Blog Posts
Business
New York’s LLC Transparency Act Now in Effect
New York Governor Kathy Hochul signed the New York Limited Liability Company Transparency Act (“NY LLCTA”) into law in December 2023. Under the NY LLCTA, covered companies became subject to certain new reporting requirements that became effective January 1, 2026. But the NY LLCTA today is far narrower than the drafters originally intended. The NY LLCTA was originally designed as a state-level version of the federal Corporate Transparency Act (“CTA”). Both laws require certain companies to disclose to government agencies the identity of the individuals who own or control those companies. While the CTA requires federal filings, the NY LLCTA requires filings with the NY Department of State (“NY DOS”). The CTA is part of the Anti-Money Laundering Act of 2020, which became effective January 1, 2021, as a part of the National Defense Authorization Act. The CTA was enacted to combat money laundering, terrorism financing, human and drug trafficking, sanctions evasion, tax fraud, and other financial crimes. The CTA established beneficial owner information (“BOI”) reporting requirements for a wide range of legal entities nationwide. The NY LLCTA incorporates, by explicit reference, several provisions of the CTA. However, it applies only to limited liability companies formed in New York or qualified to do business in New York unless they fall within a range of specified exemptions (“Reporting LLCs”). The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) in December 2024 dramatically narrowed the CTA’s requirements, excluding all companies formed in the U.S. FinCEN confirmed these changes in its Interim Final Rule on March 26, 2025. In response to the Interim Final Rule, NY’s legislature amended the NY LLCTA in 2025 to de-link the NY LLCTA to some extent from the CTA by broadening the coverage of the NY LLCTA to encompass nearly all LLCs formed or registered to do business in New York, whether domestic or foreign, unless exempt (S8432/A8662). However, NY Governor Kathy Hochul vetoed this bill on December 19, 2025. As a result, LLCs formed in New York or LLCs formed elsewhere in the U.S. and registered to do business in New York are currently not required to file BOI reports with the NY DOS. Unless the New York legislature overrides the Governor’s veto, only LLCs formed outside the U.S. and registered to do business in New York State now fall within the definition of Reporting LLCs. Under the NY LLCTA, (foreign) Reporting LLCs formed before January 1, 2026, are required to file initial reports (“BOI reports”) by no later than December 31, 2026. Reporting LLCs formed or qualified in New York State in 2026 or later are required to file initial BOI reports within 30 days after formation or qualification. All Reporting LLCs must file annual reports with the NY DOS disclosing their beneficial owners. The reports must disclose certain identifying information about each individual who exercises substantial control over or owns 25% or more of a Reporting LLC. Even exempt LLCs must file initial and annual attestations of exemption. This information will be available to government enforcement agencies but will not be publicly disclosed. The NY DOS has posted on its website beneficial ownership disclosure FAQs and beneficial owner disclosure exemptions. Offit Kurman will continue to monitor for any updates to the status of the NY LLCTA and the BOI reporting obligations.
January 23, 2026
Business
Choice of US Entity for Foreign Companies
Originally posted on 02/12/2019, content updated on 10/09/2023 Foreign companies (“FC”) wishing to establish a U.S. entity to expand their business activities in the U.S. will need to consider whether to form a corporation (Inc.) or a limited liability company (LLC). Likewise, an FC which wants to invest in an Inc. or an LLC will need to be familiar with certain tax and non-tax aspects of an Inc. and an LLC. Professional services, such as architecture and engineering, may require a special professional services entity (which will not be addressed in this article). An Inc. and an LLC are similar in that they both offer limited liability to their owners (shareholders of an Inc. or members of an LLC). In general (with some exceptions), an FC is not liable for the obligations of an Inc. or LLC. Following are some of the main differences between both entities: Taxation: An Inc. is subject to U.S. federal, state and local corporate income tax. An LLC is not subject to federal or state income tax (but may be subject to local tax, such as the New York City unincorporated business tax). Profits of an LLC are allocated or “passed-through” to its owners, who are subject to U.S. income tax on those profits, whether or not distributed, and who will need to file U.S. income tax returns for their share of the LLC’s profits. An FC which owns an LLC will need to obtain a U.S. federal taxpayer identification number and will need to appoint a person whom the IRS can contact for any tax matters of the LLC (so-called “partnership representative”). That person does not need to be a U.S. citizen or resident. Professional investors, such as venture capitalists, often do not want to invest in LLCs because of their flow-through tax treatment. In order to avoid