Blog Posts
Business
The Corporate Transparency Act and FinCEN Reporting
As you may already know, the Corporate Transparency Act (“CTA”) goes into effect on January 1, 2024. Under the CTA, many privately held companies will be required to file beneficial ownership information (“BOI”) reports online with the Financial Crimes Enforcement Network of the U.S. Treasury (FinCEN). For more information, see an overview linked below. We will continue to monitor updates to this process in the new year.
December 27, 2023
Business
Newly Enacted Requirements for Disclosure of Beneficial Ownership of US Business Entities
Originally posted on 02/21/2021, content updated 11/08/23. Congress has passed legislation over the veto of former President Trump to require the disclosure of the direct or indirect beneficial ownership of US business entities at the time of formation. This legislation was included as part of the annual National Defense Appropriations Act, which took effect on January 1, 2021. Under this Act, upon the issuance by the Department of Treasury of regulations providing more detail on the specific requirements of the Act, all corporations, limited liability companies and other types of business entities will be required to disclose the details of their direct and indirect beneficial owners at the time the business is formed unless the business falls within a group of exempt industries. These exempt industries include banking, insurance, and other financial institutions, where the disclosure of beneficial ownership of such businesses is generally already required. In addition, within 2 years of the issuance of the regulations, the same disclosure requirements will apply to all existing non-exempt industry business entities, except those which are publicly traded or have more than 20 full-time employees, have annual revenues of more than $5 million, and have an operating presence at a physical office within the United States. The Treasury regulations must be published within one year of the effective date of the Act or by January 1, 2022, but are expected to be published sooner. The Act requires such reporting companies to submit the disclosure information to the Department of Treasury, which is required to create a beneficial ownership registry within its Financial Crimes Enforcement Network (FinCEN). The purpose of the registry is to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists and criminals.” The information will not be made available to the public in general but will be available to US federal law enforcement agencies and, with the consent of the reporting company, financial institutions in order to meet their customer due diligence requirements. The Act defines a beneficial owner as an individual who owns a 25% equity interest in or exercises “substantial control” over the reporting company. The definition of substantial control is not stated in the Act, and there are many other questions regarding the scope of the disclosure requirements, including how to measure a 25% equity stake in a tiered group of entities or in an entity which has shifting percentage interests of its members. Presumably, these and other issues arising under the Act will be clarified in the regulations. The information that must be reported to the registry includes the following with respect to any beneficial owner, as well as any “applicant” for the entity (which includes incorporators and other formation agents): (i) full legal name, (ii) date of birth, (iii) residential or business street address, and (iv) a unique identifying number from an acceptable identification document, including a driver’s license, US passport, or other US state-issued identification document. Further, any changes to the beneficial ownership of a business entity or any change to any of the foregoing information must be reported to the registry within one year of the change. The Act imposes penalties on companies that fail to report the required information or submit a report containing false or fraudulent beneficial ownership information of $500 per day up to a maximum of $10,000 and imprisonment of up to 2 years. The Act represents a sea change in the US requirements for beneficial ownership disclosure of business entities. Similar or even more restrictive ownership disclosure requirements have been in place for several years in Europe and other developed nations throughout the world. We will be monitoring the issuance of the Treasury regulations and other developments in this area. Please feel free to contact us with any questions. Final regulations under the Corporate Transparency Act were issued on September 30, 2022, which provide for the implementation of the Act commencing January 1, 2024. See separate blog post – “FinCEN Issues Final Rule for Beneficial Ownership Reporting under the Corporate Transparency Act.”
