Connie Wilson

Attorney

May 2023

Starting in 2024, there will be a new filing requirement for many entities at the federal level and starting in 2025, at the state (Pennsylvania) level. On the federal level, the Financial Crimes Enforcement Network (“FinCEN”), a bureau within the US Department of the Treasury, adopted rules to implement the beneficial ownership information reporting provisions of the Corporate Transparency Act. These rules become effective January 1, 2024. In Pennsylvania, recent amendments to Title 15 created an annual filing obligation starting in 2025 applicable to most Pennsylvania entities that are created by a filing with the Department of State. This EAlert will provide the basic Who, What, When, How and Why regarding the FinCEN reporting requirement. The Pennsylvania annual reporting requirements will be discussed in a second EAlert in the coming weeks.

Federal - Corporate Transparency Act Beneficial Ownership Reporting

Who

The filing obligation applies to a “Reporting Company” as defined in the Corporate Transparency Act and collects data about the Reporting Company and each of its “Beneficial Owners” (ownership of 25% or more or exercise of substantial control, more detail below) and its “Company Applicant” (the persons responsible for creating an entity that is formed after January 1, 2024, more detail below). The definition of Reporting Company is broad and includes any entity created by filing a document with a secretary of state or similar office of a State or Indian Tribe and any foreign entity registered to do business in any State or tribal jurisdiction. There are 23 exceptions to the definition, that cover larger private entities (reporting more than $5 million in gross receipts or sales on the prior year’s tax return, more than 20 full-time employees and a physical operating presence in the US); publicly traded entities and other entities subject to reporting requirements under the Securities Exchange Act of 1934; and other highly regulated entities (banks, credit unions, brokers or dealers in securities, insurance companies, public utilities, tax exempt entities, certain inactive entities and others).

What

Initial Report:

Full legal name of the Reporting Company

Any trade name or “doing business as” name

Current address of the principal place of business or the primary location in the US of the Reporting Company

The Reporting Company’s Jurisdiction of formation

The Reporting Company’s EIN

Beneficial Owner information, for each Beneficial Owner and each Company Applicant (for entities formed or registering after January 1, 2024). For each Beneficial Owner, the following information must be provided:

Full legal name

Date of Birth

Current address – for a Beneficial Owner, the current residential address is required, for a Company Applicant who forms an entity in the course of the Company Applicant’s business, the Company Applicant’s business address is allowed.

Unique identifying number and issuing jurisdiction (US Passport, state, local or Indian tribe issued identification number, driver’s license number, foreign passport (if have none of the prior options is available) or a FinCEN identifier

An image of the document providing the unique identifying number

A Beneficial Owner is any individual who, directly or indirectly, either exercises substantial control over the Reporting Company or owns or controls at least 25 percent of the ownership interests of the Reporting Company. Examples of direct or indirect exercise of substantial control include serving as a senior officer of the Reporting Company (holding the position of or exercising the authority of a president, CFO, general counsel, CEO, COO or any other officer who performs a similar function), having authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); and directing, determining, or having substantial influence over important decisions made by the Reporting Company. There are 5 exceptions to the definition of “Beneficial Owner” which include minors (if the Reporting Company provides the required information for the parent or legal guardian of the minor) and creditors holding beneficial rights to an entity only for the payment of a predetermined sum.

A “Company Applicant” is the individual who files the document that (i) creates a domestic Reporting Company or (ii) first registers a foreign Reporting Company and the individual primarily responsible for directing the filing.

When

Initial Report

An entity formed on or after January 1, 2024, will need to file an initial report with FinCEN within 30 days of the earlier of the date it received actual notice that its formation has become effective or the date the secretary of state or similar office first provides public notice, that the entity has been created.

An entity formed before January 1, 2024 must file its initial report not later than January 1, 2025.

Updated Report

Any changes to the required information previously reported trigger the requirement to file an updated report within 30 days of the date on which the change occurs. An update is required for any change of the required information, including a change in Beneficial Owners or a change to the information provided with regard to a Beneficial Owner, for example, if a Beneficial Owner moves. If an entity qualifies for an exemption after making an initial report, an update should be filed indicating the entity is no longer required to file a report.

Corrected Report

If information provided in a report was inaccurate when filed, a corrected report must be filed within 30 days of the date the filing entity became aware of the inaccuracy.

How

FinCEN will develop and publish the filing form in advance of January 1, 2024, but has not done so yet. FinCEN also intends to develop compliance and guidance documents as well as a Small Entity Compliance Guide.

Why

Why the filing requirement was enacted.

The purpose of the beneficial ownership reporting is to provide information to national security, intelligence and law enforcement agencies to help prevent and combat money laundering, terrorist financing, corruption, tax fraud and other illicit activities, by limiting use of corporate structures and shell companies to hide owner identities and hide and launder proceeds of illicit activities. The collected beneficial ownership information is expected to significantly reduce the amount of time and research needed to identify who is behind shell companies and other corporate structures which will help prevent the movement of assets and destruction of evidence. The Corporate Transparency Act directs the Secretary of the US Treasury to maintain information security protection, including encryption, for the beneficial ownership information, “incorporating Federal information system security controls for high-impact systems, excluding national security systems[.]”

Disclosure of beneficial ownership information by FinCEN is limited to: (i) requests through appropriate protocols from federal agencies engaged in national security intelligence or law enforcement, or request from a state, local or tribal law enforcement agency if a court or court official has authorized the law enforcement agency to request the information; (ii) request from a federal agency on behalf of a law enforcement agency, prosecutor or judge in another country if certain conditions are met; and (iii) requests from financial institutions, with the consent of the Reporting Company, to facilitate compliance with the financial institution’s customer due diligence requirements.

Why entities will file.

The failure of an entity or person to make a complete required filing (including an initial filing and an update) is a reporting violation, as is providing or attempting to provide false information to FinCEN. Penalties for reporting violations include civil penalties up to $500 per day for each day the violation continues and criminal penalties including a fine up to $10,000 and/or imprisonment for up to 2 years.

There are also penalties for unauthorized disclosure or use of the information collected by FinCEN, including civil penalties up to $500 per day for each day the violation continues and criminal penalties including a fine up to $250,000 or imprisonment for up to 5 years, or both. The criminal penalties are enhanced if the violation is part of a pattern of illegal activity involving more than $100,000 in a 12 month period.

Connie is a Senior Attorney of the Business and Corporate Law Team at SkarlatosZonarich LLC. If you have any questions, please contact Connie at cwilson@skarlatoszonarich.com or any other member of the Team at https://www.skarlatoszonarich.com/business-and-corporate-law.

This communication contains only general, overview information and does not take the place of specific legal advice applied to specific factual settings. Nothing in this communication should be construed to create an attorney-client privilege.