pass-through tax treatment to the FC, an LLC can file an election with the IRS to be taxed as a corporation. Alternatively, the FC could establish a so-called “blocker” corporation which will own or invest in the LLC. Dividends from an Inc. to the FC are generally subject to a U.S. withholding tax or a reduced income tax treaty rate, if applicable. After-tax profits of an LLC are generally subject to a U.S. “branch profits” tax (or a reduced income tax treaty rate, if applicable) when distributed or deemed distributed to the FC. In contrast, net profits distributed to an owner in the U.S. are not taxed again. Management: An Inc. is managed by directors and officers. The directors are responsible for overall management of the Inc. Although they make certain management decisions, such as approving a major contract, they generally do not sign contracts on behalf of the Inc. Directors are elected and removed by the shareholders. The officers are responsible for day-to-day management and sign contracts and other documents on behalf of the Inc. The officers include a President/CEO, Secretary and a Treasurer. They are elected and removed by the directors. The directors and officers must be individuals. They do not need to be U.S. citizens or residents. All director and officer functions can be combined in one person. An LLC is managed by one or more managers or by the owners of the LLC. A manager can be either an individual or a corporate entity and does not need to be a U.S. citizen or resident. Formation costs: Although the costs of formation of an Inc. and an LLC are comparable, an LLC which will register in New York will need to publish its formation in two newspapers in New York. Publication costs can make the formation or registration of an LLC in New York more expensive than that of an Inc. Corporate Organizational Documents. Both an Inc. and an LLC are formed by filing a formation document with the secretary of state of the state in which the entity will be formed. An Inc. will also need to have several additional organizational documents, including a statement of "incorporator" for the election of the first director(s), a written consent of the first director(s) electing the first officer(s), bylaws, issuance of the first shares to the FC and a shareholders’ agreement if more than one shareholder. An LLC will only need an operating agreement between the LLC and its owner(s) providing for, among other things, the management of the company and the allocation and distribution of profits and losses. Sharing of Profits and Losses. Shareholders of an Inc. share in the profits in proportion to their ownership percentages. Owners of an LLC share in the profits and losses as agreed to between the owners in the operating agreement. If an FC invests in a joint venture company and wishes to allocate profits and losses to the joint venture partners in a ratio which is different from the ownership percentages, the FC should consider forming the JV entity as an LLC. All in all, generally, unless there is a need for pass-through tax treatment, management by a corporate entity, or a flexible joint venture entity, an FC will probably prefer to establish or invest in an Inc. instead of an LLC.
October 9, 2023
Business
U.S. Inbound M&A and Investment Transactions May Be Subject to CFIUS Review
Originally posted on 03/26/2020, content updated on 10/06/2023 Foreign companies and investors who are acquiring or investing in a U.S. company should consider whether their U.S. inbound transaction will be subject to review by the Committee on Foreign Investment in the United States (CFIUS). On February 13, 2020, regulations (31 CFR §§800, 802) (the “Final Regulations”) issued by the U.S. Department of the Treasury went into effect, which expanded and clarified CFIUS’ jurisdiction over certain foreign investments in U.S. companies or real estate. CFIUS is an interagency committee chaired by the Secretary of the Treasury that is authorized to review certain transactions involving foreign investment into the U.S. to determine the effect of such transactions on national security. If a transaction could pose a risk to U.S. national security, the U.S. President may suspend or prohibit the transaction, or impose conditions on it. Before August 2018, CFIUS’s jurisdiction was limited to transactions in which a foreign investor acquired control of a U.S. business (which involves certain blocking rights). CFIUS’s jurisdiction was expanded in August 2018, when President Trump signed the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) into law. The Final Regulations implement FIRRMA. FIRRMA covers not only certain controlling/majority investments but also certain non-controlling/minority investments and certain investments in real estate located near sensitive government sites (including airports, harbors, and military sites). This article will focus on non-controlling investments in U.S. companies. A non-controlling investment is subject to CFIUS’ jurisdiction if it (i) is an investment in a U.S. business involved in certain critical technologies, critical infrastructure, or sensitive personal data of U.S. nationals (referred to as “TID” businesses), and (ii) grants the foreign investor any of the following: (a) access to any material non-public technical