November 8, 2023
Business
FinCEN Issues Final Rule for Beneficial Ownership Reporting under Corporate Transparency Act
On September 30, 2022, the Financial Crimes Enforcement Network (FinCEN) within the U.S. Department of Treasury issued final regulations under the Corporate Transparency Act (CTA) that will require most small domestic and foreign business entities which are registered to do business in the United States to disclose the identity of their beneficial owners. The rule will take effect on January 1, 2024. These regulations, which finalized proposed regulations issued under the CTA in December 2021, resulted from years of debate in Congress over the best measures to develop a database of beneficial owners of business entities in order to combat terrorism, money laundering and other financial crimes. With the adoption of these regulations, the United States joins many other developed countries throughout the world in providing a means for the federal government, as well as state and local law enforcement agencies, to ascertain the identity of individuals who possess ultimate control over so-called “shell companies” that heretofore were not required to disclose their owners and therefore be better equipped to combat illicit activities conducted through such entities. The regulations require all “reporting companies,” as discussed below, to report identifying information concerning itself and any individual who either (i) exercises “substantial control,” as discussed below, over the reporting company or (ii) owns or controls at least 25% of the ownership interests of the reporting company. In addition, all reporting companies formed after January 1, 2024, must disclose the identity of the individual or individuals who directly filed the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business in the United States, and the individual who is primarily responsible for directing or controlling the filing of the relevant document by another (including attorneys, corporate service companies, etc.)(each such individual referred to as a “company applicant”). Reporting Company A reporting company is any entity (i) that is formed under the laws of any state or Indian tribe in the United States or any entity that is formed under the laws of any foreign jurisdiction that has qualified (registered) to do business in any jurisdiction in the United States, and which is formed or qualified by the filing of a document with the secretary of state or equivalent filing office in the jurisdiction of formation or qualification, and (ii) is not one of 23 specified categories of exempt entities that are already subject to beneficial ownership reporting requirements to FinCEN. Accordingly, all corporations, limited liability companies, limited partnerships and business trusts, among other entities, fall within the definition of a reporting company, while general partnerships, sole proprietorships and other trusts do not. Exempt entities include, among others, (i) most regulated financial institutions, including banks, credit unions, insurance companies, and broker-dealers, (ii) companies required to file reports under the Securities and Exchange Act of 1934, (iii) tax-exempt entities, (iv) subsidiaries of exempt entities, and (v) “large operating companies”. This latter category of an exempted entity consists of any entity that has a physical presence in the United States, employs more than 20 full-time equivalent employees and has annual gross receipts in excess of $5 million. Beneficial Owners The regulations require each reporting company to report to FinCEN certain information with respect to each individual that qualifies as a direct or indirect beneficial owner of such reporting company, as described below. The determination of who constitutes a beneficial owner derives from either of two independent tests, a substantial control test or an ownership test. The regulations define “substantial control” over the entity to mean any of the following: (i) service as a senior officer; (ii) possessing authority to remove or appoint any senior officer or majority of the board of directors or equivalent body; (iii) having the ability to direct, determine or have substantial influence over important decisions to be made by the reporting company; or (iv) having some other form of substantial control over the reporting company. Substantial control can be exercised in a number of ways, including through a position held with the reporting company, through a position held with the parent or other controlling entity of the reporting company, through contractual or other arrangements, through nominee relationships, or through other financial relationships with the reporting company. The ownership test requires that the individual own, directly or indirectly, at least 25% of the ownership interests of the reporting company. Such ownership may be obtained through direct or indirect ownership of equity interests in the company, through a profits interest, or through convertible instruments such as options, warrants or convertible debt instruments, as well as through trusts or other contractual arrangements. In calculating the percentage of ownership, the regulations require that the number of ownership interests owned by such individual be compared to the total outstanding ownership interests of the company and that any convertible, or exercisable interests in securities owned by the individual be considered to be fully converted or exercised on a per share basis. The regulations make it clear that there can be more than one beneficial owner of each reporting company. Information to be Reported and Filing Deadline