States Deciding Whether to Follow Feds in Requiring Reporting of Beneficial Ownership Information for Business Entities

Congress passed the federal Corporate Transparency Act (“CTA”) early in 2021.[1] The CTA worked a sea change requiring the reporting of beneficial ownership information (“BOI”) for tens of millions of business entities (most small corporations, limited liability companies, and other similar entities), which are referred to as “reporting companies,” formed or registered to do business in a U.S. jurisdiction. The reporting regime adopted by the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury, which requires reporting companies to report to FinCEN certain identifying information about the beneficial owners who own or control such entities, as well as the company applicants who form or register those companies, has been up and running since January 1, 2024.

A small handful of U.S. jurisdictions have considered implementing their own reporting requirements. To date, however, only New York and the District of Columbia have enacted legislation requiring reporting, and only the District of Columbia’s reporting system is currently active. Three other states—California, Maryland, and Massachusetts—have introduced legislation, but the bills have not, and may not, become law.

New York

We wrote before about New York State’s “LLC Transparency Act,” which was originally signed into law by Governor Kathy Hochul on December 22, 2023, and then revised by the legislature and signed again by Governor Hochul on March 1, 2024.[2] New York’s revised LLC Transparency Act essentially piggybacks on the federal reporting regime to require that domestic limited liability companies formed under New York law and foreign LLCs authorized to do business in New York State that are required to file their BOI with FinCEN also file their BOI with New York’s Department of State.[3] The LLC Transparency Act does not take effect until January 1, 2026. It applies only to limited liability companies, and not to corporations and other forms of business entities.

District of Columbia

Effective in 2020, the District of Columbia amended the general provisions of its Business Organizations Code to require that every business registration and biennial report filed by an entity[4] with the Mayor after January 1, 2020, must state the name, residence, and business addresses of each person whose aggregate share of direct or indirect legal or beneficial ownership of a governance interest[5] or total distributional interest of the entity either (a) exceeds 10% or (b) does not exceed 10%, if that person (1) controls the financial or operational decisions of the entity or (2) has the ability to direct the day-to-day operations of the entity.[6] This is similar to the federal standard in requiring reporting of BOI as to major shareholders/members and others who exercise control over the entity, with an even lower standard of only 10% ownership as opposed to 25% under the CTA. If a reportable beneficial ownership interest is owned by a foreign entity—that is, an entity governed as to its internal affairs by the law of a jurisdiction other than the District of Columbia[7]—then the entity must state the name, residence, and business address of each person who meets any of the same criteria with respect to the foreign entity.[8] If an entity submits an entity registration filing that does not include the required information, then the entity will not be allowed to register or do business in the District of Columbia.[9] If an entity submits a biennial report that does not include the required information, then a domestic entity will be administratively dissolved, while the registration of a foreign entity will be terminated.[10] If the information required to be reported changes, then the new information must be reported (in articles of amendment as to a registration; in a statement of correction as to a biennial report).[11]

California

Senate Bill (“SB”) 1201 was introduced in the California Senate on February 15, 2024. SB 1201 would require domestic and foreign corporations to include in their annual statements, and limited liability companies to include in their biennial statements, the name and business or residence address of any beneficial owner of the corporation or limited liability company.[12] The term “beneficial owner” would be defined, as in the CTA,[13] to include a person who (1) owns 25% or more of the equity interest of the entity, and/or (2) exercises substantial control over the entity, with “substantial control” being defined by reference to FinCEN’s rule implementing the CTA.[14] These amendments to California’s Corporations Code, if signed into law, would become operative on January 1, 2026. SB 1201 passed in the California Senate on May 23, 2024, but it appears that no further action of substance has been taken since then.

Maryland

Senate Bill (“SB”) 954 was introduced in the Maryland Senate on February 2, 2024. SB 954 would require every “reporting entity”[15] to file with the Maryland State Department a report containing, for each applicant and beneficial owner of the entity, the person’s full legal name, current residential or business address, and an acceptable identification document.[16] SB 954 defines the term “beneficial owner” to mean, similar to the CTA, “an individual who, through any contract, arrangement, understanding, relationship, or other means: 1. exercises substantial control over a reporting entity; or 2. Owns or controls at least 25% of the ownership interest of a reporting entity.”[17] The “applicant” is the individual who files with the State Department the document causing the reporting entity to be formed.[18] Acceptable identification documents include a valid U.S. passport; a valid U.S. driver’s license issued by a state; some other valid identification document issued by a state, local government, or Indian tribe; and, if the individual does have any of those documents, a valid passport issued by a foreign government.[19] The report would have to be filed within 30 days of the filing of the document that caused the reporting entity to be formed.[20] An amended report would have to be filed within 30 days after any change in the information required to be reported.[21] The State Department would be authorized to impose a civil penalty of $500 for each day the entity was in violation of the reporting requirement.[22] SB 954 calls for the statute to take effect on October 1, 2024, and would require existing entities to file the required report on or before October 1, 2025.[23] However, no action was taken on SB 954 before the legislative session adjourned in April 2024.