information of the U.S. company, (b) membership or observer rights on the board of directors or equivalent governing body of the U.S. company or the right to nominate an individual to a position on the board of directors or equivalent governing body, (c) any involvement, other than through voting of shares, in substantive decision-making of the US company. Critical technologies are defined as items on certain U.S. export regulations (such as the U.S. Munitions List and the Commerce Control List) and other regulatory regimes and include certain emerging and foundational technologies controlled under the Export Control Reform Act of 2018 (“ECRA”). The Bureau of Industry and Security (BIS) is working on proposed rules to define “emerging and foundational technologies” that will be subject to future export controls. BIS is considering technologies such as (a) artificial intelligence and machine learning technology; (b) logistics technology; (c) robotics; and (d) advanced surveillance technologies, such as faceprint and voiceprint technologies. Critical infrastructure is generally defined as systems and assets, whether physical or virtual, so vital to the U.S. that the incapacity or destruction of such systems or assets would have a debilitating impact on national security. Critical infrastructure includes certain IP networks, telecommunications services, interstate oil pipelines, crude oil storage facilities, rail lines, public water systems, and electric power generation, storage, or transmission facilities. A list of types of critical infrastructure can be found in Appendix A to Part 800 of the Final Rules. Sensitive personal data include the following categories: financial, consumer report data, geolocational, health data, non-public electronic communications (including emails and chats), Federal ID card data, U.S. government personnel security clearance data, and genetic testing data. The categories are covered under FIRRMA only if the U.S. business: (a) targets or tailors its products or services to sensitive U.S. Government personnel or contractors, (b) maintains or collects such data on greater than one million individuals, or (c) has a demonstrated business objective to maintain or collect such data on greater than one million individuals and such data is an integrated part of the U.S. business’s primary products or services. Genetic testing data from databases maintained by the U.S. government and routinely provided to private parties for research are exempted, so as not to capture U.S. businesses using common datasets for research purposes. Examples of transactions that were blocked by CFIUS involved a dating app for LGBT individuals (Grinder LLC) and an online patient forum (PatientsLikeMe). Under the Final Regulations, non-controlling investments by certain investors from Canada, the UK and Australia are exempted. Furthermore, investments in TID businesses by U.S. investment funds with foreign limited partners will not be subject to CFIUS review if (i) the fund is managed exclusively by a U.S. general partner (or equivalent), (ii) the firm's advisory board on which the foreign limited partner sits does not have the ability to control in any way the investment decisions of the investment fund, (iii) the foreign limited partner does not have the ability to control the fund, including through investment decisions, ability to approve or disapprove decisions made by the managing partner, or unilaterally determine the compensation of the general partner, and (iv) the limited partner does not have access to material, nonpublic technical information. Filings with CFIUS are voluntary, except for the following investments which require a prior filing with CFIUS: (i) investments in critical technology businesses operated within one of twenty-seven specific industries, as defined by the North American Industry Classification System (NAICS) codes, listed in Appendix B to Part 800 of the Final Rules, as well as (iii) investments by foreign persons in which a foreign government (other than Canada, the UK, or Australia) owns a substantial stake. Filings related to investments in critical technology businesses were made mandatory in October 2018 when FIRMA instituted a “Pilot Program”. CFIUS stated, however, that it expects to replace the Pilot Program system based on NAICS codes with a system based on export control licensing requirements. Even if a prior filing with CFIUS is not required, the parties should consider filing on a voluntary basis in order to avoid a possible rejection or modification of the transaction after closing. Filings with CFIUS may require a filing fee not to exceed $300,000. Voluntary and mandatory CFIUS filings can be done by a short declaration or longer notice. Mandatory declarations must be filed 45 days before the close of a transaction. CFIUS has 30 days to render a decision on a mandatory declaration but may at that time require a full notice, which may delay the transaction substantially. CFIUS has 130 days to decide on a notice. Failure to submit a mandatory filing may result in a penalty of up to the greater of $250,000 or the value of the transaction. If you have any questions or would like to discuss any of these issues, please contact me at 212-545-1900 or mbloemsma@offitkurman.com.
