Private Client Perspectives: Practical Considerations for Completion of Filings Required by the U.S. Corporate Transparency Act (the "CTA") for Existing and New Entities

Management of many legal entities (LLCs, LPs, Corporations organized in the United States or operating in the U.S.) will need to prepare and submit a U.S. report of beneficial ownership under the Corporate Transparency Act (the "CTA").  This CTA report is being administered by the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN).  The CTA takes effect January 1, 2024, and existing entities have 2024 to gather records and prepare filings. 

Generally speaking, entities to which this applies include partnerships, corporations, and limited liability companies and any entity or arrangement that requires application and/or registration to establish legal existence.  

In the private client context, legal entities are commonly used for a wide range of purposes which include but are not limited to (1) "special purpose vehicles" that hold individual pieces of real estate or select investments; (2) "joint ventures" used by associated or collaborative parties to undertake a common objective; (3) "pooled deals" where a tight knit group of like-minded parties agree to act in unison for a shared purpose; (4) "family businesses" where family members share in the shareholding of a single or multigenerational business enterprise, and (5) "family partnerships" where members of a nuclear or extended family agree to cooperate, co-own, and coordinate the orderly transfer of certain investment assets for stability and cohesive management purposes, legal entities are put to good purpose.  However, in many cases these legal entities will be subject to possible U.S. registration requirements.  

Exemptions apply, however.  Some family entities like (1) robust family businesses, (2) large operating family offices, and (3) regulated private trust companies may NOT need to register at all as long as they begin and continue to be classified as "exempt" under one of the 23 enumerated exemptions.  This includes subsidiaries of exempt companies as well.   

It's Happening:  Preparing for the Corporate Transparency Act

The CTA creates a registration requirement and an obligation of management.  All in management will need to consider and some will need to effectuate filings.  Every person involved in the management of an entity should consider and plan for the registration of existing entities, new entities, and also consider the possibility of reorganizing the ownership or management of those entities that might be out of date.  If qualification for an exemption is possible, then it should be memorialized.  

The CTA takes effect on January 1, 2024, such that newly formed entities in 2024 and onward will have registration and reporting obligation as of that date.  Entities that were formed before January 1, 2024, have a registration deadline of January 1, 2025, for their first filing – unless an exemption applies.  Willful violations of the CTA may result in civil and criminal penalties.  Thus, 2023 is the last year to consider and implement management and ownership updates for applicable entities.  

This article provides management of those applicable entities some guidance on the forms used for purposes of the CTA's registration requirements.  

To Whom This Applies:  Brief Summary of Entities and Information Subject to Reporting

The CTA requires domestic (U.S.) and foreign (non-U.S.) "reporting companies" to report their beneficial ownership information, unless an exemption applies at the start (changed to and from exempt reporting companies may still require a filing).  Beneficial ownership is in two parts: (A) any individual who directly or indirectly either exercises substantial control over the entity or (B) any individual who owns or controls twenty-five percent (25%) or more of the ownership interests in the entity.  FinCEN is focused on identifying individuals, so intermediate entity ownership will require further look-through.  

A domestic reporting company is any corporation, limited liability company, or any other entity that is created by the filing of a document with a secretary of State or any similar office under the law of a State, unless an exemption applies.  A foreign reporting company is any corporation, limited liability company, or other entity formed under the law of a foreign country, which is registered to do business in any U.S. State by the filing of a document with a secretary of State or any similar office under the law of a U.S. State.  There are twenty-three (23) categories of CTA exemptions that deserve special attention but are not addressed in detail in this article, but for references of particular importance to the private client entity.  

There is an additional requirement beginning in 2024.  A reporting company created or registered on or after January 1, 2024, will be required to file information regarding their "company applicant."  A company applicant is the one or two individuals that were involved in the creation of the entity.  This means that (A) the individual that directly files the document that creates, or first registers, the reporting company as well as (B) the individual that is primarily responsible for directing or controlling the filing of the relevant document, would both need to be reported.  

The current version of the proposed forms permits filers to declare that certain information is "unknown" or that filers are "unable to obtain" such information.  The level of due diligence required to be conducted prior to indicating such a response is an open issue, but allowing such response places different burdens on different people submitting the FinCEN CTA form.  In all cases, one would expect that the person tasked with submitting the CTA information would use reasonable best efforts to obtain the information.  Whether or not the applicable information is located, this option of indicating that some piece of information is "unknown" does not waive the penalties related to willful violations of the CTA.

