What Business Owners Should Know About the New Corporate Transparency Statutes

The federal Corporate Transparency Act (the “Act”) is now in effect. Among other things, the Act requires disclosure to the Financial Crimes Network or “FinCEN”, a bureau of the U.S. Department of the Treasury, of the beneficial owners of certain types of entities. This Client Alert sets forth the highlights of the reporting requirements imposed by the Act with a fuller discussion of the Act below. The State of New York also has enacted a similar law which applies only to limited liability companies that are formed or registered in New York, which is also discussed in this Client Alert.

Highlights of the Act:

• Non-exempt domestic corporations, limited liability companies, limited partnerships, statutory trusts and foreign entities (“Reporting Entities”) must file a Beneficial Ownership Information Report (“BOIR”) with FinCEN providing certain information about the entity and its “beneficial owners” (as defined in the Act).
• Reporting Entities that were formed or, in the case of a foreign entity, registered to do business in a state prior to January 1, 2024 must file a BOIR by January 1, 2025.
• Reporting Entities that are formed or registered to do business on or after January 1, 2024 must file a BOIR within 90 days of formation or registration (this timeframe is shortened to 30 days starting as of January 1, 2025). Such Reporting Entities must also include in their BOIR information about “company applicants,” that is, the individuals who filed or directed the filing of the formation or registration document for the Reporting Entity.
• Updates to information reported in a BOIR must be filed no later than 30 days after a change to the information occurs.
• Exemptions from reporting are available for certain types of entities.
• The BOIR requires disclosure of information about (i) individuals who own or control 25% or more of the ownership interest of a Reporting Entity or exercise substantial control over the Reporting Entity, and (ii) the senior officers of a Reporting Entity. Directors may also need to be listed. The information includes one of several approved governmental identification documents.
• Civil and criminal penalties may be imposed for failure to comply with the Act.
• Compliance with the Act may have an impact on a Reporting Entity’s formation and related documents as well as certain transaction agreements.
• The State of New York has passed a law which applies only to limited liability companies formed or registered in New York. The New York law, which is similar to, but differs in key respects from, the Act is not yet effective.

the Federal corporate transparency act

What are the basic requirements of the Act?

The Act, originally adopted on January 1, 2021, became effective on January 1, 2024. Under the Act, unless one of its enumerated exemptions applies, (i) a corporation, limited liability company, limited partnership or statutory trust formed in the United States or (ii) a foreign entity registered to do business in the United States must report certain information to FinCEN. The purpose of the required disclosures under the Act is to prevent the use of anonymously owned entities for illegal purposes.

What are the filing deadlines?

Existing non-exempt entities that were formed or registered to do business in the United States prior to January 1, 2024 have until January 1, 2025 to file an initial BOIR with FinCEN. Non-exempt entities formed or registered to do business in the United States on or after the Act’s effective date on January 1, 2024 and before January 1, 2025, must file an initial BOIR within 90 calendar days of formation or registration. Non-exempt entities formed or registered on or after January 1, 2025 must file an initial BOIR within 30 calendar days of formation or registration.

Does a BOIR need to be updated?

In the event of a change to or error in the information contained in a BOIR, an amended BOIR must be filed no later than 30 calendar days after the date on which the change occurred or the error is discovered. The requirement to update can arise due to, among other events, a corporate reorganization, merger, name change, reincorporation in a different state, or a sale or other transaction that changes who meets the 25% ownership interest threshold and, for individuals, a new passport or driver’s license number or either becoming or no longer being a senior officer.

What are the available exemptions to the filing requirements?

The Act provides 23 categories of exemptions from compliance for entities, including an entity (i) that has issued a class of securities registered under Section 12 of the Securities Exchange Act of 1934 or is required to file supplementary and periodic information under Section 15(d) of the Securities Exchange Act of 1934; or (ii) that employs more than twenty full-time employees in the U.S.; filed in the previous year a U.S. federal income tax return demonstrating more than $5,000,000 in gross receipts or aggregate sales; and has an operating presence at a physical office within the U.S.

Other exemptions exclude from the Act’s reporting requirements entities such as registered investment companies, investment advisers, and broker/dealers; accounting firms; banks; insurance companies; and subsidiaries of certain Reporting Entities. An exemption also exists for inactive entities, subject to certain requirements listed in the Act.

What are the disclosure requirements of the Act?

A Reporting Entity must provide information on the entity and each “beneficial owner” and, for a newly formed or registered entity, its “company applicants.”

The Act defines a “beneficial owner” as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, exercises substantial control over the Reporting Entity, or owns or controls 25% or more of the ownership interests of the entity or receives substantial economic benefits from the assets of the entity. Senior officers (President, Chief Financial Officer, General Counsel, Chief Executive Officer, Chief Operating Officer, or any other officer, regardless of official title, who performs a similar function) of a reporting company also are required to be listed as beneficial owners. Directors of a Reporting Entity may have to be reported, where they are deemed to have “substantial control” over the reporting entity, but are not per se control persons. Finally, there are exemptions for certain individuals, including an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual or an individual acting solely as an employee.

