Corporate Transparency Act: Reporting Beneficial Ownership Information During an Ownership Dispute

For some companies, compiling and reporting ownership information may be straightforward. But for privately owned companies whose ownership is in dispute, reporting ownership information may be more complicated.

Under the CTA, reporting companies must report, among other things, the identities of their beneficial owners and certain information about them to FinCEN. The CTA defines a beneficial owner as someone who either (1) directly or indirectly exercises substantial control over the company (such as an officer or, in some circumstances, a director of a corporation, or a manager of a limited liability company) or (2) owns at least 25% of the ownership interests in the company. For each of its beneficial owners, the reporting company must report the beneficial owner’s full legal name, date of birth, and current address. For each beneficial owner, the reporting company must also report a unique identifying number and issuing jurisdiction from a specified non-expired identification document (for instance, a passport or a state driver’s license), as well as an image of that document.

As previously detailed, reporting companies that were in existence before January 1, 2024 will have one year — until January 1, 2025 — to file initial reports with FinCEN. Reporting companies created in 2024 must file their initial reports no later than 90 days after their formation. Reporting companies created in 2025 and thereafter will have 30 days to file their initial reports. For other detailed overviews of the CTA, please visit our earlier posts located here. 

Reporting Companies Must Disclose Any Changes to Beneficial Ownership or Face Penalties

In addition to reporting beneficial ownership information in its initial report, each reporting company is subject to ongoing disclosure requirements under the CTA and must report any changes to information submitted to FinCEN, including beneficial ownership information, within 30 calendar days from the date the change occurred.

In certain situations, such as a dispute among owners of a reporting company, it may be unclear who qualifies as a beneficial owner for purposes of the CTA. For example, there may be a dispute concerning who owns what percentage of the company. Or perhaps it is unclear who has the ability to exercise control over the company or who has the authority to make important decisions on behalf of the company. In these situations, it remains important to accurately report beneficial ownership information because failure to do so may subject the reporting company to severe penalties under the CTA. A person who willfully provides false information or fails to report complete information, including updating information as required, may be subject to both civil and criminal penalties, including monetary fines or in some cases imprisonment.

Report All Potential Owners as Beneficial Owners

In its answer to Beneficial Ownership Information Frequently Asked Question D.11., FinCEN recently provided some guidance to reporting companies regarding CTA compliance in the event of an ownership dispute. When a reporting company whose ownership is in dispute has not yet filed its initial beneficial ownership information report, FinCEN instructs the company to report beneficial ownership information for all potential owners by the reporting deadline. If the beneficial ownership information changes once the dispute is resolved, the company should update its initial report within 30 calendar days of the change.

Similarly, in situations where a reporting company has already filed its initial report prior to an ownership dispute and then resolution of the ownership dispute results in a change in beneficial ownership information, the company should update its initial report within 30 calendar days of that change.

Reporting Companies Should Consider Revising Their Governing Documents to Ensure Compliance With the CTA

Companies should consider revising their governing documents to establish processes that will assist them with CTA compliance. For example, a reporting company might consider updating its operating agreement or other governing documents to require any potential beneficial owners to cooperate in providing beneficial ownership information to the company. Reporting companies might also consider implementing indemnity provisions that require potential beneficial owners to indemnify the company (and, if appropriate, other owners) should the company incur penalties under the CTA as a result of the beneficial owner’s actions or omissions. Companies should consider implementing these revisions before any ownership dispute arises. Doing so may help companies to protect themselves from CTA penalties or avoid penalties altogether.

Takeaways

The CTA will impact companies across a variety of industries, as well as many privately owned companies. Companies subject to the CTA’s reporting requirements should take proactive measures to ensure compliance with the CTA’s mandates, such as updating governance documents to require all beneficial owners to cooperate in providing beneficial ownership information that must be reported to FinCEN.

For more practical guidance on ownership disputes, please visit our ongoing series.