Update Beneficial Ownership Reporting

By TABS INC OnDecember 5, 2023 0 Comments

Navigating the Corporate Transparence Act Update: What You Need to Know

The new reporting requirements for United States entities (and foreign entities registered to do business in any U.S. state) are scheduled to begin 1 January 2024 under the Corporate Transparency Act. You can review our previous articles for additional background regarding the CTA.

FinCEN (The Financial Crimes Enforcement Network) should begin accepting reporting of Beneficial Ownership Information and Company Applicants on 1 January 2024. (I emphasized “should” because with little more than thirty days before the reporting requirements begin, we haven’t seen the reporting website or the form to report ownership information – FinCEN has stated that the filing system is currently under development).

As previously discussed, under the CTA reporting companies will be required to report information about the company itself, the Beneficial Owners and Company Applicants (if the Reporting Company is formed after 1 January 2024).

Below are what we anticipate will be common questions and brief answers regarding reporting requirements under the CTA. If you have additional questions or would like to know how TABS can help your company, please reach out to us.

If you are a Corporate Governance client of TABS, we will contact you in or about the third quarter of 2024 to prepare for the CTA reporting.

Q. Is my company required to report?

A. The CTA requires domestic and foreign companies that were created or registered for authority by the filing of documents with a secretary of state or similar office (a Reporting Company) to register and provide Beneficial Owner and Company Applicant information unless the Reporting Company qualifies for one of 23 exemptions. Exemptions 1-20 and 22 largely deal with entities that are otherwise already regulated by another agency (e.g. securities reporting companies, governmental authorities, banks, insurance companies etc.) or are a subsidiary to a company that is regulated by another agency.

The Large Operating Company Exemption (Exemption 21)

In order to qualify for this exemption, your company will need to meet ALL six (6) of the following: (i) the entity must have more than 20 full-time employees, (ii) the entity must have more than 20 full-time employees must be employed in the United States, (iii) the entity must have an operating presence from which the entity regularly conducts business in the United States that it either owns or leases and is operationally distinct from any unaffiliated entity, (iv) the entity filed a Federal income tax return in the United States for the previous year demonstrating more than $5M in gross receipts or sales, (v) the entity reported the more than $5M as gross receipts or sales (net of returns and allowances) on its tax filing and (vi) when gross receipts or sales from sources outside the United States are excluded the amount remains greater than $5M.

The Inactive Entity Exemption (Exemption 23)

To qualify for this exemption your company will need to meet ALL six (6) of the following: (i) the entity was in existence on or before 1 January 2020; (ii) the entity is not engaged in active business; (iii) the entity is not owned directly or indirectly by a foreign person; (iv) the entity has not experienced any changes in ownership in the preceding twelve (12) months; (v) the entity has not received any funds in an amount greater than $1000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest in the preceding twelve (12) months; and (vi) the entity does not otherwise hold any kind or type of assets.

Q. Reporting Begins on 1 January 2024, but when does my company need to report?

A. For the timing of filing initial reports, Reporting Companies fall into two categories – those that were formed (or registered for the first time if a foreign entity) before 1 January 2024 and those that were formed (or registered for the first time if a foreign entity) on or after 1 January 2024. If your company is formed on or after 1 January 2024, it will need to file an initial report within 30 days of its formation or registration. If the Reporting Company was formed before 1 January 2024, it will have a year to file its initial report.

After the initial report is filed, if there is any change to the required information about your company or its beneficial owners, your company must file an updated report no later than thirty (30) days after the date that the change occurred. This is an important fact that may create limitations on making changes within your company retroactively and also why your company may want to wait until the last quarter of 2024 to make its initial report, if possible.

Q. Who qualifies as a Beneficial Owner of the company?

A. A beneficial owner is defined as any individual who directly or indirectly (i) exercises substantial control over a reporting company and/or (ii) owns or controls 25% or more of the ownership interest of the Reporting Company. Reporting Companies are not required to report the reason (i.e., substantial control or ownership interests) that an individual is a beneficial owner.

There is no limit to the number of individuals who can be included as Beneficial Owner. FinCEN expects that at least one Beneficial Owner will be reported for each Reporting Company.

Q. What does substantial control mean?

A. An individual is determined to have substantial control over a Reporting Company if the individual meets any one of the following criteria: (i) the individual is a senior officer (e.g., President, CEO, Treasurer, CFO or Chief Legal Counsel or General Counsel or Chief Operating Officer), (ii) the individual has authority to appoint or remove certain officers or a majority of directors of the Reporting Company, (iii) the individual is an important decision-maker (e.g. they have substantial influence over the nature and scope of the business, its finances and/or its structure), OR (iv) the individual has any other form of substantial control over the Reporting Company.

Q. What is considered an ownership interest?

A. Any of the following may represent an ownership interest: (i) holding equity, stock, or controlling voting rights; (ii) having an interest in capital or profits of the Reporting Company; (iii) holding convertible instruments, options, or other privileges to buy or sell any of the foregoing or (iv) any other instrument, contract or mechanism used to establish ownership.

Q. Are there exceptions to the Beneficial Owner definition for reporting purposes?

A. Yes. There are five exceptions, which include: (1) minor children; (2) individuals merely acting on behalf of a beneficial owner as their nominee intermediary, custodian or agent; (3) employees who meet each of the following three criteria (a) they are subject to the will and control of their employer in what and how to do work and they may be discharged from their work; (b) their substantial control is derived solely from their employment status; and (c) they are not a senior officer; (4) the individual’s only interest in the company is a future interest through the right of inheritance and (5) the individual is a creditor and would otherwise only qualify as a Beneficial Owner through the rights and interest for repayment of a predetermined sum of money.

COMPANY APPLICANT REPORTING

Q. Do I need to report Company Applicant Information?

A. Domestic Reporting Companies that are formed on or after 1 January 2024 and Foreign Reporting Companies first registered to do business in the United States on or after 1 January 2024 are required to report company applicant information.

Q. Who is a Company Applicant of my company?

A. There are two categories of company applicants – the first is the “direct filer” and the second is the individual who “directs or controls the filing action.” It is important to note that a Company Applicant is an individual (not another entity), and there can be no more than two Company Applicants or more than one from either category.

The Direct Filer is the individual who filed the document that created a domestic reporting company or the individual who filed the document that first registered a foreign reporting company.

If an additional Company Applicant is to be listed, it would be the person who directed or controlled the filing action – likely this would be the person that prepared the documents that are filed or to be filed (e.g. the attorney who drafted the formation documents).

REPORTING INFORMATION

Q. What information is my company required to report?

A. Reporting information can be separated into three categories: information about the company, information about Beneficial Owners, and information about company applicants.

Beneficial Owner Information

Required information about Beneficial Owners will include (i) full legal name; (ii) date of birth; (iii) complete current residential address; (iv) unique identifying number and issuing jurisdiction and an image of a U.S. passport, a state driver’s license, identification document issued by a state or a foreign passport.

Company Applicant

The required information is the same as for the Beneficial Owner, with the exception that a business address may be used if the company applicant forms or registers companies in the ordinary course of their business.

If you wish to make any changes to the officers and directors of your company prior to reporting, please reach out to us.

Stay Compliant, Stay Safe!