October 6, 2023
Business
New Mandatory CFIUS Filing Rule for Critical Technologies
Originally posted on 10/12/2020, content updated on 10/04/2023 On September 15, 2020, the U.S. Treasury Department issued a rule changing the requirements for mandatory filings with CFIUS for a national security review of certain investments by foreign investors in U.S. businesses with critical technologies. As of October 15, 2020, CFIUS no longer reviews whether the critical technology of the U.S. company is used in one of 27 specified industries identified by their North American Industry Classification System ("NAICS") codes (the NAICS test). Instead, critical technology requires a CFIUS filing if the export of the technology from the U.S. to the foreign investor requires a license from the U.S. government (export control test). In a previous article, the CFIUS filing requirements were addressed in general, including the NAICS test (learn more here »). Whether a CFIUS filing is required is an important issue that needs to be addressed when a foreign company invests in a U.S. technology company. Failure to submit a mandatory filing may result in civil penalties up to the greater of $250,000 or the value of the transaction. The NAICS test continues to apply to transactions for which the signing or the closing occurred on or after February 15, 2020, and before October 15, 2020. The determination of whether the target U.S. company is engaged in "critical technologies" activities is assessed as of the date of signing a binding written agreement for the transaction. This means that if a technology is declared "critical" by the government after signing the agreement, it is not subject to the mandatory filing requirement. The universe of "critical technologies" will likely expand as the government continues to identify "emerging" and "foundational" technologies under the Export Control Reform Act of 2018 (ECRA). A U.S. license or authorization may be required under one of the four major U.S. export control regimes: (i) the U.S. Department of State's International Traffic in Arms Regulations (the "ITAR"); (ii) the U.S. Department of Commerce's Export Administration Regulations (the "EAR"); (iii) the Department of Energy's regulations governing assistance to certain foreign atomic-energy activities; and (iv) the Nuclear Regulatory Commission's regulations governing the export and import of certain nuclear equipment and material. Of the export control regimes, the EAR is the one that will be most likely relevant for investments in technology companies. The EAR controls the export and reexport of most commercial items (commodities, software, and technology) and are administered by the Bureau of Industry and Security (BIS), which is part of the U.S. Commerce Department. Only a small percentage of all U.S. export transactions require licenses from the U.S. government, including so-called dual-use items (both civil and military). To determine whether an item is subject to the EAR, one should refer to the EAR's Commerce Control List (CCL) to see if it has an Export Control Classification Number (ECCN). If the item falls under the jurisdiction of the U.S. Department of Commerce and is not listed on the CCL, it most likely will not require an export license. Depending on the destination, end-user, or end use of the item, however, even such an item may require an export license. If the export control laws provide for any license exceptions, a CFIUS filing will still be mandatory unless any of the EAR license exceptions for technology and software (unrestricted) (TSU), encryption (ENC), and strategic trade authorization (STA) apply. Certain license exceptions may contain procedural requirements. For example, the ENC license exception requires submission of a classification request to the Bureau of Industry and Security 30 days before export. If a license exception imposes certain procedural requirements before export, those procedural requirements will have to be met in order for the CFIUS filing to be non-mandatory. Since export licenses are much more likely to be required for exports to countries subject to stricter U.S. export controls, such as China and Russia, investors from those countries will become subject to heightened CFIUS review. Under the new export control test, not only will it need to be reviewed whether the (hypothetical) export of the technology from the U.S. to the foreign investor would require a license from the U.S. government, but also to the home countries of those who hold a 25 percent direct or indirect interest in the foreign investor.
