In April 2021, the Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking to solicit public comment on a wide range of questions related to the implementation of the beneficial ownership information reporting provisions of the Corporate Transparency Act (CTA). IncNow provided four responses. The first response addressed the Series LLC and whether the Series LLC should be covered by the CTA.
If you own a Series LLC, it’s understandable to have questions about how the CTA will impact you. Here’s what you need to know.
What is the Corporate Transparency Act?
The Corporate Transparency Act is new legislation that requires all small business entities to file “beneficial ownership” information with FinCEN. A beneficial owner is a human being who directly or indirectly has substantial control over a company or owns or controls at least 25% of its ownership interests. The Act also requires that FinCEN filings include applicants who form the business for each small business entity.
Newly formed companies must file this information, and previously filed companies have two years to file or risk financial penalties. Required compliance doesn’t start until January 2022for new companies and 2024 for previously filed companies.
The CTA is unprecedented, breaking an American tradition that previously resisted any type of asset ownership registry. The CTA has put America’s small businesses on the hot seat. Nearly all small business entities are under threat of criminal penalties for willful non-compliance. Entrepreneurs dedicating time and energy to running their businesses are known to be poor at keeping up with timely government filings. Honest business owners can face $10,000 in fines and two years of jail time for willful non-compliance. Large and medium sized businesses meanwhile are benefiting from exemptions. The Act does not require companies to disclose their beneficial owners if they have more than 20 employees and more than $5 million in assets. Instead, large companies and nonprofits can file an exemption.
How Does the Corporate Transparency Act Impact Series LLCs?
The Corporate Transparency Act regulates “filed” entities, which includes the Series LLC. The CTA should require only one FinCEN filing in the case of the Delaware Series LLC, as only one “entity” is filed. The protected series established by private operating agreement, although separate legal persons, are part of the same juridical entity. This is done without any additional state filings. Therefore, we argued to FinCEN that only the “mothership” Delaware Series LLC should be required to file a CTA FinCEN report. Each “daughter” protected series should not have to file a report because they are established only by private operating agreement. They are not filed or formed. Final regulations will clarify this point before January 2022.
If FinCEN were to require Delaware Series LLCs and all protected series to file separate beneficial ownership reports, the burden on businesses would be unreasonable. The benefit to financial institutions and investigators would be minimal. A beneficial owner of a Series LLC could have control over dozens, or even thousands of protected series. An overwhelming volume of beneficial ownership filings coming from Series LLCs could contribute to issues with administrative registries. This could lead to unfair penalties for innocent parties and duplicative reporting requirements.
We proposed that any controlling party or beneficial owner of the entity, whether only owning 25% of any given protected series or 25% of the mothership, simply be filed as part of the “mothership” filing. Thinking of this like horses would “rope in” all its protected series into one umbrella filing “paddock”. This would be more efficient and helpful than cordoning off the protected series into separate “stalls” with a multitude of separate filings.
How to Comply with the Corporate Transparency Act
Many owners of LLCs, whether series or traditional, will find complying with the Corporate Transparency Act to be daunting until they get comfortable with the forms and terminology. FinCEN does not currently have an online space where businesses can file their beneficial ownership information or a “sandbox” to test what the filings will look like. We expect this will be available soon and your registered agent should also be able to assist you by 2022 with this filing when it is time for newly formed small businesses to come into compliance; and by 2024 when it is time for your previously filed businesses to come into compliance.