Treasury releases new regulations on beneficial business ownership

One year after Congress passed the Corporate Transparency Act to counter illicit financial activity, the Financial Crimes Enforcement Network (FinCEN) at the U.S. Department of Treasury has released a proposed rule on “beneficial ownership” reporting that will place new requirements on small businesses.

The number of legal entities already in existence in the U.S. that may need to comply with reporting information on themselves, their beneficial owners and their formation or registration agents pursuant to these new reporting requirements is estimated in the tens of millions. ICSC has been engaged for several years with other trade groups representing small businesses to lessen the impact of the law and will be collecting feedback on the proposed regulations. (To share how these changes will impact your business, please contact Jennifer Platt at jplatt@icsc.com).

Compulsory reporting obligations will apply to corporations, limited liability companies, business trusts and most limited partnerships, in addition to any other entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe.

As defined by the legislation, a company does not need to report, if it:

1. “employs more than 20 employees on a full-time basis in the United States”;
2. “filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate,” including the receipts or sales of other entities owned by the entity and through which the entity operates; and
3. “has an operating presence at a physical office within the United States.”

There is also an exemption for certain pre-existing “dormant entities.”

An applicable reporting company would be required to identify itself and report four pieces of information about each of its beneficial owners and the company applicants: name, birthdate, address and a unique identifying number from an acceptable identification document (and the image of such document).  

A beneficial owner would include any individual who exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. The proposed regulation defines the terms “substantial control” and “ownership interest” and sets forth standards for determining whether an individual owns or controls 25% of the ownership interests of a reporting company. The proposed rules provide additional direction on these criteria. 

Report timing would depend on when a reporting company was created or registered, and whether the report at issue is an initial report, an updated report providing new information or a report correcting erroneous information in a previous report. Domestic reporting companies created before the effective date of the final regulation would have a year to file their initial reports and 30 days to file updates; reporting companies created or registered after the effective date would have 14 days after their formation to file. The same deadlines would apply to existing and newly registered foreign reporting companies.

The comment period for the proposed rule is open for 60 days until February 7, 2022. Additional rulemakings are forthcoming to establish rules for who may access these records, for what purposes, and what safeguards will be required to ensure that the information is secured and protected and to revise FinCEN’s customer due diligence rule following the promulgation of the final rule. In addition, FinCEN is developing the infrastructure to administer these requirements, such as the beneficial ownership information technology system.

The full proposed rulemaking can be found here.