A Major New Law Affecting Many Perelson Weiner Clients - Update

March 2024

 
 

In December, we alerted Perelson Weiner clients about the federal Corporate Transparency Act ("CTA") that went into effect January 1, 2024. This is an update on key new developments, the role our firm can play in helping our many affected clients comply with the law, and to alert you to CTA scams and misinformation surrounding CTA compliance.

Businesses with more than $5 million in gross receipts and more than 20 employees are exempt from reporting. Thus, the law affects small Secretary of State (SOS) registered LLCs, S corporations and other small businesses, including most family businesses, plus the similar non-business entities owning real estate, and other holdings primarily for "asset protection." Sole proprietors filing Form 1040 Sch. C need not file unless the business is in an SOS registered LLC.

To help curtail money laundering and other illegal activity, the CTA requires an expected 32 million entities to file a "Beneficial Ownership Information (BOI)" report with the US Treasury Department's Financial Crimes Enforcement Network ("FinCEN").

BOI reports provide information about the Reporting Entities themselves, those who form new entities called "Company Applicants," and individuals defined as "Beneficial Owners." This includes individuals with actual ownership interests plus others without them, but who have a level of direct or indirect "substantial control" over a Reporting Company, including having "substantial influence over important decisions." The subjectivity of terms like "substantial control" and "important decisions" can create problematic CTA compliance issues when asking "Who are the Beneficial Owners?"

For entities with simple ownership and control structures, filing the 4-page FinCEN BOI report can be simple. However, the form comes with over 100 pages of FinCEN guidance, with key subjective elements as to which entities are exempt from filing, which Reporting Company relationships meet the Beneficial Owner threshold, and guidance gaps, such as what a Reporting Company should do if an entity cannot locate a Beneficial Owner to get the information required for the BOI report.

The CTA imposes severe civil penalties, ($591/day in 2024, adjusted for inflation) and potential criminal penalties for noncompliance, which includes late filings and failure to include the required information about each Company Applicant and Beneficial Owner in a BOI report. The civil penalties apply separately to the entity and to each individual for each day of noncompliance. The report, which must be electronically filed, does not provide for explanations if required information is unavailable.

For entities created before December 31, 2023, the initial BOI report is due January 1, 2025. Entities created in 2024 have 90 days from the date of entity formation to file an initial BOI report with FinCEN. For entities that filed a report, but have subsequent changes to any information in the last filed report, the CTA imposes a short 30-day window for reporting the changes to FinCEN, after which penalties are possible. NY State has a version of the CTA for LLCs only, with rules and penalties similar to the CTA. Initial NY filings are due January 1, 2027. The CTA requires new reporting only when information changes. NY requires an annual statement even from exempt entities on their filing status.

Due to the size of potential penalties, where questions exist as to whether an entity is exempt from filing BOI or NY LLC reports, or whether an individual qualifies as a Beneficial Owner, the wise move may be to follow the recommendation, "When in doubt, Report and File!"

Trusts

FinCEN has not yet issued promised guidance on trust BOI reporting. As most trusts are not registered with a state SOS, they are exempt from BOI report filing themselves. However, if a trust controls an entity that is required to report, any number of individuals could be Beneficial Owners, including trustees, beneficiaries with "controlling powers", trust protectors, advisory board members, etc. Legal advice may be needed to determine who is a Beneficial Owner under CTA.

Fraudulent Scams

With millions of expected BOI report filings, the CTA scammers have arrived. There are a growing number of CTA phishing phone calls, emails and letters coming from thieves seeking to steal information for identity theft, or to get individuals to send BOI report filing payments to fraudulent BOI report filing companies, potentially exposing entities to the major CTA penalties for non-compliance if they believe they have filed. FinCEN never sends unsolicited Email. Do not click on links or open attachments, which can expose your computer to Malware. If you are not confident about who you are dealing with, do not provide any personal information or make any payments to unknown BOI reporting or other vendors.

Misinformation

On Friday, March 1, 2024, an Alabama Federal District Court held the CTA to be unconstitutional. This led to substantial publicity that the CTA is universally suspended while the case is on appeal. FinCEN has since clarified that the CTA is on hold solely for the plaintiffs in the case, one individual and members of the National Small Business Association on March 1st. Besides these plaintiffs, any other Reporting Entity, Company Applicant or Beneficial Owner not complying with CTA while the case is on appeal risks the outsized CTA non-compliance penalties.

What to Do Now

It is advisable to begin gathering the needed BOI reporting information by late spring 2024, unless your entity has a simple ownership structure, such as two 50% LLC members with no employees and no individuals with a level of non-ownership control to be Beneficial Owners.

With 32 million electronic filings expected by FinCEN's system to meet the December 31st deadline, waiting till Thanksgiving to begin the information gathering process could make it impossible to timely file, especially if legal analysis is necessary. Though not inclusive of all considerations, key questions, and issues to consider are in Appendix I to this Alert – "What to Do Now: Select Questions and Issues."

How Perelson Weiner Can Help

We have already helped several clients with CTA compliance questions. We can assist you with the timely preparation and submission of your initial BOI report to FinCEN, which includes directing you to the relevant FinCEN guidance needed for you to provide us with the information for your BOI report. We can and will perform our CTA services, as accountants, under a separate CTA engagement letter. No other service for which you have engaged our firm includes CTA services.

Where legal counsel is necessary with regards to updating trusts, business agreements or other legal documents, and to meet other CTA legal obligations, we can coordinate with your attorneys, to get the information necessary for timely BOI report filing. Lawyers with the expertise to provide the necessary services will likely be inundated with CTA related legal work by late fall. Reaching out to them as soon as possible is advised.

