Newly Enacted Requirements for Disclosure of Beneficial Ownership of US Business Entities
Congress has passed legislation over the veto of former President Trump to require the disclosure of the direct or indirect beneficial ownership of US business entities at the time of formation. This legislation was included as part of the annual National Defense Appropriations Act, which took effect January 1, 2021.
Under this Act, upon the issuance by the Department of Treasury of regulations providing more detail on the specific requirements of the Act, all corporations, limited liability companies and other types of business entities will be required to disclose the details of their direct and indirect beneficial owners at the time the business is formed unless the business falls within a group of exempt industries. These exempt industries include banking, insurance, and other financial institutions, where the disclosure of beneficial ownership of such businesses is generally already required. In addition, within 2 years of the issuance of the regulations, the same disclosure requirements will apply to all existing non-exempt industry business entities, except those which are publicly traded or have more than 20 full time employees, have annual revenues of more than $5 million, and have an operating presence at a physical office within the United States. The Treasury regulations must be published within one year of the effective date of the Act, or by January 1, 2022, but are expected to be published sooner.
The Act requires such reporting companies to submit the disclosure information to the Department of Treasury which is required to create a beneficial ownership registry within its Financial Crimes Enforcement Network (FinCEN). The purpose of the registry is to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists and criminals.” The information will not be made available to the public in general, but will be available to US federal law enforcement agencies and, with the consent of the reporting company, financial institutions in order to meet their customer due diligence requirements.
The Act defines a beneficial owner as an individual who owns a 25% equity interest in or exercises “substantial control” over the reporting company. The definition of substantial control is not stated in the Act, and there are many other questions regarding the scope of the disclosure requirements, including how to measure a 25% equity stake in a tiered group of entities or in an entity which has shifting percentage interests of its members. Presumably, these and other issues arising under the Act will be clarified in the regulations.
The information that must be reported to the registry includes the following with respect to any beneficial owner, as well as any “applicant” for the entity (which includes incorporators and other formation agents): (i) full legal name, (ii) date of birth, (iii) residential or business street address, and (iv) a unique identifying number from an acceptable identification document, including a driver’s license, US passport, or other US state-issued identification document.
Further, any changes to the beneficial ownership of a business entity or any change to any of the foregoing information must be reported to the registry within one year of the change.
The Act imposes penalties on companies that fail to report the required information, or submit a report containing false or fraudulent beneficial ownership information, of $500 per day up to a maximum of $10,000 and imprisonment of up to 2 years.
The Act represents a sea change in the US requirements for beneficial ownership disclosure of business entities. Similar or even more restrictive ownership disclosure requirements have been in place for several years in Europe and other developed nations throughout the world.
We will be monitoring the issuance of the Treasury regulations and other developments in this area. Please feel free to contact us with any questions.
ABOUT JOHN ORRICK
John ‘Jack’ Orrick practices in Business Transactions focuses on general corporate matters, joint venture formations, and business and tax planning, as well as representing clients in securitized equity and debt financings.
Clients turn to Jack because of his business sense and collaborative philosophy, which he uses to negotiate transactions strategically and close deals. His diverse and extensive transaction experience gives him a broad view of overall business operations, allowing him to advise clients in a variety of industries, including, but not limited to, real estate. Jack’s clients include property owners, developers, investors, owners of closely-held businesses, nonprofits and associations, financial institutions, and providers of professional services.
ABOUT OFFIT KURMAN
At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we focus on furthering our clients’ objectives and provide timely services and within budget, all while focusing on the clients’ interests and goals.
Offit Kurman is one of the fastest-growing, full-service law firms in the United States. With over 230 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well-positioned to meet dynamic businesses’ needs, as well as the needs of the people who own and operate them. We also provide representation of individuals and families in diverse matters ranging from estate planning and asset protection to intellectual property structuring and entrepreneurial start-ups. Our International Group provides clients with a broad range of services for transactions and dispute representation for clients worldwide, including Europe, Canada, Asia, Latin America, the Middle East and Africa.
At Offit Kurman, we distinguish ourselves by the quality, breadth, and global reach of our legal services — as well as our unique operational structure, which encourages a culture of collaboration and entrepreneurialism. The same approach that makes our firm attractive to legal practitioners interested in representing clients in the middle market, also gives clients access to experienced counsel in almost every area of the law and in many jurisdictions in the U.S. and abroad
Subscribe and follow us on our Blog, and on Facebook, Twitter, Instagram, YouTube, and LinkedIn. You can also sign up to receive LawMatters, Offit Kurman’s monthly newsletter covering a diverse selection of legal and corporate thought leadership content.
DELAWARE | MARYLAND | NEW JERSEY | NEW YORK | NORTH CAROLINA | PENNSYLVANIA |SOUTH CAROLINA | VIRGINIA | WASHINGTON, DC