Dillman: Reporting requirements for family partnerships, LLCs, corps

In an effort to bolster transparency and combat financial crimes such as money laundering and tax fraud, the Financial Crimes Enforcement Network, or FinCEN, issued a final rule implementing the beneficial ownership reporting requirements of the Corporate Transparency Act.

This legislation, which came into effect on Jan. 1, introduces significant reporting requirements for family partnerships, limited liability companies and corporations. The CTA mandates the disclosure of ownership and management details, targeting entities operating within or accessing the U.S. market.

For those of us who work in estate planning and asset protection planning and use family partnerships, LLCs and corporations as a tool, we need to be aware of this new regulation and the implications it has for us and our clients.

Reporting deadlines and requirements

For reporting companies established or registered on or after Jan. 1, reports must be filed within 30 calendar days of either the entity’s effective registration or the secretary of state’s public notice. Those created before this date must file reports by Jan. 1, 2025. The required information includes the entity’s full legal name, trade name, current address, jurisdiction and IRS taxpayer identification number.

Beneficial owners and company applicants must provide comprehensive details such as their full legal name, date of birth, residential address, a nonexpired U.S. identification document or a foreign passport. Companies with complex structures are advised to consult attorneys, although FinCEN is expected to release detailed filing instructions.

What is considered a reporting company?

The heart of the CTA lies in its definition of “Reporting Companies.” This term encompasses any domestic entity formed or any foreign entity registered to do business in any state within the United States — subject to 23 enumerated exemptions, including:

• Governmental authorities, banks and credit unions.

• Investment companies, investment advisers and venture capital fund advisers registered with the Securities and Exchange Commission.

• Large operating companies that employ more than 20 full-time employees in the U.S., have an operating presence at a physical office within the U.S., and filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5 million in gross receipts or sales.

More information on the exemptions can be found here in Section C2.

Are certain corporate entities considered reporting companies?

The reporting obligation for entities like trusts, business trusts or foundations depends on whether they were created or registered with the filing of a document with a secretary of state or similar office. State laws vary on this matter, and exemptions may apply based on the entity’s structure and purpose. Additionally, trusts registered solely to establish a court’s jurisdiction over disputes are not considered reporting companies.

Sole proprietorships are generally not reporting companies unless they were created or registered in the U.S. by filing a document with a secretary of state or similar office. Mere filings for an IRS employer identification number, a fictitious business name or a professional license do not categorize a sole proprietorship as a reporting company.

To learn more about the reporting requirements for these entities, visit Chapter 1 of FinCEN’s Small Entity Compliance Guide.

Who are beneficial owners?

Beneficial owners are any individuals who directly or indirectly (a) exercise substantial control of a reporting company, or (b) own or control at least 25% of the ownership interest in a reporting company.

The term “substantial control” under the reporting requirements encompasses senior officers and individuals influencing crucial decisions within a reporting company. Determining beneficial ownership relies on a broad definition, including factors like board representation, voting rights control or any contractual relationships, necessitating reporting companies to conduct a factual assessment for qualification under this standard.

Who are company applicants?

Company applicants are certain individuals who file or help to prepare the documents that create the reporting company or qualify it to do business. This can include attorneys, accountants and other third-party professionals who may assist in the business formation process.

Reporting process and secure filing system

Entities required to report their beneficial ownership information will do so electronically through FinCEN’s BOI E-Filing website. Authorized individuals, including employees, owners or third-party service providers, may file on behalf of reporting companies. Filers need to provide basic contact information, such as name and email address or phone number, during the submission process.

Consequences of noncompliance

The penalties for failing to comply with the CTA are severe. Noncompliance can lead to steep financial penalties, fines and even imprisonment. Civil penalties of up to $500 per day may be imposed until the violation is rectified, with criminal fines reaching $10,000 and a maximum imprisonment term of two years.

With these new reporting requirements, attorneys practicing in business formation and estate planning may find themselves navigating additional compliance responsibilities and ensuring their clients’ adherence to the new regulations. Educating clients will be key, and given the potential complexities introduced by the CTA, attorneys may also find opportunities to offer additional services related to compliance, including assisting in the preparation of necessary reports and helping clients understand whether any exemptions apply to their specific situations.

The CTA represents a significant step forward in enhancing the transparency of entity structures and ownership within the United States. Now that we are past the Jan. 1 deadline, entities falling under the purview of the CTA must diligently prepare to comply with the new reporting requirements. Understanding the obligations, seeking professional advice when necessary and ensuring timely and accurate filings are crucial to avoiding the substantial penalties associated with noncompliance. In the ever-evolving landscape of financial regulations, staying informed and proactive is key for businesses and professionals alike.•

Information was obtained from the Financial Crimes Enforcement Network website.

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Lisa Dillman is an attorney at Applegate & Dillman Elder Law. The firm specializes in elder law and Life Care Planning, a holistic approach to deal with legal, financial, medical and emotional issues involved in growing older. The firm has offices in Indianapolis, Carmel and Zionsville. Find out more at www.applegate-dillman.com. Opinions expressed are those of the author.