A Reporting Entity that is newly formed and therefore required to report company applicants must identify and report at least one company applicant, and at most two. A company applicant must be an individual. There are two categories of company applicants, namely (i) an individual who is the “direct filer” of an application to form or register the Reporting Entity, and (ii) an individual who “directs or controls the filing action.” All Reporting Entities that have a company applicant reporting requirement must identify a direct filer. The second category (individual who directs or controls the filing action) is required to be reported only when more than one individual is involved in the filing of the document that first formed or registered the entity. The direct filer is the individual who has actually physically or electronically filed the formation or registration document with the relevant secretary of state or similar office. The other possible company applicant is the individual who was primarily responsible for directing or controlling the filing of the formation or registration document.

A Reporting Entity must report the following information for its beneficial owners and company applicants:

• Full legal name
• Date of birth
• Current business or residential street address
• Scanned copy of unexpired passport, driver's license, state-issued ID or if none, a foreign passport

In the alternative, an individual who has registered with FinCen for a FinCen identifier can provide it in lieu of the information described in the bullet points immediately above.

A Reporting Entity must report the following information for the entity: 

• Full legal name of the Reporting Entity
• Trade or DBA names
• Jurisdiction of the entity's formation or registration
• Street address of the entity's principal place of business (if located in the U.S.)
• Street address of the entity's primary location in the U.S. (if the principal place of business is outside the U.S.)
• Tax identification number

Will the information be publicly available?

The information in the FinCEN database will not be publicly available and federal law requires FinCEN to implement protocols to safeguard the beneficial ownership information submitted under the Act. In certain circumstances, information may be disclosed to federal or state law enforcement agencies and, with the Reporting Entity’s consent, to financial institutions in connection with their know-your-customer obligations.

What are the consequences of non-compliance with the Act?

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOIR may be held accountable for that failure.

Do the Act’s requirements affect other legal documents?

The requirements of the Act make it advisable to make certain changes and include certain provisions in various legal documents, such as formation documents and related agreements (for example, a Reporting Entity may consider adding requirements to provide information for the purpose of its compliance with the Act in operating and shareholder agreements), as well as transaction documents (for example, a Reporting Entity may consider adding compliance requirements in acquisition agreements). In addition to filing the required reports with FinCEN, a Reporting Entity should consider having its counsel review such existing agreements as part of the entity’s compliance with the reporting requirements of the Act.

Recent court determination of unconstitutionality of the Act

On March 1, 2024, the United States District Court for the Northern District of Alabama, in National Small Business United v. Yellen (“Yellen”), No. 5:22-CV-1448-LCB, 2024 WL 899372 (N.D. Ala. Mar. 1, 2024), found the Act unconstitutional and enjoined enforcement as to the plaintiff in that case. The decision, which is expected to be appealed, currently applies only to the plaintiff in Yellen, and FinCEN’s stated position is that the Act otherwise continues to apply to non-exempt Reporting Entities.

The New york llc transparency act

On December 23, 2023, the LLC Transparency Act (the “NY Act”) was signed into law in New York. Eventually, it will require all limited liability companies (“LLCs”) that either are (i) formed under New York law or (ii) authorized to do business in New York to submit information to the New York Department of State disclosing their beneficial owners, unless the LLC qualifies for a statutory exemption. The NY Act will become effective on January 1, 2026.

The NY Act is modeled on the federal Act but applies only to LLCs and not to any other type of entity. The information a reporting LLC must file is essentially the same as that required to be reported to FinCEN under the Act, and the NY Act contains many of the same definitions and provisions as the Act, including the exemptions from reporting set forth in the Act.

What are the key differences between the NY Act and the federal Act?

• After the initial beneficial ownership disclosure has been filed, LLCs must file an annual statement confirming or updating the previously filed information. After an initial attestation of exemption has been filed, LLCs must file an annual statement confirming their status as an exempt company.

• The NY Act does not require an LLC to provide information about company applicants.
• A New York LLC or foreign LLC seeking authorization to do business in New York that wishes to claim an exemption from the NY Act must submit a statement indicating which exemption the LLC is relying on.
• Non-compliance with the NY Act can lead to the LLC being subject to fines of up to $500 per each day of noncompliance, suspended from conducting business in New York state, dissolved or, if a foreign LLC, having its authority to do business in New York state annulled.

New York LLCs formed prior to the effective date of the NY Act and foreign LLCs that qualified prior to the effective date of the NY Act must file either the required beneficial ownership report or the statement specifying the applicable exemption by December 31, 2026.

New York LLCs formed after the effective date of the NY Act and foreign LLCs that qualified to do business in New York after the effective date of the NY Act must file either the required beneficial ownership report or the statement specifying the applicable exemption within 30 days of formation or qualification.

Friedman Kaplan attorneys are happy to assist in determining if an entity is required to report under both the Act and the NY Act and, if so, advise in connection with the required reports. Please contact any of Asaf Reindel, Joel I. Frank, or Daniel R. Greenberg for more information.

This is not intended to provide legal advice for specific situations, and no legal or business decision should be based on its content. If you would like us to advise you on your specific situation, please feel free to contact us.