October 24, 2019 / North America
On October 22, 2019, the U.S. House of Representatives passed the Corporate Transparency Bill of 2019 (“the Bill”), an amendment to the Bank Secrecy Act. If passed by the Senate and signed by the President, the Bill would effectively require investment companies and small business entities to disclose information on the entity’s economic owners at the time of formation and in annual disclosures. While it is not knowable at this time whether the Bill will pass the Senate (and in what form), there are indications that the Trump administration supports the legislation in principle.
Under current law, the information collected at formation of a corporation or limited liability company (LLC) is dependent on the state in which the entity is formed. Many states, such as Delaware (the most commonly used state of formation), requires little information on the individuals that are the true economic owners, as opposed to persons that may hold bare legal title to shares for the benefit of undisclosed persons. Additionally, neither the states nor the Federal government generally require annual disclosures of a U.S. entity’s owners (other than certain disclosures on income tax returns). As a result of current law, the proponents of the legislation believe that a lack of information gathering has perpetuated an environment whereby persons can hide investments for nefarious purposes (such as terrorism, money laundering, and tax evasion).
Reporting: Disclosing Beneficial Owners
The Bill would require disclosures to the Financial Crimes Enforcement Network (‘FinCEN”), a bureau of the Treasury Department, regarding the beneficial owners of an entity at the time of formation and on an annual basis. The disclosures would include personal information on each beneficial owner (including a U.S. passport number or state driver’s license number), as well as the applicant (an individual that files the formation application). The Treasury Department would have the regulatory authority to also require a filing where there is a change in the beneficial owners.
A beneficial owner is defined in the Bill as a natural person (an individual) who, directly or indirectly, (1) exercises substantial control over corporation or LLC; (2) owns more than 25 percent of the equity interest of a corporation or LLC; or (3) receives substantial economic benefits from the assets of a corporation or LLC. The definition excludes persons that are acting on behalf of the economic owners (such as employees, nominees, intermediaries, custodians, agents) and creditors. There is uncertainty as to whether a person that indirectly owns equity in a entity through other entities will be treated as a beneficial owner. For example, if in individual owns 100% of a corporation, which owns 100% of an LLC, it is not clear that the individual would be treated as a beneficial owner of the LLC.
Entities Subject to Reporting
The Bill generally would apply to corporations and LLCs formed under the laws of a State (including the District of Columbia and any territory or possession of the United States), but potentially may also cover foreign entities that are registered (or eligible for registration) to do business under the laws of a State. It is unclear to what extent foreign entities will be required to disclose. The Bill does not apply to limited partnerships, as well as entities that are formed by contract (such as general partnerships and trusts). However, forthcoming regulations could cover such entities.
The Bill is intended to target certain closely-held investment companies where the ultimate economic ownership is currently not disclosed. As a result, only certain entities are required to make the disclosures. The Bill would exempt from the beneficial ownership disclosure requirement certain enumerated entities (such as public companies, financial institutions, regulated accounting firms, public utilities, and churches and other charitable organizations). In addition, the Bill would also exempt from the disclosure requirement entities that (1) employ more than 20 employees on a full-time basis in the United States; (2) file income tax returns in the United States showing more than $5 million in gross receipts or sales; and (3) have an operating presence at a physical office within the United States. Entities that are formed and owned by an entity that is exempt from the disclosure requirement will also be exempt under the Bill. Exempt entities will still be required to file a statement that certifies their eligibility for the exemption….
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