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 advocates why the protected series of a Delaware Series LLC should all be subsumed into one CTA filing for the Series LLC as a whole.
If you own a Series LLC, it’s understandable to have questions about how the CTA will impact you. The regulations are silent on the Series LLC. Here is what you need to know, based on reading between the lines.
What is the Corporate Transparency Act?
The Corporate Transparency Act is new legislation that requires all small business entities to file “beneficial ownership” information (BOI) with FinCEN. A beneficial owner is an individual who directly or indirectly has “substantial control” over a company and/or owns at least 25% of a company’s ownership interests. The CTA also requires that FinCEN filings for newly formed companies include two company applicants; the person who requests the formation of the legal entity and the person who submits the filing to the Secretary of State.
Entities filed before January 2024 are not required to comply until January 2025. However, entities formed after January 2024 must file beneficial ownership information within 30 days of formation.
The CTA is unprecedented, breaking an American tradition that previously resisted any type of entity ownership registry. The CTA has put America’s small businesses on the hot seat. Nearly all small business entities are subject to penalties for failing to comply. Honest business owners can face civil penalties of $500 per day, and criminal penalties of up to $10,000 in fines and/or two years of jail time as a result of willful non-compliance. With the complexity of the filing process and severity of penalty, it is important to ensure all BOI is correctly reported in a timely manner.
Large and medium sized businesses, meanwhile, are benefiting from exemptions if they meet the criteria. The CTA does not require these companies to disclose their beneficial owners if they have more than 20 full-time employees and more than $5 million in U.S.-source income per year.
How Does the Corporate Transparency Act Impact Series LLCs?
The Corporate Transparency Act regulates entities formed through a “filing” with any government or tribal office in the United States. It appears CTA will treat a Series LLC and all its protected series as one entity. The CTA under the regulations, requires only one FinCEN filing in the case of the Delaware Series LLC, as only one “mothership entity” is filed with the Secretary of State. The “daughter” protected series, which are established by private Operating Agreement, although separate legal persons, are part of the same juridical mothership entity. Even the registered series in Delaware which require additional state filings are nevertheless not separate juridical entities. Therefore, we argued to FinCEN that only the mothership Delaware Series LLC should be required to file a BOI report. The same argument may also apply to registered series in Delaware, as they are not separate entities and, therefore, only the mothership entity should be required to file the report with FinCEN.
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 suggest that each controlling party or beneficial owner of each protected series and the company as a whole, whether only owning 25% of any given protected series or 25% of the mothership, simply be filed as part of one omnibus filing. Think of this like horses in a barn and in a fenced field. The “Farm” filing would “rope in” all its horses in the barn and the fenced-in field. Each protected series is a “paddock” in the field. One farm filing would be more efficient and helpful than cordoning off the protected series into separate “stalls” or “paddocks” with a multitude of separate filings for non-entities.
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 in the coming months. If you have a Delaware Series LLC, perhaps you should consider changing to IncNow, a Registered Agent operated by a Delaware attorney who helps draft Series LLC legislation and serves as a Series LLC expert in court.