Legal Update

LEGAL UPDATE By: W. Michael Baisley

Long, Ragsdale & Waters Alyx M. Thompson

UT College of Law, Class of 2023

GET READY FOR THE CORPORATE TRANSPARENCY ACT

Business lawyers need to be prepared for the Corporate Transparency Act of 20211 (the “CTA”). The CTA’s purpose is to “improve transparency for national security, intelligence, and law enforcement agencies and financial institutions concerning corporate structures and insight into the flow of illicit funds through those structures” and to “discourage the use of shell corporations as a tool to disguise and move illicit funds.”2

The CTA became law in January 2021, but its implementation has been delayed until until the Financial Crimes Enforcement Network (FinCEN)3 issues final regulations. The final regulations could be issued any day – but they are expected to be published closer to the end of 2022 or early in 2023. Upon publication of the final regulations, compliance will immediately become mandatory for all non- exempt entities. Noncompliance may result in severe penalties, as discussed below.

The following is a high-level overview of the CTA and what it means for business entities and business lawyers.

What is required?

The CTA requires non-exempt “reporting companies” (defined below) to file a beneficial ownership information report (“BOI report”) with FinCEN.4 The BOI report shall identify each of the reporting company’s “beneficial owners” and “company applicants,” including each individual’s legal name, date of birth, residential or business address, Social Security number, and an acceptable identification document such as a driver’s license or passport.5 FinCEN will maintain BOI reports for at least five (5) years after the date on which a reporting company terminates.6 The regulations do not address what is meant by “terminates,” nor do they address whether (or when) FinCEN will purge BOI reports from its database. The Secretary of the Treasury (who oversees FinCEN) is required to implement security protocols to protect the information compiled by FinCEN under the CTA.7

What is a “reporting company”?

The CTA limits the definition of “reporting companies” to corporations, LLCs, and other similar entities that are “created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe” or “registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.”8 FinCEN has indicated that “other similar entities” will likely include LPs, LLPs, LLLPs, certain trusts, and other entities afforded limited liability protection under state law.9

What companies are exempt?

The CTA includes several exemptions within the definition of “reporting companies.”10 Some noteworthy exemptions are: companies that are already subject to reporting requirements under other federal laws; public companies issuing securities under §12 of the Securities Exchange Act of 1934; certain venture capital fund advisors; banks; utility companies; pooled investment vehicles; insurance companies; 501(c) tax-exempt entities; and charitable trusts.11 Entities that are owned or controlled by another exempt entity are also exempt.12 Also exempted are “large operating companies,” which: (a) have more than 20 full-time employees in the U.S.; (b) had more than $5,000,000 in gross sales or receipts in the previous year (aggregated with sales or receipts of any entities owned or controlled by such entity, or by any entities “through which such entity operates”); and (c) have a physical location and operates in the U.S.13 Finally, inactive entities will be exempt if they: (a) have been in existence for more than one (1) year; (b) are not actively transacting business; (c) are not owned by a foreign person; (d) have not, in the past 12 months, had a change of ownership or sent or received more than $1,000; and (e) do not otherwise hold any kind of assets, including an interest in another entity.14

Who are “beneficial owners” and “company applicants”?

A “beneficial owner” is an individual who, with respect to a nonexempt reporting company, directly or indirectly: (a) exercises substantial control over the entity; or (b) owns or controls more than 25% of the entity’s ownership interests.15 Although “substantial control” is not defined, the proposed regulations reference a “facts and circumstances test that looks at the individual’s ability to control or influence the decisions of the company.”16 Indicators of substantial control include: (a) serving as one of the senior officers of the reporting company; (b) having authority to appoint or remove a senior officer or majority of the board of directors; and (c) directing, determining, or making decisions regarding, or exerting substantial influence over the reporting company’s important matters.17 “Beneficial owners” does not include minor children (if the parent’s or guardian’s information is reported), individuals acting as agent for a beneficial owner, individuals acting only in the capacity of employees of a reporting company, individuals whose interest arises as a right of inheritance, or creditors of a reporting company.18

A “company applicant” is a person who files an application to form a domestic reporting company or registers a foreign reporting company to do business in the U.S.19 “Company applicants” also include individuals who “direct or control the filing of such document by another person . . . .”20 Thus, a lawyer (and possibly even the lawyer’s paralegal or legal assistant) who files a formation document for a reporting company is also a “company applicant.”

Here, one can begin to see where it may be difficult to determine the identities of beneficial owners and company applicants.

When must a BOI report be filed?

Non-exempt reporting companies formed after the final regulations are issued will have only fourteen (14) days from the date of formation to file an initial BOI report.21 Non-exempt reporting companies formed before the issuance of the final regulations will have one (1) year to file an initial BOI report.22 If an exempt company loses its exemption, it must file its initial BOI report within thirty (30) days from the date the exemption was no longer satisfied.23 BOI reports must also be updated within thirty (30) days if there is any change in beneficial ownership or the personal information of a beneficial owner, or if the reporting company becomes exempt under the CTA, or when the estate of a deceased beneficial owner settles.24 Lastly, reporting companies will be required to correct inaccuracies within fourteen (14) days after the inaccuracy is discovered or should have been discovered.25

What are the penalties for non-compliance?

The CTA provides that it shall be “unlawful for any person to willfully provide or attempt to provide false or fraudulent beneficial ownership information . . . or to willfully fail to report, complete, or update beneficial ownership information to FinCEN . . . .”26 Failure to