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Final FinCEN Beneficial Ownership Reporting Rules Pose Compliance Issues for LLCs

Updated: Sep 7, 2023


On September 29, 2022, the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the United States Department of Treasury (“Treasury”), issued final regulations (“final CTA regulations”) implementing section 6403 of the Corporate Transparency Act (“CTA”), enacted as part of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021. Beneficial ownership reporting requirements under the final regulations are effective beginning January 1, 2024. The final rules provide significant exceptions for U.S. affiliates of foreign not-for-profit organizations, organized or registered to conduct business in the U.S.

The CTA furthers international regulatory compliance and law enforcement objectives by requiring domestic or foreign entities to disclose the beneficial owner upon formation or registration to do business under the laws of a U.S. State or Indian Tribe. A reporting company is a corporation, LLC or similar entity, whether domestic or foreign, that files an organizational document or registers to do business with a secretary of state or similar office of a State or Tribal jurisdiction. The company applicant or an agent of a reporting company must file a report and annual updates with FinCEN identifying any beneficial owner of the entity and, for companies formed on or after the effective date of the final rules, an applicant who is not a beneficial owner. Failure to disclose beneficial ownership information may result in penalties up to $10,000, subject to IRS reasonable cause waiver, and certain additional penalties, which may be civil or criminal and which apply broadly to any person in violation of CTA reporting rules. Generally, a beneficial owner is an individual who, directly or indirectly, exercises substantial control over, owns 25 or more percent equity interests of, or receives substantial economic benefits from the assets of a reporting company. CTA applies broadly to foreign-formed companies that submitted a successful registration filing under the law of a State or Indian Tribe to conduct business in the U.S.

Overall, final CTA regulations exempt 23 types of entities from the definition of a “reporting company”. Enterprises exempt from CTA include an entity exempt under section ("Section") 501(c)(3) of the Internal Revenue Code of 1986, as amended, a domestic entity assisting financially a tax-exempt entity, and a subsidiary of a tax-exempt entity. Thus, the organizational structure and U.S. tax treatment of a foreign charitable organization and and a U.S. affiliate organized as an LLC may determine whether ultimate beneficial owners (“UBOs”) of the LLC will be subject to FinCEN reporting under the CTA. An LLC owned or controlled by a foreign not-for-profit organization may be subject to or exempt from CTA compliance, based on the corporate and governance structure and U.S. tax treatment of the foreign nonprofit parent and the LLC, under either of the above three CTA exemptions.

Treasury and FinCEN have not clarified how the exemptions may apply to LLCs seeking an individual tax exemption under Section 501(c)(3) taking into account LLC tax-exemption guidance in IRS Notice 2021-56. In addition, LLCs seeking to be exempt from CTA reporting would benefit from additional guidance clarifying the meaning of the term "financial assistance" with respect to the above corresponding CTA exemption. Furthermore, Treasury and FinCEN may clarify how the ownership and control requirements under the same CTA exemption apply to LLCs effectively controlled by U.S. managers but beneficially owned by a foreign charity not exempt under Section 501(c)(3).

LLCs beneficially owned by foreign not-for-profit organizations should review the final CTA regulations and seek counsel on compliance with the final rules generally effective January 1, 2024, or available exemptions from UBO reporting. Likewise, foreign exempt organizations with U.S. affiliates would find advisable to consult with U.S. counsel on CTA compliance with respect to U.S. subsidiaries, taking into account organizational, governance and tax structure of both the foreign parent organization and the domestic affiliate. To facilitate compliance and reduce administrative burden, Treasury and FinCEN may issue additional guidance clarifying CTA reporting requirements for LLCs owned or controlled by foreign charities.

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