Massachusetts

House Bill No. H.3566 was introduced in the Massachusetts House of Representatives on March 30, 2023. H.3566 would require each domestic limited liability company, in its certificate of organization, and each foreign limited liability company, in its application for registration, to disclose each beneficial owner of the company.[24] The term “beneficial owner” would be defined to mean a person who, directly or indirectly, (1) holds a membership interest in the company; (2) exercises substantial control over the decisions of a membership interest; or (3) has been assigned a membership interest.[25] Beneficial owners also include “any ultimate beneficial owner regardless of the place of registration of the” company.[26] Beneficial owners must be identified by name; date of birth; current residential or business address; and a unique identifying number from a non-expired U.S. or foreign passport or state driver’s license bearing a photograph and date of birth.[27] When disclosing its beneficial owners, the company would also have to identify the total number of properties, if any, each beneficial owner owns in Massachusetts and the city or town in which each such property is located.[28] The disclosure requirements could be satisfied by submitting a copy of the BOI submitted to FinCEN under the CTA and FinCEN’s implementing rule.[29] If enacted, Massachusetts’ disclosure requirements could prove to be problematic, as “[a]ll disclosed information filed with the state secretary under this section shall be a matter of public record and subject to chapter 66” of the Massachusetts General Laws, which deals with public records, including the procedure for the public to request such records.[30] It was this sort of public access provision that caused New York to go back immediately after passage of the original version of its LLC Transparency Act and revise the statute to remove the right to public access.[31] Not much has happened with H.3566 since it was referred to the Joint Committee on Economic Development and Emerging Technologies on March 30, 2023, other than that the committee was, on May 15, 2024, ordered to make an investigation and study of the bill and report the results and any recommendations to the Clerk of the House of Representatives on or before December 31, 2024.

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

[2] See eMinutes, “New York Jumps on the BOI Reporting Bandwagon” (Feb. 15, 2024); eMinutes, “New York State Revises Its BOI Reporting Law. Thank You New York!” (Apr. 8, 2024).

[3] For a detailed discussion of the mechanics of the LLC Transparency Act, see eMinutes, “New York State Revises Its BOI Reporting Law. Thank You New York!,” supra note 2.

[4] The term “entity” is broadly defined to include business and nonprofit corporations, general and limited partnerships, including limited liability partnerships and limited liability limited partnerships, limited liability companies, general and limited cooperative associations, unincorporated nonprofit associations, statutory and business trusts, and “[a]ny other person that has a legal existence separate from any interest holder of that person or that has the power to acquire an interest in real property in its own name.” D.C. Code § 29-101.02(10)(A).

[5] An “interest” is defined to mean, for example, a share in a business corporation, a membership interest in a limited liability company, or a partnership interest in a general or limited partnership. D.C. Code § 29-101.02(19). A “governance interest” is the right, “other than as a governor, agent, assignee, or proxy, to: (A) Receive or demand access to information concerning, or the books and records of, the entity; (B) Vote for the election of the governors of the entity; or (C) Receive notice of or vote on issues involving the internal affairs of the entity.” Id. § 29-101.02(17). The term “governor” includes, for example, the director of a corporation, general partner of a general or limited partnership, or the manager of a manager-managed LLC or a member of a member-managed LLC. Id. § 29-101.02(18).

[6] Id. §§ 29-102.01(a)(6) (registration filings), 29-102.11(a)(6) (biennial reports).

[7] Id. § 29-101.02(14).

[8] Id. §§ 29-102.01(a)(7) (registration filings), 29-102.11(a)(7) (biennial reports).

[9] Id. § 29-102.01(a)(8).

[10] Id. § 29-102.11(a)(8).

[11] Id. §§ 29-102.01(a)(9) (registration filings), 29-102.11(b) (biennial reports).

[12] SB 1201 §§ 1-3.

[13] See 31 U.S.C. § 5336(a)(3)(A).

[14] SB 1201 §§ 1-3. FinCEN’s rule implementing the CTA is codified at 31 C.F.R. § 1010.380. Under FinCEN’s rule, an individual may exercise substantial control over an entity in a variety of ways, including serving as a senior officer of the company, having authority over the appointment or removal of any senior officer or a majority of the board of directors, and directing or having substantial influence over important decisions made by the company. 31 C.F.R. § 1010.380(d)(1).

[15] “Reporting entity” means any entity, except a banking institution, created by the filing of any document (such as articles or certificate of incorporation or articles of organization for a limited liability company) with the State Department. SB 954 § 1.

[16] SB 954 § 1.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id. §§ 2, 3.

[24] H.3566 §§ 2, 4, 6.

[25] Id. § 1.

[26] Id.

[27] Id. § 6.

[28] Id.

[29] Id.

[30] Id.; see generally Mass. Gen. Laws ch. 66, § 10 (setting out the procedure to request public records).

[31] See eMinutes, “New York State Revises Its BOI Reporting Law. Thank You New York!,” supra note 2.