FinCEN reporting requirements for non-exempt companies appear on course to become effective in 2022. As reported in our prior article, the burdens of the CTA will disproportionately impact small businesses and real estate LLCs. Multi-layered companies that will become subject to the FinCEN reporting requirements should begin assessing the information that will need to be reported, and the identities of previously undisclosed “beneficial owners” that may need to be obtained.
Recently, we addressed new reporting requirements coming for LLCs and corporations under the Corporate Transparency Act (“CTA”). The CTA will become effective following FinCEN’s adoption of implementing regulations. On December 7, 2021, FinCEN published proposed regulations for comment. The Notice of Proposed Rulemaking allows comments until February 7, 2022. Final regulations are expected to be adopted in 2022.
Once final regulations are adopted, reporting to FinCEN begins as follows:
- For companies formed or registered on or after the effective date of the regulations, initial reports must be filed within 14 calendar days after the date the company was formed with the Secretary of State;
- For companies formed before the effective date of the regulations, reports must be filed not later than one year after the effective date of the regulations. (The CTA says reporting must begin not later than 2 years after the effective date of the regulations. The regulations set the reporting deadline as one year.)
- If a change occurs in the information reported, updated information must be reported within 30 calendar days after the date on which there is any change.
- If inaccurate information is reported, a corrected report must be filed within 14 calendar days after the date on which the company becomes aware or has reason to know that any required information was inaccurate.
The comment period could lead to modifications in how the reporting requirements are implemented. But, the currently proposed regulations provide details on how the reporting is likely to work.
In addition to setting reporting deadlines, the proposed regulations describe who is a “beneficial owner”. Under the CTA, a “beneficial owner” is “any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise – (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity.” The proposed regulations clarify the meaning of “beneficial owner” by defining the terms “substantial control” and “ownership interests, and providing rules for determining whether an individual owns or controls 25% of the ownership interests of a reporting company.
The proposed regulations set forth three specific indicators of “substantial control:”
- Service as a senior officer of a reporting company;
- Authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body) of a reporting company;
- Direction, determination or decision of, or substantial influence over, important matters of a reporting company. Examples may include the sale, lease or transfer of any principal assets of the company, the entry into or termination of significant contracts, major expenditures and investments by the company and compensation structures for senior officers.
The proposed regulations also include a catch-all provision to make clear that substantial control can take additional forms not specifically listed. Reporting who exercises substantial control would not be limited to one person; all persons exercising substantial control within the definition would have to be reported.
Ownership or Control of Ownership Interests
“Ownership Interests” would not be limited to current equity ownership under the proposed regulations. They define “ownership interests” as including both equity in the company and other types of interests, such as capital or profit interests (including partnership interests) and convertible instruments, warrants or rights, or other option or privilege to acquire equity, capital, or other interests. Debt instruments are included if they enable the holder the ability to convert the instrument into one of the specified equity or other interests.