With the effective date of the Corporate Transparency Act (CTA) approaching at the start of 2024, affected entities should be aware of and begin preparing for new requirements, including for beneficial ownership information (BOI) reporting. In this LawFlash, we give an overview of the CTA and its specific impact on family offices.

BACKGROUND

The CTA, enacted into US federal law in January 2021, establishes uniform BOI reporting requirements for certain business entities created or registered to do business in the United States (Reporting Companies).

On September 30, 2022, the Financial Crimes Enforcement Network (FinCEN) published a Final Rule that requires Reporting Companies to eFile a report with FinCEN containing personal identifying information about the company and its “beneficial owners” and “company applicants.”

The goal is to establish a central registry of beneficial owners of legal entities in order to provide transparency and combat money laundering and illicit financial activities by those who control smaller unregulated businesses. The CTA has broad application, and it is estimated that it will affect more than 32 million entities.

WHO IS SUBJECT TO CTA REPORTING

Domestic entities that are subject to reporting include corporations (both C corporations and S corporations), limited liability companies (LLCs), and other entities formed by the filing of a document with a secretary of state or similar office. Similar foreign entities that are registered to do business in any state or tribal jurisdiction are also subject to the reporting requirements. There are many types of entities that are excluded from the definition of “Reporting Company” because they are already subject to substantial federal or state regulation.

These exemptions include, among others, large operating companies—defined as entities with more than 20 full-time US-based employees, a US office (meaning the entity regularly conducts its business at a physical location in the United States that the entity owns or leases), and more than $5 million in US-source gross receipts or sales. Subsidiaries of such large operating companies may also be exempt.

Thus, many family offices that are formed as a corporation or an LLC will be subject to CTA reporting. While some family offices may qualify as a large operating company or subsidiary of a large operating company, and be exempt from reporting, the structure of investments and the limitation on the subsidiary exemption may not exempt all family offices. In addition, information about a family office may need to be disclosed if it invests in a Reporting Company and exercises substantial control over the company or owns or controls a 25% ownership interest.

Similarly, many LLCs formed by individuals to hold real estate or other property will be subject to reporting. Note that, although trusts are not currently subject to reporting, trusts that own or control at least 25% of a Reporting Company (and note that a trust’s holdings may be aggregated with ownership interests that an individual holds outside of the trust) and trustees who exercise substantial control over a Reporting Company are subject to reporting.

As such, if a trust owns an interest in a Reporting Company, it may be necessary to disclose the trustee, the beneficiary, the grantor, or some combination of the foregoing depending on the terms of the trust.

WHAT INFORMATION MUST BE REPORTED

Reporting Companies must disclose the following information regarding the entity: legal name, trade name, business address, jurisdiction information, and US Internal Revenue Service taxpayer identification number.

In addition, Reporting Companies must disclose certain personal information of each (1) “beneficial owner” (any individual who exercises substantial control over the Reporting Company or who owns or controls a 25% ownership interest) and (2) “company applicant” (any individual who directly files the document that creates the Reporting Company and the individual primarily responsible for directing or controlling of the filing, although company applicants need only be reported for Reporting Companies formed on or after January 1, 2024).

Required disclosures regarding the beneficial owners and company applicants include legal name, date of birth, current address, and an image of an identification document with a unique identifying number (e.g., a passport).

WHEN REPORTS ARE DUE

• Existing Companies: Reporting Companies created on or registered before January 1, 2024 must file their initial BOI reports by January 1, 2025. Note that if you are anticipating needing a nonexempt entity soon, forming it before the end of 2023 will result in not having to report until January 1, 2025 (rather than 30 days after formation of the entity).
• New Companies: Reporting Companies created on or after January 1, 2024 must file their initial reports within 30 calendar days of the earlier of the date on which it receives actual notice that its creation has become effective (in the case of domestic Reporting Companies) or it has been registered to do business (in the case of foreign Reporting Companies), or the date on which a secretary of state or similar office first provides public notice.

In addition, after the initial filing, it is the Reporting Company’s responsibility to keep its BOI report current with FinCEN.

NEXT STEPS

Your first step should be to determine if any entity formed by you or in which you have an interest is a Reporting Company. If so, you could consider restructuring to take advantage of available exemptions. If that is not possible, you should establish procedures to identify and verify the beneficial owners and company applicant, maintain accurate records, and submit timely reports as required by the CTA.

In addition, you should obtain a unique identification number from FinCEN, called a FinCEN Identifier. Failure to comply with the reporting requirements could result in both civil and criminal penalties. Legal counsel and compliance experts will play a crucial role in helping family offices and other entities navigate the complexities of the CTA to ensure compliance.

For more information, see the newly released Small Entity Compliance Guide. For a comprehensive overview of the Final Rule, please see our previous Report.