Matthew J. Schiller
Partner, Murphy Schiller & Wilkes LLP
Office: (973) 705-7431
For decades, the real estate industry has been particularly adept at using various corporate structures such as limited liability companies, limited partnerships and corporations in order to maximize the numerous liability and privacy protections and tax benefits afforded to such businesses. Commencing Jan. 1, 2024, however, many U.S. businesses will be required to disclose (and update) information with respect to their beneficial ownership to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) pursuant to the Corporate Transparency Act (the CTA), giving rise to many privacy and regulatory concerns.
The CTA will apply to tens of millions of new and existing businesses throughout the country, including many real estate businesses, individual and family investment vehicles, and smaller private companies and joint ventures. 2024 will be an especially burdensome year under the CTA as all businesses that are subject to the CTA must comply with the CTA’s reporting requirements by the end of the year. Accordingly, it is imperative for businesses to begin taking proactive measures in order to ensure CTA compliance next year and going forward.
Congress enacted the CTA under the Fiscal Year 2021 National Defense Authorization Act in order “to help prevent and combat money laundering, terrorist financing, corruption, tax fraud and other illicit activity” by creating a federal framework for reporting, storing and disclosing beneficial ownership information (BOI) of applicable “reporting companies.” The CTA consists of three primary elements: (i) reporting requirements regarding the actual “reporting company,” its primary owners and officers (each a “beneficial owner”), as well as the professionals that helped form or register the reporting company (each a “company applicant”); (ii) controls to limit access to BOI solely to government regulatory and investigatory bodies (i.e., the general public will not have access to BOI) and (iii) revise certain customer due diligence requirements for financial institutions to conform to the CTA and account for their ability to access BOI.
Under the CTA, a “reporting company” is any (1) corporation, (2) limited liability company or (3) any other entity (including limited partnerships, limited liability partnerships and statutory trusts) that is created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian Tribe that does not meet the criteria for one of the CTA’s 23 enumerated exemptions. Notably, there is an exemption for “Large Operating Companies,” provided that such business satisfies all of the following criteria: (1) employs more than 20 employees on a full-time basis in the United States; (2) filed in the previous year Federal income tax returns in the United States demonstrating more than $5 million in gross receipts or sales in the aggregate, including the receipts or sales of other entities owned by the entity and through which the entity operates; and (3) has an operating presence at a physical office within the United States. Other CTA exemptions include publicly traded companies, banks, insurance companies, pooled investment vehicles, tax-exempt entities including 501(c) organizations, tax-exempt political organizations and subsidiaries of exempt entities (including both direct and indirect subsidiaries of such entities). As many for-profit real estate businesses will not qualify as one of the enumerated CTA exceptions, each business should confirm CTA applicability with its counsel and/or accountant.
The CTA requires the disclosure to FinCEN of each “beneficial owner” of a reporting company, which may be a concern for many individual investors and principals of a business. Under the CTA, a “beneficial owner” is an individual who directly or indirectly exercises substantial control over the reporting company or who owns or controls at least 25 percent of the ownership interest in the reporting company. Businesses will therefore need to carefully review their underlying corporate documents in order to determine which individuals need to be disclosed to FinCEN pursuant to the CTA and alert such individuals accordingly.
As of Jan. 1, 2024, newly formed entities subject to the CTA must file the requisite disclosures to FinCEN within 30 days after their date of formation. Moreover, existing businesses formed prior to 2024 that are subject to the CTA must submit the necessary disclosures to FinCEN prior to Jan. 1, 2025. Accordingly, starting in 2024, business entities subject to the CTA will be obligated to e-file the requisite BOI though designated “company applicants” via FinCEN’s online portal called the Beneficial Ownership Secure System (BOSS). Specifically, CTA filings must set forth (i) the reporting company’s legal name (as well as any trade names), address, jurisdiction of formation and IRS Taxpayer Identification Number; (ii) each beneficial owner’s full legal name, residential address, date of birth and a government document containing a government identification number and a photograph of such individual (e.g., state-issued driver’s license, U.S. or foreign passport); and (iii) substantially similar information for each individual company applicant. Updated reports will thereafter be required to be filed with FinCEN within 30 days, should any reported BOI change.
Compliance with the CTA is critical, as both civil and criminal penalties may be imposed for non-compliance. Specifically, any person who willfully provides false information to FinCEN, or willfully fails to report required information to FinCEN: (i) may be liable for a civil penalty of not more than $500 for each day that the violation continues or has not been remedied; and (ii) may be fined not more than $10,000, imprisoned for not more than two years, or both. Notably, the CTA regulations provide a 90-day safe harbor provision to allow reporting companies to voluntarily and promptly correct any inaccurate reports.
It is clear that the implementation of the CTA will be burdensome on the real estate industry as well as most other businesses, banks and financial institutions throughout the U.S., and many investors may have questions with respect to its applicability thereto. Given such, businesses must be proactive in understanding the requirements of the CTA and taking the necessary measures to ensure compliance in 2024 and beyond. Such steps include educating personnel and collecting required personal information from applicable investors in order to comply with the requirements of the CTA. Moreover, where applicable, existing businesses may need to update their corporate documentation to both authorize compliance with the CTA’s requirements and ensure that the current beneficial ownership of such company is accurately set forth therein.
Matthew J. Schiller is a partner at Murphy Schiller & Wilkes LLP (MSW), a commercial real estate boutique law firm based in Newark, New Jersey. MSW’s lawyers negotiate operating agreements and structure joint ventures for all kinds of real estate companies concerning assets throughout New Jersey, New York, Connecticut and the rest of the country.
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