.

Reporting Companies

The final regulations identify two types of reporting companies: domestic and foreign. Domestic reporting companies are all corporations, limited liability companies or other entities formed under the laws of any State or Indian tribe. Foreign reporting companies are corporations, limited liability companies or other entities formed under the laws of a foreign country and registered to do business in any State or Indian territory.

There are significant carve-outs from the definition of “reporting companies.” The supplementary information to the regulations makes it abundantly clear that FinCEN is specifically targeting the use of “shell” companies; that is, entities without operations or employees, which can be used to conceal the identity of an illicit actor. Therefore, the final regulations exempt from BOI reporting, among others, banks and other financial institutions, publicly traded companies, and operating entities with more than 20 employees in the United States and $5 million in gross receipts.

Company Applicants

In addition to the entity identifiers, such as name, address, and tax ID number, the final regulations require a reporting company to disclose two company applicants: the person responsible for directing the filing of the document creating the entity and the person who physically files the document. In previous versions of the regulations, there was no limit on the number of company applicants, but several commenters had expressed concerns on the burden associated with disclosing a significant number of people typically associated with the creation of a new business entity.

If an entity was formed by a law firm, according to FinCEN, the reporting company would have to disclose the name of the attorney in charge of the filing and, if applicable, the name of the paralegal who physically filed the document. FinCEN believes that this information may be useful to law enforcement as they may be able to “draw connections between and among seemingly unrelated reporting companies, beneficial owners, and company applicants.”

Beneficial Ownership Information

BOI reporting is the core of the CTA. Reporting companies must disclose in a report the identity of its beneficial owners, along with the beneficial owners’ dates of birth, street addresses, and passport or other ID numbers, along with a copy of the document.

A “beneficial owner” is defined as an individual who, directly or indirectly, owns or control a 25% ownership interest in the reporting company or exercises “substantial control” over it.

An individual is deemed to exercise “substantial control” if he or she serves as a senior officer or has the power to influence major decisions of the reporting company. The “substantial control” standard adds to the definition of “beneficial owner” individuals who potentially have no ownership interest in the reporting company. For example a general manager who is merely an employee of an entity can be a beneficial owner under the broad, and somewhat misleading, definition adopted in the final regulations.

When an interest in a reporting company is held by a trust, beneficiaries of the trust will need to be disclosed, but only if the beneficiary is (a) the sole permissible recipient of income and principal from the trust, or (b) if the beneficiary has the right to demand a distribution of, or withdraw substantially all, of the assets in the trust.

Access to BOI

The CTA and the final regulations require that BOI be kept confidential. There will be no publicly searchable database. Access will be limited primarily to federal law enforcement agencies. State law enforcement will be able to access BOI only with an order from a court of competent jurisdiction. Foreign law enforcement agencies and judicial authorities may also request access to BOI. The scope and procedures for access to BOI will be the subject of proposed regulations that FinCEN will issue in the coming months.

Penalties

Failure to comply with the BOI reporting requirements of the CTA will result in steep penalties. Reporting companies will be subject to a civil penalty of $500 for each day of noncompliance. Individuals who willfully provide false information or fail to file a report may also be fined up to $10,000 or imprisoned for up to 2 years.

What Comes Next

FinCEN will issue additional regulations in the coming months, particularly as it concerns access to BOI and the BOSS system. FinCEN is also expected to release Frequently Asked Questions, offering guidance on some of the provisions that remain unclear or potentially ambiguous.

The information contained in this document does not constitute legal advice.

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Corporate Transparency Act: Additional Compliance Required for Business Entities

Nelson Slosbergas — Tue, 03 May 2022 18:34:32 +0000

Rulemaking is underway for the Corporate Transparency Act (the “CTA,” Title LXIV of the National Defense Authorization Act for Fiscal Year 2021), the 2021 landmark piece of legislation that will require the disclosure of beneficial ownership information for all entities formed under the law of any U.S. states or territories or operating in the U.S. The Financial Crimes Enforcement Network, better known by its acronym, FinCEN, is the financial intelligence unit of the U.S. Department of Treasury, tasked with safeguarding the U.S. financial system from illicit activities, such as money laundering or evading U.S. economic sanctions, through the collection and processing of data. The CTA gave FinCEN the additional responsibility of serving as the depository of beneficial ownership information for all new and existing U.S. entities.

When the CTA became law, it gave the Secretary of Treasury a deadline of one year to implement its contents. The requirements of the CTA will be enforceable when final regulations become effective. On December 7, 2021, FinCEN issued proposed regulations (the “Proposed Regulations”) inviting comments until February 7, 2022.

When the comment period closed, FinCEN had received over 230 comments.

Who has an obligation to report?

Under the Proposed Regulations, all entities formed under the laws of a U.S. state or territory and all foreign entities registered to do business in a U.S. state or territory will have the obligation to report their beneficial ownership information.

The Proposed Regulations carve out several exceptions from the status of “reporting company.” Most significantly, entities with over 20 employees or more than $5,000,000 in gross revenue, as reflected in a federal income tax return, are not reporting companies.

In addition to disclosing beneficial ownership information, reporting companies will also have to disclose information about the “Company Applicant,” defined as the individual who files the document legally forming the entity, including any person who directs such filing. As a result, information on the decision-maker, along with information regarding who materially filed the organizational document (such as an employee of a law firm or corporate formation business), will have to be disclosed to FinCEN.

What is the content of a report?

The CTA requires disclosure of the following information for each beneficial owner of an entity:

(i) full legal name; (ii) date of birth; (iii) current, as of the date on which the report is delivered, residential or business street address

The CTA defines “beneficial owner” as any individual who, directly or indirectly, “(i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.” The Proposed Regulations expanded on the notion of “substantial control” by indicating that substantial control can be expressed as “(1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any senior officer or the dominant majority of the board of directors (or similar body) of a reporting company; or (3) direction, determination, or decision of, or substantial influence over, important matters of a reporting company.”

It is important to note that the information required to be disclosed will not be publicly available. FinCEN will have to maintain this information confidential and limit its use and dissemination for law enforcement purposes.

When is a report due?

For newly formed entities, a beneficial ownership report is due within 14 days after formation. As to existing entities, initial reports will be due within 1 year after the implementation of FinCEN’s final regulations.

When previously-filed beneficial ownership information changes (for example, as a result of a transfer or death), reporting companies will have 30 days to file an updated report.

The CTA indicates that failure to provide a report will result in a civil penalty of up to $500 for each day of noncompliance plus a fine of up to $10,000. Noncompliance can trigger more severe criminal sanctions, including up to two years’ imprisonment.

How is a report filed?

In its December 7, 2021 notice of proposed rulemaking, FinCEN indicated that in addition to its significant regulatory effort, it is designing and building a new IT system — the Beneficial Ownership Secure System, or BOSS — to collect and provide access to beneficial ownership information. So, it is expected that the filing of beneficial ownership information reports will be electronic.

The issuance of final regulations by FinCEN and their effective date remains unclear at the moment. Presumably, FinCEN will wait to have the BOSS system up and running before launching the new reporting requirements.

The information contained in this document does not constitute legal advice.

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