In estate planning, family entities, like limited liability companies and limited partnerships, are used to facilitate asset management and succession within the family. The Corporate Transparency Act (“CTA”), a set of new Federal disclosure rules that went into effect on January 1, 2024, imposes new reporting requirements on these and other types of entities. In an attempt to make it more difficult for anonymously owned entities to be used for illegal purposes, the CTA requires the disclosure of personal information about the owners of and major decision makers within certain entities to the Financial Crimes Enforcement Network (“FinCEN”) at the U.S. Treasury. The personal information reported to FinCEN will be maintained on a new website and available to law enforcement and certain government officials and financial institutions. The CTA will affect owners and managers of businesses and other non-operating entities, fiduciaries and beneficiaries.
There are many uncertainties and ambiguities in the CTA as written. Frequently asked questions are addressed on www.fincen.gov/boi-faqs, which is updated by FinCEN with additional guidance fairly frequently. FinCEN’s stated goal is that entities will be able to comply with the CTA without the assistance of professional advisors, but at this stage, it is hard to imagine that professional advisors will not be required.
With some exceptions primarily for regulated and tax-exempt entities, every entity that is formed by the filing of a document with a Secretary of State is subject to the CTA. The list of covered entities will vary from state to state, but in California it includes corporations, limited liability companies and limited partnerships. The filing deadlines depend on whether the covered entity was formed prior to 2024, during 2024 or after 2024. The disclosures are made on a Beneficial Ownership Information Report, or “BOIR”.
Information required to be disclosed includes the name, address, date of birth, driver’s license or passport number, and a photograph of the driver’s license or passport of each “beneficial owner” of the covered entity. A “beneficial owner” is an individual who, directly or indirectly,
- exercises substantial control over the entity, or
- owns or controls at least 25% of the entity’s ownership interests.
A person who “exercises substantial control” may include a senior officer, director, CEO, CFO, or other substantial decision maker of the entity. These management roles are not common in the context of a limited liability company or limited partnership, and it is not clear what the comparable roles are outside the corporate setting. In some cases, the personal information of the person who files the formation paperwork with the Secretary of State (often a paralegal at a law firm) is subject to disclosure as well.
Once the initial BOIR is filed by the covered entity, it must be updated within 30 days of any change in the information required to be disclosed, including, for example, a change in the address of a beneficial owner, the election of a new CEO or a change in the ownership of the entity due to a sale. Failure to file or update the BOIR could lead to civil and criminal penalties for the covered entity’s management team.
A beneficial owner may apply for a FinCEN identifier number, and this number may be provided by the covered entity in lieu of the detailed personal information. In this case, the obligation to report changes in the information required to be disclosed shifts from the covered entity to the beneficial owner, presumably simplifying compliance for the covered entity.
If a trust is a beneficial owner, it appears that the following parties with respect to the trust may be subject to disclosure: the trustee, the grantor if the trust is revocable, advisors under directed trusts, trust protectors, holders of lifetime powers of appointment, and sole income or principal beneficiaries. An agent acting under a power of attorney may also be a beneficial owner. In the context of estate planning and administration, the CTA will need to be navigated by trustees, executors, beneficiaries, agents, custodians, conservators and by clients gifting or selling interests in entities.
If you are involved with or own an interest in a covered entity, we recommend that you visit the FAQ website noted above and read FinCEN’s Small Entity Compliance Guide at https://www.fincen.gov/boi/small-entity-compliance-guide. We recommend also that the governing documents and procedures of each covered entity be reviewed by a business attorney to determine what changes are needed. For example, does an existing confidentiality clause in a shareholder’s agreement need to be updated, or should all beneficial owners be required to provide and update their personal information or obtain FinCEN identifier numbers, or should a particular employee be tasked with collecting and tracking the personal information and filing the BOIR?
The logistical, technical, privacy, and personal issues with the CTA are glaringly obvious. This article is not intended to provide an exhaustive analysis or review of the CTA or a summary of the many unanswered questions. Hopefully, with time, we all will have better clarity on these issues, and compliance under the CTA will not be as onerous as it appears to be at this time.