iWhether you are a hotel owner, operator, or developer, or anyone who has an interest in an LLC, corporation, or limited partnership, you should be aware of your new compliance obligations under the Corporate Transparency Act (the “CTA”). To put a finer point on this, the Financial Crimes Enforcement Network (“FinCEN”), the bureau under the Treasury Department tasked with enforcing the CTA, believes that over 32 million businesses, both foreign and domestic, will be required to comply with new reporting requirements or be subject to civil fines or even criminal penalties.
What is the purpose of the CTA? The CTA was enacted as part of the Anti-Money Laundering Act of 2020, to combat money laundering, terrorist financing, and other illicit activities.
What are my obligations under the CTA? Beginning on January 1, 2024, any newly created “reporting company” will need to file a Beneficial Ownership Information Report (a “BOIR”) with the Department of Treasury’s Financial Crimes Enforcement Network within 90 days of creation (this is reduced to 30 days beginning January 1, 2025). Any “reporting company” formed prior to January 1, 2024 will need to submit a BOIR prior to January 1, 2025.
What is a “Reporting Company”? Subject to certain exceptions, a “reporting company” is (1) any corporation, LLC, or other entity created by filing a formation document with a Secretary of State within the United States, or (2) any foreign company that is registered with a Secretary of State within the United States.
What information goes into the BOIR? In the BOIR, you will be expected to provide information about the “reporting company” itself, information about each “Beneficial Owner” (very broadly defined) of the “reporting company”, and, solely for entities formed after January 1, 2024, information about the “Company Applicants” (the person(s) or entit(ies) who filed your company formation documents or registration documents or who is primarily responsible for the filing of the formation or registration documents). Any person named in the BOIR, whether as a “Beneficial Owner” or a “Company Applicant,” will need to provide certain basic information about themselves, including uploading a copy of a government ID (driver’s license, passport, etc.).
I have many “reporting companies” for which I will need to file a BOIR, is there a way to make this process less time consuming? Regardless of how many BOIR forms you expect to complete, you may want to consider applying for a FinCEN ID. You can apply for a FinCEN ID online with a valid government ID and related personal information. With a FinCEN ID, you will be able to include your FinCEN ID on the BOIR form as opposed to filling out your personal information and uploading a picture of your ID each time you prepare a BOIR. This will benefit you, in that your sensitive personal information never has to be provided to the “reporting company”, and will benefit the “reporting company” as well, as it will not be responsible for processing or storing your personal information.
Can you give me an example of how the CTA would apply in a hotel development scenario? For a simple hotel development joint venture, you may have a sponsor/developer LLC (“Sponsor”), a capital partner LLC or LP (“Capital Partner”), a joint venture between the two structured as an LLC (“JV”), and a wholly owned LLC subsidiary of the JV that owns the property (“PropCo”). Each of these entities is likely to be a “reporting company”. Each of the Sponsor and the Capital Partner will be responsible for filing their own BOIR, unless they qualify for one of the exemptions. The Sponsor and the Capital Partner will need to coordinate to determine who is responsible for filing the BOIRs for the JV and the PropCo, and will need to share information with each other to determine who all of the “Beneficial Owners” of the JV are (and depending on the structure of the JV, the Sponsor, and the Capital Partner, there may be a large number of people who qualify as “Beneficial Owners”). If either Sponsor or Capital Partner has an affiliated management company that will operate the hotel, that entity will likely need to file a BOIR as well. Note that any “Beneficial Owner” analysis will depend on the facts and circumstances of the ownership structure for that particular transaction, and it would be prudent to consult with your own legal counsel before filing any BOIRs.
Do I need to be concerned about obtaining information from my investors? It depends. If any of your investors would be considered a “Beneficial Owner” of your “reporting company”, you will need their information or their FinCEN ID to file the BOIR for that “reporting company.” At a minimum, it would be a good idea to update your investment documents/organizational documents, and your future investment documents/organizational documents, to (i) include a covenant requiring your investors to provide any information that may be required to permit the “reporting company” to comply with its obligations under the CTA, and (ii) add a repurchase right in the event that any beneficial owners refuse to provide their required information. Some “reporting companies” have even begun requiring that any potential investor provide a FinCEN ID as a condition to investing.
Has the recent Northern District of Alabama ruling impacted the enforcement of the CTA? In National Small Business United, d/b/a the National Small Business Association, et al. v. Yellen, et al., the U.S. District Court for the Northern District of Alabama ruled that the CTA was unconstitutional because the legislation cannot be justified as an exercise of Congress’ enumerated powers.
At this time, non-exempt reporting companies outside the Northern District of Alabama that are not plaintiffs in this case remain subject to the CTA. We predict that other lawsuits challenging the CTA will follow, but in the meantime, reporting companies outside the Northern District of Alabama are still obligated to timely comply with the requirements of the CTA.
For more detailed information on how to make sure you are in compliance with the CTA, please click here for a fulsome summary.
