Sophisticated family enterprises often employ legal entities and governance structures to support complex and dynamic economics and decision making regarding investment organization, creditor management, economic incentives and allocations. Administration for these structures requires compliance, which now includes the U.S. Corporate Transparency Act (the CTA). This will likely be managed by a centralized management company, such as a family office or a private trust company (PTC), each a private family management company (PFMC).
Here’s a summary of the necessary steps to comply with the CTA, which went into effect on Jan. 1, 2024, and requires most companies formed or registered before Jan. 1, 2024 to file reports by Jan. 1, 2025. Much has been written about the CTA in the past few months, most of which provides general guidance, background and details of the statute and regulations. We’ll assume the reader is already familiar with the basics and will focus on the process and filing.
Complying with the CTA may seem challenging, but with proper preparation and methodic steps, it needn’t be overwhelming. As a starting point, PFMCs should identify an individual(s) (a responsible person) who will gather and monitor:
- The identification of reporting companies;
- Whether any of the CTA’s 23 exemptions to the reporting company definition could apply;
- Governing documents to identify beneficial owners of each reporting company;
- Reportable information to be entered on the beneficial ownership information reporting (BOIR);
- The BOIR (which will then be prepared and filed); and
- Potential changes for updates in the future.
For PTCs, a compliance officer might ensure that the company meets all statutory and regulatory requirements for itself and the entities it oversees. The compliance officer would be responsible for ensuring compliance with the CTA.
Family offices would likely have officers and a board of managers or directors. A secretary, chief compliance officer or learning officer might be the responsible person. They would engage with settlors and beneficiaries, as well as those who have management roles, to obtain relevant data and oversee the completion of compliance requirements.
Identify Reporting Companies
Identifying entities that might be reporting companies shouldn’t take long, but this serves as a crucial first step. The designated responsible person within a PFMC should outline which domestic entities were formed via filing with a Secretary of State’s office and which foreign entities have registered to do business with a Secretary of State’s office. PFMCs are typically organized under state law and, therefore, would fall within the reporting company definition. The responsible person should also be able to quickly determine which entities may not be reporting companies if formed by agreement and not by state filing.
Determine if Any Exemptions Apply
If an entity is identified as a potential reporting company, it may be exempt from filing a BOIR if it falls within one of the CTA’s 23 listed exemptions to the reporting company definition. The CTA exempts companies: (1) regulated by a state or federal banking regulator (such as a trust company), and (2) large operating companies, which are those that: (i) employ more than 20 full-time U.S. employees, (ii) have more than $5 million in gross receipts in the prior tax year, and (iii) have an operating presence at a physical office within the United States. In some cases, this can also apply to their subsidiaries.
Analyze Governing Documents
Each reporting company required to report should:
Identify beneficial owners. This includes:
- Any individuals who either: (1) own, directly or indirectly, more than 25% of the equity interests in a reporting company, or (2) exercise substantial control over the entity (typically individuals in key management roles). This is the greater of the value of their voting rights or the value of their interests. Any options are treated as if exercised. An individual exercises substantial control if that individual: (1) serves as a senior officer of a reporting company, (2) has the power to remove and replace any senior officer or a majority of the board of directors, or (3) directs, determines, or has substantial influence over “important” decisions.
- Entities formed after Jan. 1, 2024. These entities would report up to two company applicants.
Review governing documents. Trace through books and records that reflect current ownership and management and identify or update historical changes in ownership and management to properly identify and memorialize beneficial owners.
Ask questions. Multiple reporting positions are likely available regarding certain entities, fiduciaries, and management roles. When ambiguities arise, the responsible party should ask questions and contemporaneously memorialize conclusions.
-
- Trusts? Family enterprises with a PFMC may hold assets in trust, which affects the ownership and control analysis under the CTA rules. If a trust owns 25% or more of a reporting company, it’s necessary to determine whether any of the individuals who are the trust’s fiduciaries, settlors or beneficiaries are beneficial owners.
- Who does what? Identifying which fiduciary, director, officer or manager exercises substantial control will be a facts-and-circumstances analysis that will require review of governing documents.
Isolate and Compile Reportable Information
Once the beneficial owners have been identified, isolate and compile reportable information. This will include:
- For the reporting company: (1) names and trade names, (2) address, (3) state of formation, and (4) tax identification number.
- For each beneficial owner: (1) name and date of birth, (2) address, (3) passport or driver’s license, and (4) picture. A FinCEN identifier is recommended.
Prepare and File the BOIR
Internal protocols are needed to ensure timely compliance with the CTA’s reporting requirements because the CTA imposes an ongoing obligation to update reportable information after the initial BOIR is filed. Updates are to be made within 30 days of becoming aware of the change. PFMC personnel would be trained to recognize whether an updated BOIR is required, thus aiding in compliance with the CTA on an ongoing basis.
Avoid Unnecessary Fire Drills
The CTA may seem daunting, but with proper planning, PFMCs can set themselves up for success and avoid unnecessary fire drills between now and Jan. 1, 2025.