October 4, 2023
Business
Many US and Foreign Companies in the US Will Need to Disclose Ownership
Originally posted on 02/03/2021, content updated on 10/02/2023 On January 1, 2021, the Corporate Transparency Act of 2019 (the “CTA”) became law. The CTA is part of the Anti-Money Laundering Act (“AMLA”) and is intended to fight money laundering and terrorism through the anonymous use of shell companies. Under the CTA, many US and foreign companies registered in the US will need to disclose their beneficial ownership to the Financial Crimes Enforcement Network of the US Treasury (“FinCEN”). Unlike in some foreign countries, including in Europe, states in the US generally do not require disclosure of entity ownership. In Delaware, for example, only the name of the entity and the registered agent information is included in the certificate of incorporation, and the beneficial owners do not need to be disclosed in the Delaware annual report filings. Who will need to disclose ownership information? Beneficial ownership will need to be disclosed by a "reporting company." The CTA broadly defines “reporting company.” It does not only include "a corporation, limited liability company, or other similar entity" in the US but also similar entities formed abroad and registered to do business in the US. The CTA excludes, among others, taxable entities that (i) employ more than 20 full-time employees in the US; (ii) annually report more than $5 million in gross receipts or sales to the Internal Revenue Service (IRS); and (iii) have an operating presence at a physical office within the US. Public companies and non-profits are also excluded. Many small to mid-size privately held companies will be affected by the disclosure requirements of the CTA. What will need to be disclosed? A reporting company must report the name, date of birth, current address (business or residential) and unique identifying number from an acceptable document (such as a state driver’s license, other U.S. state-issued identification, U.S. or foreign passport) for each “beneficial owner.” Under the CTA, a "beneficial owner" is any natural person who, directly or indirectly, owns at least 25% of the equity interests in a reporting company or exercises "substantial control" over the reporting company. The CTA does not define the term “substantial control.” Certain individuals are expressly excluded from the definition of "beneficial owner," including: individuals acting as agents, nominees, intermediaries, or custodians on behalf of another; individuals who control an entity solely because of their employment; and individuals whose only interest in a reporting company is through a right of inheritance. When will disclosure need to be made? Disclosure will need to be made after final regulations under the CTA will have become effective. It is expected that regulations will be issued before January 1, 2022. Companies which already exist as of the effective date of the CTA’s implementing regulations will be required to report beneficial ownership information within two years; companies created after the effective date of the regulations will be required to report that information upon formation. Reporting companies must update their disclosures within one year of any change in ownership or control. Who will have access to the information? Beneficial ownership information will need to be submitted to FinCEN, which is only permitted to use that information for limited national security and anti-money laundering purposes. The beneficial ownership information submitted to FinCEN will be stored and maintained solely with FinCEN and will not be made publicly available nor will such ownership information be made generally available to the states. FinCEN may use the information to confirm beneficial information provided to financial institutions to facilitate the compliance of such financial institutions with anti-money laundering laws, provided that the consent of the reporting company is obtained. Are there penalties for non-disclosure? Any person who willfully fails to report complete beneficial ownership information to FinCEN or who willfully provides false or fraudulent information in any such report is subject to a civil penalty up to a maximum of $10,000 and possibly imprisonment. Negligent omissions or mistakes in beneficial ownership reports do not trigger penalties. If you have any questions or would like to discuss any of these issues, please contact me at 212-545-1900 or mbloemsma@offitkurman.com.
October 2, 2023
Business
Expanding Your Business To The U.S.: Should You Form A U.S. Legal Entity?
Originally posted on 01/23/2020, content updated on 08/11/2023 In my practice as a corporate lawyer in New York, I represent many European and other foreign companies and entrepreneurs who are doing business in the U.S. If you are a foreign company and want to expand your business to the U.S., or an advisor to such a company, you will need to consider several important legal issues. Some of those issues include questions like should I form a separate legal entity in the U.S.? If so, what should the legal form of the U.S. entity be? Where in the U.S. should the legal entity be incorporated? Do I need to appoint U.S. managers to run the U.S. entity? What types of taxes will I need to deal with? How can I protect my intellectual property? What do I need to consider when hiring employees or consultants in the U.S.? Do I need general terms and conditions which are different from the ones I use for my foreign company? What can I do to minimize the risk of litigation in the U.S.? What issues should I consider when entering into a joint venture or buying a company in the U.S.? In this article, I will address the question of whether you should form a U.S. entity. As a foreign company, you are not required to form a separate legal entity in the U.S. in order to sell products or provide services in the U.S. There are, however, several disadvantages to doing business in the U.S. as a foreign company. If you conduct business in the U.S. as a foreign company, your foreign company will become liable for contractual obligations with U.S. customers or clients. Your