New Reporting Requirements for Business Entities

We work with lots of clients to set up limited liability companies (LLCs) and corporations (s-corps and c-corps). The legal and filing requirements to establish a new entity are fairly straightforward, and one of the first steps is to file Articles with the Minnesota Secretary of State to register an entity. When a client creates a new business entity, they also face other decisions and steps to take relating to tax elections, banking, and perhaps real estate, licensing, succession, and issues specific to their business.

In addition, there are now federal reporting requirements regarding the ownership of business entities, generally referred to as the ‘Beneficial Ownership’ rules. The purpose behind these reporting requirements is to help the federal government combat financial crimes, such as money laundering, tax evasion, fraud, and other crimes, such as drug trafficking and cybercrimes. The Feds want to know who are the individuals behind a business entity, and particularly small business entities.

The U.S. Department of Treasury’s Financial Crimes Enforcement Network (FCEN) is the agency charged with implementing these regulations pursuant to the Bank Secrecy Act of 2018 and the recently enacted Corporate Transparency Act of 2021.

First, the banking regulation, called the ‘Beneficial Ownership Rule’, went into effect May 11, 2018. The Rule requires banks to verify and identify each natural person with an ownership interest of 25% or more for each of their legal entity customers. The Rule also requires banks to identify one individual who has significant responsibility ‘to control, manage, or direct’ the legal entity. So, the business entities that must report include LLCs, s-corps, c-corps, partnership, limited partnerships, some trusts, and any entity created by a filing with the Secretary of State. Non-profit corporations are subject to the ‘control prong’ part of the Rule.

Second, the new Corporate Transparency Act requires business entities to report ‘beneficial ownership’ directly to the Financial Crimes Enforcement Network (FCEN) of the Treasury Department. This is a new step that now must be completed when setting up a new business entity, and existing business entities will also be required to file this report. This reporting requirement will be implemented within the next two years and subject to regulations adopted by the U.S. Department of the Treasury.

There will be exceptions to the reporting requirement. For example, public companies, financial and insurance institutions, and business entities that employ 20 or more people and have gross revenues over $5 million do not need to file a report.

Information required to be reported will include the legal name, date of birth, current address, and a “unique identifying number from an acceptable identification document” such as a passport or driver’s license for each individual ‘beneficial owner’ and any individual who has completed a filing for the business entity.

Helping the ‘Feds’ fight crime is not what first comes to mind when setting up an LLC or a corporation for one of our local or regional clients, but these new regulations create a new reality for us. We will keep abreast of these new regulations and how to comply with them. Please watch for a follow up article from us, once the regulations have been adopted.

Any requests for topic suggestions may be sent to rene@breenandperson.com. Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it.