November 30, 2023

A NEW FEDERAL FILING REQUIREMENT FOR MANY ENTITIES

By: Cesar de Jesús Umpierre

A NEW FEDERAL FILING REQUIREMENT FOR MANY ENTITIES

On January 1, 2024, as part of the Anti-Money Laundering Act of 2020, the Corporate Transparency Act (the “CTA”) will become effective.  Those entities subject to the CTA (“Reporting Entities”) will be required to file a report to the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) that includes certain information about their “beneficial owners” and “company applicants”.

To determine if an entity is subject to the CTA, the first step is to determine if the entity is a Reporting Entity and second to determine if there are Beneficial Owners.

Registered Company Test

A Reporting Company is an entity that is (i) a corporation, limited liability company, or created by filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe, or (ii) a corporation, limited liability company, or other entity formed under the law of a foreign country, and registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of a state or any similar office under the law of a State or Indian Tribe.

For these purposes, the term “State” means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of Northern Mariana Islands, American Samoa, Guam, the United States Virgin Islands and any other commonwealth, territory, or possession of the United States.

The CTA provides 23 specific Reporting Company Exemptions mostly addressed to large operating companies and regulated entities, which are:

1	Securities reporting issuer	13	State-licensed insurance producer
2	Governmental Authority	14	Commodity Exchange Act registered entity
3	Bank	15	Accounting Firm
4	Credit Union	16	Public utility
5	Depository Institution Holding Company	17	Financial market utility
6	Money services business	18	Pooled investment vehicle
7	Broker or dealer in securities	19	Tax-exempt entity
8	Securities exchange or clearing agency	20	Entity assisting a tax-exempt entity
9	Other Exchange Act registered entity	21	Large operating company
10	Investment company or adviser	22	Subsidiary of certain exempt entities
11	Venture capital fund adviser	23	Inactive entity
12	Insurance company

Based on the above, corporations and limited liability companies organized in the Commonwealth of Puerto Rico or in a State of the United States or any other foreign corporations that are registered to do business in Puerto Rico or in a State of the United States, which are not specifically exempted, are considered “Reporting Companies”. 

Beneficial Owner Test

The term “beneficial owner” means any individual who, directly or indirectly, either (i) exercises substantial control over the Reporting Company, or (ii) owns at least 25% of the ownership interest of the Reporting Company.  “Substantial Control” over a Reporting Company is based on facts and circumstances and more than one individual may have substantial control and be considered a Beneficial Owner.  A Beneficial Owner through Substantial Control include individuals that: (i) serves as a senior officer, (ii) has authority to appoint or remove a senior officer or a majority of the board of directors, (iii) directs, determines or has substantial influence over important decisions made by the Reporting Company. 

The FinCEN Report

Once you have determined that there is a Reporting Company and that there are Beneficial Owners an initial report must be filed that includes:

For the Reporting Company:

A. The full legal name of the reporting company

B. Any trade name or “doing business as” name of the reporting company

C. A complete current address (a PO Box only is not sufficient)

D. The State, Tribal or foreign jurisdiction of formation

E. In cases of foreign companies, the State or Tribal jurisdiction where such company is registered

F. The Internal Revenue Service (“IRS”) Taxpayer Identification Number (“TIN”) of the reporting company

For every Beneficial Owner and Company Applicant of the Reporting Company:
A. The full legal name of the individual
B. The date of birth of the individual
C. A complete current address (a PO Box is not sufficient)
D. A unique identifying number and the issuing jurisdiction from one of the following documents:
	A non-expired passport issued to the individual by the United States government
	A non-expired identification document issued to the individual by a State, local government, or Indian tribe for the purpose of identifying the individual
	A non-expired driver’s license issued to the individual by a State, or
	A non-expired passport issued by a foreign government to the individual
E. An image of the document from which the unique identifying number was obtained

A Company Applicant is the individual who directly files the document that creates the reporting company (in the case of foreign companies the individual who registers the foreign company), and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.

Filing Date of the Report

Reporting companies organized or registered before the January 1, 2024 effective date must file their initial report on or before January 1, 2025.  Reporting Companies that are organized or registered on or after January 1, 2024 must file their initial report within 30 calendar days after the effective date of its organization or registration. 

This report is not required to be filed annually.  Once the initial report is filed it only requires additional filings for updates or corrections.  If there is any change in the information provided for the Reporting Company or the Beneficial Owner an update should be filed within 30 days of the change. 

Manner of Filing the Report

Any Reporting Company required to file the beneficial ownership information to FinCEN will do so electronically through a secure filing system available via FinCEN. 

Penalties for Violations

It is unlawful for any person, including any individual reporting entity or other entity, to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information or to willfully fail to report complete or updated beneficial ownership information to FinCEN.  Civil penalties of up to $500 for each day the violation continues and a fine of up to $10,000 and/or imprisonment may be imposed.

Action Plan – Next Steps

Under the CTA most small and private entities will be required to file a report to FinCEN with respect to their beneficial owners.  Currently existing entities are required to file such reports by January 1, 2025.  However now is the time to evaluate if your company will be subject to such FinCEN requirement.  If you understand that any exemption may be applicable or have questions about the existence of a beneficial owner, we can help you in such analysis to ensure compliance.

Also, if you have plans to organize or register an entity during 2024 you may want to consider doing it earlier, before January 1, 2024, so to defer the filing of the report until January 1, 2025.

Stay Tuned

On March 24, 2023, the FinCEN issued Frequently Asked Questions (“FAQs”) in response to inquiries received relating to the Beneficial Ownership Information Reporting Rule and were last updated on September 29, 2023.  More are expected, Stay Tuned!

About The Author

César is a Member at Alvarado Tax & Business Advisors.  Prior to that, he was Partner at Zaragoza & Alvarado LLP.

His Curriculum Vitae also includes previous experience in the corporate and individual tax advisory area working with various international auditing firms and industries.