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18 • 2024

A New Speedbump in the Path to Entity Formation

Until the past few weeks, forming a new business entity was all about speed, efficiency, and document preparation —  decide what type of entity you wanted to form, file Articles, pay the required fee, and you were good to go, so long as you remembered to keep up with whatever periodic filings might be required. In many instances, you can even do all of this online.[1] Things got a lot more complicated at the beginning of 2024.

As of January 1, 2024, the federal Corporate Transparency Act (“CTA”)[2] and its implementing regulations adopted by the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury[3] now require that millions of small businesses (“reporting companies”) formed or registered after that date file with FinCEN certain information about (1) the reporting company, (2) the “beneficial owner” or owners of the reporting company,[4] and (3) the “company applicant” who (a) directly files with the state or tribal regulatory body the document that creates or registers the new entity or (b) is primarily responsible for directing or controlling such filing if another individual is involved in filing the document.[5] The information to be reported to FinCEN about each beneficial owner and company applicant includes the individual’s (1) full legal name, (2) date of birth, (3) current residential address for an individual or business address for a company applicant who forms or registers an entity in the course of the company applicant’s business (like our attorneys), and (4) a unique identifying number from, and an image of, a non-expired U.S. or foreign passport, non-expired state driver’s license, or other non-expired identifying document issued by a state, local government, or Indian tribe.[6] As things currently stand, that information must be filed with FinCEN within 90 days after the reporting company receives actual or public notice that its formation or registration is effective, for reporting companies created or registered during 2024, and within 30 days beginning in 2025.[7]

We believe that it is crucial that company applicants should have all of the information required to be reported to FinCEN on hand before filing thee Articles, even though the reporting company has 90 days (in 2024, 30 days starting in 2025) to file the required information with FinCEN. Here is why:

The CTA provides for substantial criminal and/or civil penalties for any person who willfully provides or attempts to provide false or fraudulent information or who willfully fails to report complete or updated information to FinCEN in accordance with the CTA.[8] Those penalties include (1) a fine of not more than $10,000, imprisonment for not more than two years, or both, and (2) a civil penalty of not more than $500 for each day that the violation continues or has not been remedied.[9]

A person fails to report complete or updated information to FinCEN if, with respect to an entity, (1) the entity is a reporting company required to report information to FinCEN pursuant to the CTA and FinCEN’s regulations implementing the CTA; (2) the reporting company fails to report such information to FinCEN; and (3) “such person either causes the failure, or is a senior officer of the entity at the time of the failure.”[10] A company applicant who files the document that creates or registers the reporting company, or who is primarily responsible for directing or controlling such filing, may but need not be a senior officer of the reporting company (as in the case of attorneys in our firm). But even if the company applicant is not a senior officer of the reporting company, it is possible that the company applicant might be considered to have willfully “cause[d] the failure” of the reporting company to report all of the required information to FinCEN if the company applicant files the document forming or registering the company knowing that complete information would not be available for filing with FinCEN, such as if the company applicant knows that one or more beneficial owners have refused to provide the required information.

At this point, there appears to be no definitive guidance from FinCEN on this issue. FinCEN has indicated that an enforcement action can be brought against “a beneficial owner or company applicant who willfully fails to provide required information to a reporting company” for reporting to FinCEN, because that individual willfully causes the reporting company’s failure to submit complete information to FinCEN.[11] Thus, the individual who refuses to provide the information required to be reported to FinCEN may be considered primarily responsible for the reporting violation. However, FinCEN has also stated that reporting companies are responsible for identifying their beneficial owners and company applicants, reporting them to FinCEN, and certifying that the company’s report is true, correct, and complete.[12] FinCEN thus “expects that reporting companies will take care to verify the information they receive from their beneficial owners and company applicants before reporting it to FinCEN.”[13] FinCEN then warns that “[b]eneficial owners and company applicants should also be aware that they may face penalties if they willfully cause a reporting company to fail to report complete or updated beneficial ownership information.”[14]  It follows that:

Persons considering creating or registering legal entities that will be reporting companies should take steps to ensure that they have access to the beneficial ownership information required to be reported to FinCEN, and that they have mechanisms in place to ensure that the reporting company is kept apprised of changes in that information.[15]

While not definitive, this statement raises the possibility that a company applicant who goes ahead and files the document to create or register a new business entity knowing that the entity has not collected, and may have difficulty collecting, all of the information required to be reported to FinCEN once the formation or registration is effective could be considered to have willfully caused the reporting company’s failure to file a complete report if the company cannot, in fact, obtain all of the required information. This is especially risky if the company applicant is also responsible for filing the reporting company’s initial report with FinCEN. This particular application of the CTA and FinCEN’s implementing regulations may or may not come to pass, but the penalties for a reporting violation are severe enough that we think it is simply not worth the risk, however small, for a company applicant to file a document creating or registering a new business entity unless the company applicant knows that the company has access to all of the information that the new entity will have to file with FinCEN under the CTA. That then becomes another item on the company applicant’s checklist before filing the document forming or registering the new entity.

[1] See, e.g., Cal. Sec’y of State, Forms for initial entity filings.

[2] The CTA is codified at 31 U.S.C. § 5336.

[3] FinCEN’s final rule implementing the reporting requirements of the CTA is codified at 31 C.F.R. § 1010.380. For a general description of the rule, see eMinutes, FinCEN Reporting — Yes It Is Really Happening (Feb. 23, 2023).

[4] See 31 C.F.R. § 1010.380(d) (definition of “beneficial owner”).

[5] See id. § 1010.380(e) (definition of “company applicant”).

[6] See id. § 1010.380(b)(1)(ii).

[7] See id. § 1010.380(a)(1)(i), (ii). The U.S. House of Representatives has passed a bill that would extend the deadline to 90 days even for companies formed or registered on and after January 1, 2025, but the Senate has not taken any action on the bill as of this time. See eMinutes, FinCEN Beneficial Ownership Information Reporting Deadlines (Jan. 15, 2024).

[8] See 31 U.S.C. § 5336(h)(1)(B); see also 31 C.F.R. § 1010.380(g) (reporting violations include willfully failing to report complete or updated information to FinCEN in accordance with its final rule implementing the CTA). The CTA does not define the term “willfully.” The U.S. Supreme Court has observed that “willful” is “‘a word of many meanings’ whose construction is often dependent on the context in which it appears.” Bryan v. United States, 524 U.S. 184, 191 (1998) (quoting Screws v. United States, 325 U.S. 91, 101 (1945)). In the context of a criminal statute, for example, “willful” “typically refers to a culpable state of mind,” that is, an act done with a “bad purpose” knowing that the conduct was unlawful. Id. But “willful” may also be “generally understood to refer to conduct that is not merely negligent,” so as to encompass conduct that is either knowing or reckless, McLaughlin v. Richland Shoe Co., 486 U.S. 128, 133 (1988), especially where civil liability is involved, see Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007).

[9] See 31 U.S.C. § 5336(h)(3)(A).

[10] 31 C.F.R. § 1010.380(g)(4). A “senior officer” of a reporting company means “any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function.” Id. § 1010.380(f)(8).

[11] See FinCEN, Beneficial Ownership Information Reporting: Frequently Asked Questions, FAQ K.3(ii).

[12] See id., FAQ K.4.

[13] Id.

[14] Id., FAQ K.5.

[15] Id.