To Whom This DOES NOT Apply:  Exception to Reporting

FinCEN provides for twenty-three (23) categories of exemptions.  Those entities that would be a reporting company but fit into one of these categories are exempt from registration entirely but may need to submit a filing if they change and enter into or fall out of being exempt.   

Application of the exemption was a specific topic of concern during the comment period, but FinCEN rule-makers expressed comfort to applying flexibility for exempt enterprises.  Some commentators argued that entities claiming an exemption should be required to file an initial report to "claim" the exemption.  However, FinCEN did not adopt these requests, noting that the CTA is clear that an entity qualifying for an exemption is not a reporting company, such that it is not required to report under the CTA.  Other commentators requested that entities should be allowed to obtain an "exemption certificate" by voluntarily filing a report.  FinCEN did not adopt these requests either because FinCEN did not identify a basis to permit for voluntary reporting and FinCEN did not see a need for voluntarily filing at this time.  Taken together, if an entity qualifies for an exemption under the CTA then no report is required to be filed.   

Not only does the exemption apply to a top-tier exempt entity, but also to its subsidiaries.  Any entity whose ownership interests are (A) controlled or (B) wholly owned, directly or indirectly, by one or more exempt entities would also qualify as an exempt entity. 

However, the exemption is not forever.  If an originally exempt entity changes in size or activity, it would likely lose the exemption and then would become a reporting company.  Upon such change, the entity will have thirty (30) calendar days to file an initial report.  If this was to occur in 2024, when the CTA provides extended deadlines, then the entity would be likely be provided the longer of (i) ninety (90) calendar days; or (ii) the remaining days in 2024 to file an initial report.  

Management's Task:  Submitting (or Authorizing) the Report

The CTA requires reporting companies to make an initial filing and file for any updates with FinCEN.  Management should expect electronic (online) forms to be filed via a secure cloud-based filing system available on FinCEN's website at no charge.  This is similar to FATCA's Form 114 and BEA's Forms BE 12, 15 and others.  Basically, management should expect use of FinCEN's BSA E-Filing System which was designed to support electronic filing of Bank Secrecy Act (BSA) forms (either individually or in batches) through a FinCEN secure network.  However, as of this writing, the specific system is in development and exact and specific guidance is not yet available.  

What to Expect:  Anticipating the Data Fields 

Given that the system and forms required in connection with the CTA are still being developed by FinCEN, the information necessary to complete the forms may change.  However, FinCEN has published drafts and proposals and FinCEN has stated that the information outlined below will be necessary to complete the filings.  To that end, management of applicable entities should accumulate the information below and anticipate compliance with the CTA.      

The Forms are expected to require introductory information 

First, the forms are anticipated to request identification of the type of filing.  The type is designated by a series of boxes to be "checked."  Management is given the option to "check" whether the report being filed is (a) an initial report, (b) to correct a prior report, (c) update a prior report, or (d) to report a new exempt entity.  Interestingly, for reporting an otherwise exempt entity, the reporting company will indicate that it is exempt but no other lines are expected to be filed in the report.  Finally, the date the report is prepared will be assigned automatically when the filer finalizes the report. 

Part I of the Forms are expected to require key data about each entity, whether U.S. or Non-U.S.  

For U.S. and non-U.S. entities, the form will provide the opportunity for management to obtain a FinCEN Identifier.  If a FinCEN Identifier was already obtained, one would expect that nothing further is necessary.  However, if a FinCEN Identifier was not obtained for a given entity, then the form proceeds to key questions.  FinCEN wants to know if the entity is a foreign pooled investment vehicle, and whether the entity was formed before January 1, 2024.  Each filing, for U.S. and non-U.S. entities, is anticipated to require:

• The entity's legal name, as well as any trade names, "doing business as" (d/b/a), or "trading as" (t/a) names; 
• The entity's tax identification type and number, which is understood to include either the company's employer identification number ("EIN"), or the disregarded owner's social security number ("SSN"), individual taxpayer identification number ("ITIN"), or foreign (non-U.S.) tax ID; 

• If a foreign tax ID is provided the country and jurisdiction issuing the foreign tax ID is requested;

• The jurisdiction of formation or first registration for the entity; and
• The entity's U.S. address.  