Each reporting company formed on or after January 1, 2024, must file an initial report with FinCEN within 30 days of receipt of official notice of formation or qualification from the applicable jurisdiction of formation or qualification. Each reporting company in existence or qualified prior to January 1, 2024, must file an initial report no later than January 1, 2025. The initial report must contain the following information: Legal name of the entity and any d/b/a names Full business address Jurisdiction of formation or qualification for foreign entities Tax Identification Number Beneficial Owner information, including for each individual:Full legal name of the individual Residence address of the individual Unique identifying number for the individual as provided by a governmental agency, such as a driver’s license number, passport number or other identification card number, in each case together with an image of the document where such number exists. In addition, reporting companies must file an updated report with FinCEN containing revised information within 30 days of (i) any changes to the information or (ii) the company becoming aware or having reason to know of any incorrect information previously reported. For entities formed on or after January 1, 2024, the initial report must also include information for each company applicant similar to that required of beneficial owners, although a business address may be reported in place of a residence address for such individuals. While a reporting company must file a report to show any corrected information for any company applicant named in the initial report, it is not required to report updated information with respect to company applicants. When a reporting company files an initial report, it may apply for a FinCEN identifying number that it may use for filing any updating reports. In the future, FinCEN will be releasing FAQs that detail questions and answers regarding specific situations as they arise and the forms for the initial and updated reports. In addition, FinCEN will be subsequently releasing separate sets of regulations dealing with what parties will have access to the database of beneficial ownership information and revisions to the existing Customer Due Diligence regulations for financial institutions to better harmonize the existing requirements with those under the final Beneficial Ownership Reporting regulations. Offit Kurman has a team of attorneys who are familiar with the CTA and the final regulations. We will continue to monitor the roll-out of the additional regulations and other FinCEN guidance and will be happy to answer any questions that you may have in this regard.
November 3, 2022
Business
Treasury Department Issues Proposed Regulations on Disclosure of Beneficial Ownership for Most Business Entities
On December 8, 2021, the Department of Treasury issued a release containing a set of proposed regulations that would implement the reporting requirements for disclosure of Beneficial Ownership Information (BOI) of most US and foreign entities doing business in the US under the Corporate Transparency Act (CTA) adopted by Congress in January 2021. The comment period for these regulations extends until February 22, 2021. Commencing with the effective date of the final rule, the reporting regime would commence for all newly formed entities. All existing entities would be subject to the reporting requirements commencing one year after the effective date of the regulations. It is estimated that these reporting requirements would apply to approximately 4 million newly formed entities each year and 25 million existing entities in the first year of its effectiveness. The proposed regulations require all “reporting companies”, as discussed below, to report to the Financial Crimes Enforcement Network (FinCEN) identifying information concerning any individual who either (i) exercises substantial control over the entity or (ii) owns or controls at least 25% of the ownership interests of the entity. The proposed regulations provide a range of activities that would constitute “substantial control” including (x) service as a senior officer of the entity, (y) authority over the appointment or removal of a senior officer or dominant member of a board of directors or similar body, or (z) direction, determination, or decision of, or substantial influence over, important matters for the entity. The proposed regulations also indicate that substantial control can be exercised through a number of ways by title, contract, arrangement, understanding, relationship, or otherwise, whether directly or through intermediate entities. Similarly, “ownership interests” can be evidenced in a variety of ways including equity, capital or profits interest, convertible instruments, options, through trusts, or otherwise, and either directly or indirectly through intermediate entities. Reporting companies are defined to include all domestic corporations, limited liability companies and other entities that are formed by the filing of a document with the secretary or similar agency of a state or Indian Tribe, or foreign entities that qualify to do business by the filing of a document with a state or Indian Tribe. Therefore, the regulation clarifies that limited partnerships, statutory trusts, and most other business entities would be subject to the regime. As listed in the CTA, there are 23 exempted categories of entities that are not subject to the regulations, primarily because most of these are already subject to FinCEN regulations or other governmental requirements regarding disclosure of beneficial ownership. The broadest category of exempt entities is