company could get sued in the U.S., especially if your contract with the U.S. customer or client includes a clause for dispute resolution in a court in the U.S. Your foreign company could become subject to income and sales taxes in the US. In addition, you may be required to register your foreign company with the Secretary of State of a state depending on the level of business you are conducting in that state. The Secretary of State is the government agency of a state with which companies that are incorporated in that state or are doing business in that state on a regular basis need to register. Although not much company information needs to be disclosed (unlike in some other countries), your foreign company may need to provide a good standing certificate from the country in which it is incorporated and a notarized translation of its corporate organizational documents (which can be expensive and time-consuming). Setting up a separate U.S. legal entity could reduce your foreign company’s exposure to lawsuits in the U.S. and income and sales tax liabilities. The U.S. entity could be owned by your foreign company so that it is a 100% subsidiary of your foreign company. Your foreign parent company (“FC”) is generally not liable for the obligations of the U.S. subsidiary (“USC”). Under certain circumstances, however, a creditor of USC may try to “pierce the corporate veil” and hold FC liable for the obligations of USC. The creditor will need to prove that: (i) FC completely dominated and controlled USC disregarding its separate identity, and (ii) an injustice or other wrong to the plaintiff-creditor will likely result if the corporate veil is not pierced. Courts look at many factors, none of which alone is sufficient to pierce the corporate veil, including, but not limited to: (i) USC’s corporate formalities are disregarded by FC, (ii) USC is inadequately capitalized, (iii) USC shares offices, employees, bank accounts, and telephone numbers with FC, (iv) the FC uses USC’ property as its own; (v) the agreements and other arrangements (such as sharing administrative services, employees, or insurance coverage) between FC and USC are not arm’s-length transactions; or (vi) USC makes undocumented “loans” to the FC or extends credit to the FC on other than market terms. FC could also be held liable in the U.S. for product liability if it is a manufacturer or distributor of a product which caused personal injury to a consumer in the U.S. If USC is a corporation, USC instead of FC will become subject to income and sales taxes in the US. FC generally will only become subject to U.S. income tax if USC distributes any profits to FC, subject to any reductions under any US income tax treaty with the country in which FC is incorporated. If, however, USC is a limited liability company (LLC), and does not elect to be taxed as a corporation, FC will become subject to U.S. income tax on USC’s net income. Doing business in the U.S. as a USC also offers an advantage from a marketing perspective. Having a U.S. presence in the form of a legal entity shows commitment to the US market and accessibility. US customers (whether businesses or consumers) usually prefer to deal with a vendor in the U.S. instead of an overseas company. Finally, forming a USC may make it easier for FC to obtain insurance in the US. For an FC without a USC, it is often difficult and expensive to obtain insurance for FC’s activities in the U.S. If you are a foreign business owner or entrepreneur and want to expand your business to the U.S., you should consider forming a U.S. legal entity. If you have any questions or would like to discuss any of these issues, please contact me at 212-545-1900 or mbloemsma@offitkurman.com.
August 11, 2023
Business
Foreign-Owned U.S. Entities Have Until June 30, 2023 To File Form BE-12 With The Bureau of Economic Analysis
This year, the Bureau of Economic Analysis (“BEA”) of the U.S. Department of Commerce is conducting a mandatory five-year survey on foreign investments in the United States for fiscal years ending in 2022. The survey covers financial and operating data of U.S. affiliates of foreign multinational enterprises. The survey is used to produce statistics on the scale and effects of foreign-owned business activities in the United States. Reporting on BEA’s direct investment surveys is mandatory under the International Investment and Trade in Services Survey Act (P.L. 94–472, 90 Stat. 2059, 22 U.S.C. 3101–3108, as amended). The act protects the confidentiality of the data that companies report. BEA is prohibited from granting another agency access to the data for tax, investigative, or regulatory purposes. A BE-12 report is required for each U.S. affiliate, i.e., for each U.S. business enterprise (including real estate held for non-personal use) in which a foreign person or entity owned or controlled, directly or indirectly, 10 % or more of the voting securities or equivalent interest of a U.S. business enterprise, at the end of the business enterprise's fiscal year that ended in the calendar year 2022. Certain private funds may be exempt from filing. Which BE-12 report to file depends on the size of the U.S. entity. See the chart on the BEA website. U.S. entities that were at least 10% owned by a non-U.S. entity in 2022 and whose total assets, sales, or gross operating revenues or net income did not exceed $60 million in 2022 must file BE-12C. Larger foreign-owned U.S. entities may need to file BE-12A or BE-12B. The forms are available online on the BEA website. Companies that did not file a hard copy of the BE-12 by May 31, 2023, can still file an electronic copy online via the BEA website by June 30, 2023. Failure to provide the required information may result in fines ranging from $5,580 to $55,808 and possible criminal penalties, including imprisonment. If you have any questions or need assistance with filing BE-12, please contact me at 212-545-1900 or mbloemsma@offitkurman.com. DISCLAIMER: The information contained in this blog alert is intended for informational purposes only; and should not be relied upon or construed as legal advice.
June 20, 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