For U.S. entities specifically, some U.S.-specific data is identified.  FinCEN starts by recognizing that an entity can be established in a State or in a Tribal Jurisdiction and seeks to identify the applicable State or Tribe.  In each case, the information requested about a U.S. entity includes:

• State of formation;
• Tribal Jurisdiction and name of Tribe of formation;

For non-U.S. entities some additional information is requested.  Similarly, FinCEN recognizes that a foreign entity can be registered to do business in the United States by a State or Tribal Jurisdiction, and likewise seeks to identify said State and Tribe.  In such case, the information requested about a non-U.S. entity includes:

• State of first registration to do business in the United States;
• Tribal Jurisdiction and name of Tribe of first registration to do business in the United States;

Part II of the form is expected to require information about the company applicant.  

Company applicant information is only required for entities established after January 1, 2024.  This part of the form is anticipated to recognize that management may be unable to identify all Company Applicants and management can "check" a box if management was unable to obtain any required information about one or more Company Applicants.  The form allows management to include the company applicant's FinCEN Identifier before moving on.  If there is no FinCEN Identifier, then the company applicant's full name, date of birth, current address including whether the address is a personal or business address is required.  Interestingly, here too, the form recognizes and allows management to indicate that the information is "unknown," in which case management can "check the box" if it is not able to obtain specific information about the Company Applicant.  

Part III of the form focuses on "Beneficial Owner Information."  

Beneficial ownership is both management and ownership.  It allows that there could be multiple beneficial owners and each of them may be reported in a repeating manner.  Each reporting company is required to submit the certain information regarding its individual beneficial owners.  These are individuals, in all cases.  FinCEN is seeking to identify who owns or controls 25% or more of the ownership interests in the entity, directly or indirectly.  As currently contemplated, FinCEN recognizes and permits that some in management might be unable to identify all beneficial owners and, in such cases, management can "check" an option if they are unable to obtain any required information on one or more beneficial owners.  

Minors are acknowledged.  FinCEN recognizes that in some cases information about a parent or guardian would be provided instead of minor child.  In that case, management would again "check" a box if the beneficial owner is a minor child such that the parent/guardian information is provided instead.  

Indirect ownership is also anticipated.  Indirect ownership requires a look though of intermediate vehicles.  A reporting company with an entity as the owner, would be required to report the beneficial owners of the parent entity, until an individual is identified.  However, in the event that a reporting company is owned by an entity that qualifies for an exemption, then the reporting company would be permitted to identify the exempt entity in lieu of the ownership by the beneficial owners.  

The form allows management to include the beneficial owner's FinCEN Identifier before moving on.  If there is no FinCEN Identifier, then assuming management can and has obtained the requisite information, the information to be provided will include some or all of:

• Beneficial owner's full legal name;
• Beneficial owner's date of birth;
• Beneficial owner's residential address; and
• An identifying document and respective identifying number of the beneficial owner, which would include a non-expired: (i) state-issued driver's license; (ii) state or local identification card; (iii) U.S. passport; and (iv) foreign (non-U.S.) passport.  Additionally, the reporting company must submit an image of the identification document, that includes the identifying number, to FinCEN.

As above, if any piece of this information is not available, then management can "check a box" indicating that the information is "unknown."  Additionally, the basic framework of these options is repeated in this and each section for all beneficial owners.  

Similar to reporting those who "own" some or all of an entity, FinCEN's form is expected to require information about all in management who exercise "substantial control" over an entity (substantial control is reflected as: service as a senior officer of a reporting company; authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body) of a reporting company; and direction, determination, or decision of, or substantial influence over, important matters affecting a reporting company.)  For those who are in management (exercising substantial control) the form is anticipated to require information identical to that listed above.  

Safeguards.  Disclosure of Data Fields

Information provided in a CTA filing will not be publicly available or searchable.  The information will only be available to the U.S. Department of the Treasury, U.S. federal agencies, State and local agencies with court authorization, financial institutions with consent of the client, federal and State regulators, and foreign (non-U.S.) law enforcement and agencies with qualifying requests.  This is an important contrast to some developing State proposals.  California and New York have entertained their own reporting and disclosures.  For example, New York's 2023 proposed "LLC Transparency Act" would permit public access.  The 2023 state proposals have not been enacted as of the writing of this article.