If you have any questions regarding your compliance with the CTA, please contact us as soon as possible. We can help you evaluate your specific situation and assess what, if any, CTA-related services, and assistance we may be able to provide.

Two appendices follow:

· Appendix I, "What to do Now: Select Questions and Issues",

· Appendix II, "Select CTA Provision Summaries, with the basic BOI report required information.

Appendix I – What to Do Now: Select Questions and Issues

Is your company subject to the CTA or do you qualify for any of the exemptions?

Have you or other Beneficial Owners in your Reporting Company applied for a "FinCEN Identifier," number? This number can be used for all BOI reports where an individual will be listed as a Beneficial Owner, instead of separately submitting driver's license and other information to each Reporting Company. Applying takes about ten minutes once you have a PDF available for upload, of your driver's license, passport or other identification listed in Appendix II. Here is the link:

https://fincenid.fincen.gov/assets/helpContent/FinCEN-ID-Instructions-20240101.pdf

Will you self-file the BOI report, or would you like our firm to handle this for you?

If your company is not exempt, how should you calculate percentages of "ownership interests" to determine whether any owners meet the 25%-ownership threshold? If the answer isn't simple, is there a complex capital structure, such as where ownership interests are held indirectly — for example, through upper-tier investment entities, holding companies, or trusts?

How do you assess and determine each person who exercises "substantial control" over the company? There may well be multiple people who qualify, given the expansiveness (and vagueness) of the "substantial control" definition.

What new processes and procedures should your company put in place, to monitor future changes in its Beneficial Owners and reportable changes on existing beneficial owners that will require timely updated reports to FinCEN? Each item of Beneficial Owner information included in Appendix II to this Alert must be provided to FinCEN (and kept current). The CTA requires these changes to be reported to FinCEN within 30 days of the change in a new BOI filing.

Are there current Beneficial Owners, who want to change their status before the initial BOI report is filed, enabling them to be excluded from the reporting?

Our firm provides accounting related CTA compliance services. Below are areas that may require legal assistance in addition to our services. We can coordinate with your attorneys for BOI report filing.

What legal changes should be made to trusts, LLC operating agreements, S Corp. shareholder agreements, etc. to bring them up to date for CTA compliance? Reporting Companies must rely on Beneficial Owners to timely update them on reportable changes to their information (e.g., ownership changes, moves, marriages, divorces, etc.). As a result, it may be wise for a trust to change or reduce number of individuals who may be Beneficial Owners of trust owned Reporting Entities. In some cases, trust decanting may be advisable.

A company's operative documents may need to be revised with the help of a lawyer to include provisions related to the CTA such as representations, covenants, indemnifications, and consent clauses. For example, the operating agreement may require:

A representation by each shareholder, member, or partner, as applicable, that it will be in compliance with or exempt from the CTA.

A covenant by each shareholder, member, or partner, as applicable, requiring continued compliance with and disclosure under the CTA or to provide evidence of exemption from its requirements.

An indemnification by each shareholder, member, or partner, as applicable, to the company and its other shareholders, members, or partners, as applicable, for its failure to comply with the CTA or for providing false information; and

A consent by each disclosing party for the company to disclose identifying information to FinCEN, to the extent required by law.

*Appendix II – Select CTA Provision Summaries

"Reporting Companies" Required to File BOI Reports with FinCEN

  • Domestic reporting companies – Corporations, LLCs and any other entities created by the filing of a document with a Secretary of State or any similar office in the United States.

  • Foreign reporting companies – Entities (including corporations and LLCs) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a Secretary of State or any similar office.

Trusts are not "Reporting Companies" themselves in most states, as they do not involve Secretary of State registration. But trusts that own Reporting Companies may have several individuals considered to be Beneficial Owners of those companies.

Reporting Company Exemptions

  • 23 categories of exemptions, including larger US located entities with more than 20 employees and $5 million of gross receipts.

  • See "For More Information" below.

Reporting Companies – Specific Information to Be Reported

  • Full legal name.

  • Any trade name or doing business as (DBA) name.

  • Current principal place of business street address. (No third-party addresses such as CPA or law firms for this purpose.)

  • Jurisdiction of formation or registration.

  • Taxpayer ID.

For companies formed on or after January 1, 2024, information about the "Company Applicants" (up to two) responsible for the CTA filing.

  • Individuals' names.

  • Birthdates

  • Address (Can be business address).

  • Unique identifying number from and issuing jurisdiction and uploaded image of one of the following non-expired documents: US passport; state driver's license; ID issued by a state local government or tribe; Foreign passport if the individual does not have any of the previously listed documents.

Beneficial Owner Definition

Any individual who directly or indirectly, either:

  • Owns or controls at least 25 percent of the ownership interests of a reporting company.

  • Exercises "substantial control" over a reporting company, including directing or exercising substantial influence over important decisions of the reporting company, regardless of formal title or whether that person has any ownership interest in the company.

Beneficial Owners – Specific Information to Be Reported

  • Individual's name

  • Birthdate

  • Residential street address. (For this purpose, tax return addresses using Perelson Weiner, post office boxes or attorney addresses cannot be used.)

  • Unique identifying number from and issuing jurisdiction of one of the following non-expired documents. Uploaded PDF copy of one of these documents:

o State driver's license.

o US passport.

o ID issued by a state local government or tribe.

o Foreign passport if the individual does not have any of the previously listed documents.

For More Detailed Information:

Web Links:

FinCen CTA FAQs

§ https://www.fincen.gov/boi-faqs

FinCEN CTA Small Entity Compliance Guide

§ https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf

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