so-called “large operating companies” which are defined as companies operating in the US that have more than 20 full-time equivalent employees and have reported over $5 million in gross operating receipts on a federal tax return. In addition to the BOI disclosure, the proposed regulations would require the disclosure of information concerning the individual or individuals who directed or controlled the formation of a reporting company. The BOI that must be reported for each beneficial owner by a reporting company includes (i) the individual’s full legal name, (ii) date of birth, (iii) current residential or business address, and (4) unique identifying number, which would include a passport number, driver’s license, or similar number issued by a governmental agency, together with a copy of the document that contains such identifying number. Once an individual’s information was included in a report, FinCEN would issue its own identifying number to be used for any subsequent reports filed with respect to such individual. Identifying information concerning the reporting company would also be mandated under the proposed regulations. Under the CTA, as implemented by the proposed regulations, the disclosure of BOI for each beneficial owner must be reported not only within 14 days of the formation of the entity, or for existing entities, within one year of the effective date of the regulations, but also upon any change in the information reported. The proposed regulations state that the updated BOI must be reported within 30 days of the change. The release indicates that FinCEN has to develop a new IT system, to be called the Beneficial Ownership Disclosure System (BOSS) in order to collect and provide access to the BOI, which may ultimately affect the effective date of the final regulations. The intent behind the CTA and the proposed regulations is to promote financial transparency and compliance and to assist the US government and law enforcement agencies in combatting money laundering, terrorist financing, drug and arms trafficking, and other illegal acts conducted through so-called “shell companies”. These proposed regulations are part of a larger effort by the Biden administration to combat business corruption, and two other rule-making initiatives were announced in the issuing release, including a strengthening of FinCEN’s Customer Due Diligence rules adopted in 2016 and the implementation of protocols regarding access to and the disclosure of information collected by FinCEN under the CTA. We will be monitoring further developments in the adoption of regulations regarding the reporting of BOI for business entities. Please feel free to contact me with any questions.
December 20, 2021
Business
Employer Restraints on Employee Competition Under Attack
In many employment relationships, particularly those involving employees with management roles, customer contacts or specialized knowledge, employers have sought to restrain the employee from competing with the employer’s business after terminating employment. These so-called “Covenants Not to Compete” have always been subject to court-imposed restraints in order to be enforceable – the covenant may not last for an unreasonable length of time following termination of employment, and the geographic scope of the covenant must be reasonably related to the potential harm to the employer’s business. In recent years, however, an increasing number of states have enacted statutory limitations and, in some cases, bans on Covenants Not to Compete on employees. In 2019, Maryland enacted a law that prohibits the enforcement of Covenants Not to Compete against workers earning less than $15 per hour, or $31,200 annually. This year, Virginia enacted a similar ban on enforcement of such covenants for workers earning less than the average weekly wage of workers in Virginia, $1,204 per week, or $62,608 annually. Similar laws exist in other states, including Colorado, Idaho, Illinois, New Hampshire, Oregon, Rhode Island, and Washington. Significantly, in 2021, the District of Columbia enacted a very broad law that will take effect this fall that will render unenforceable Covenants Not to Compete in all employment agreements entered into by private employers operating in the District of Columbia (with limited exceptions for certain categories including religious or nonprofit organizations and casual babysitters). The law will, therefore, effectively ban employers from requiring employees to enter into agreements that “prohibit the employee from being simultaneously or subsequently employed by another person, performing work or providing services for pay for another person, or operating the employee's own business.” The effect of this law, therefore, is broader than that of the typical Covenant Not to Compete in that it also would render unenforceable so-called “anti-moonlighting” prohibitions that are often contained in employment agreements or employment handbooks. The law is prospective in effect, so existing Covenants Not to Compete are not impacted. Further, the law specifically carves out Covenants Not to Compete executed in the context of the sale of a business. The law also affirms that other restraints against employees from “disclosing the employer's confidential, proprietary, or sensitive information, client list, customer list, or a trade secret” are not included within the scope of the law. Employers should consult with legal counsel knowledgeable in the laws of the local jurisdiction where they operate before entering into employment agreements that contain Covenants Not to Compete in order to ensure that such agreements are enforceable.
July 14, 2021
