fincenreport.com Open in urlscan Pro
50.87.253.98  Public Scan

Form analysis
1 forms found in the DOM

GET https://fincenreport.com

<form class="elementor-search-form" action="https://fincenreport.com" method="get" data-hs-cf-bound="true">
  <div class="elementor-search-form__container">
    <label class="elementor-screen-only" for="elementor-search-form-297fbe70">Search</label>
    <input id="elementor-search-form-297fbe70" placeholder="Search..." class="elementor-search-form__input" type="search" name="s" value="">
    <button class="elementor-search-form__submit" type="submit" aria-label="Search">
      <i aria-hidden="true" class="fas fa-search"></i> <span class="elementor-screen-only">Search</span>
    </button>
  </div>
</form>

Text Content

Skip to content
 * About
   * Meet Our Founder
   * About the Team
 * Solutions
   * Business Owners
   * Firms
   * Associations
 * Podcast
 * Blog
 * FAQ
 * Contact

Menu
 * About
   * Meet Our Founder
   * About the Team
 * Solutions
   * Business Owners
   * Firms
   * Associations
 * Podcast
 * Blog
 * FAQ
 * Contact

Webinar Series
Get Started
 * About
   * Meet Our Founder
   * About the Team
 * Solutions
   * Business Owners
   * Firms
   * Associations
 * Podcast
 * Blog
 * FAQ
 * Contact

Menu
 * About
   * Meet Our Founder
   * About the Team
 * Solutions
   * Business Owners
   * Firms
   * Associations
 * Podcast
 * Blog
 * FAQ
 * Contact

Webinar Series
Get Started


CTA BENEFICIAL OWNERSHIP REPORTING CHALLENGES IN COMMUNITY PROPERTY STATES

 * January 29, 2024

Inset:  This post was co-authored with Joe Wallin, a partner in the Seattle,
Washington office of Carney Badley Spellman. 

 

The Corporate Transparency Act (CTA) took effect January 1, 2024.  This new
federal law will require non-exempt reporting companies to report personally
identifiable information for each beneficial owner (each, a “BOI report”) to
FinCEN. Each BOI report will need to identify each beneficial owner of the
reporting company by applying the definition of “beneficial owner” found in the
Reporting Rule.  For reporting companies with beneficial owners residing in one
of nine U.S. states that have adopted community property laws (Arizona,
California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and
Wisconsin) this will prove especially challenging. This article explores those
challenges and proposes some strategies to resolve them.

Identifying Beneficial Owners

The Reporting Rule defines “beneficial owner” as “any individual who, directly
or indirectly, either exercises substantial control over such reporting company
or owns or controls at least 25 percent of the ownership interests of such
reporting company.”  The Reporting Rule also defines “substantial control” and
“ownership interest” as they relate to the determination of a beneficial owner.

Importantly, each beneficial owner must be an “individual,” meaning a natural
person.  The Reporting Rule provides rules for attributing ownership to an
individual when an ownership interest in a reporting company is held by a
non-individual.

For example, if a trust holds title to an ownership interest, the beneficial
owner will be either the trustee, the grantor/settler or the beneficiary of the
trust, depending on which of them has the power to dispose of all or nearly all
of the trust’s assets.  31 CFR §1010.380(d)(ii)(C).

Because the CTA is aimed at preventing money laundering by eliminating the
anonymity of beneficial ownership, the drafters of the Reporting Rule made it
intentionally broad, hoping to prevent bad actors from circumventing its
requirements. Consequently, the Reporting Rule contains provisions that compel
reporting companies to attribute beneficial ownership to individuals
notwithstanding intermediary arrangements.

For example, the Reporting Rule provides that “an individual may directly or
indirectly own or control an ownership interest of a reporting company through
any contract, arrangement, understanding, relationship, or otherwise, including
joint ownership with one or more other persons of an undivided interest in such
ownership interest.”  31 CFR §1010.380(d)(ii)(A) (emphasis added).

It is here that the problem of ownership in a community property state arises. 
In those nine states that have adopted a rule of community property, the concept
provides that two spouses (and sometimes two domestic partners) that own
property have a “joint ownership . . . of an undivided interest” in the
community property asset. 

Joint Ownership in Community Property States

The rules of joint ownership in the nine community property states are generally
consistent in that two spouses (and sometimes two domestic partners) are deemed
to own jointly all the assets of each other with an equal right and power to
keep or dispose of the jointly owned property.

The State of Washington, for example, provides that:

“[Excluding certain property types] property acquired after marriage or after
registration of a state registered domestic partnership by either domestic
partner or either husband or wife or both, is community property. Either spouse
or either domestic partner, acting alone, may manage and control community
property, with a like power of disposition as the acting spouse or domestic
partner has over his or her separate property . . .” R.C.W. 26.16.030. 

The Washington code provides exceptions to the general rule that either spouse
may manage and control community, including on prohibitions on transfers without
spousal consent for (1) testamentary gifts of more than one-half of the
community property, (2) inter-vivos transfers, (3) encumbrances or liens.  The
Washington code also provides that “where only one spouse or one domestic
partner participates in [management of a company] the participating spouse or
participating domestic partner may, in the ordinary course of such business,
acquire, purchase, sell, convey or encumber the assets, including real estate,
or the good will of the business without the consent of the nonparticipating
spouse or nonparticipating domestic partner.”

The community property laws of the other eight community property states are
generally similar, but unique provisions of state laws may require further
inquiry in some situations.

For example, the community property law in Texas provides that “during marriage,
each spouse has the sole management, control, and disposition of the community
property that the spouse would have owned if single.”  Texas Family Law Sec.
3.102(a). Subject to that general rule, however, community property is subject
to the “joint management, control and disposition of the spouses, unless the
spouses provide otherwise by power of attorney in writing or other agreement.” 
Texas Family Law Sec. 3.102(c).  As a consequence, determining whether a spouse
should be designated as a beneficial owner because of a community property
ownership in Texas may require counsel to inquire whether the ownership interest
in the reporting company was acquired before or during the marriage.

Most community property states have exceptions for property that is acquired by
one spouse during the marriage by gift, devise or descent.  See, e.g. Arizona
Code Sec. 25-211.A.2., Texas Family Law Sec. 3.001(2), RCW 26.16.010 (excluding
from community property acquired by gift, bequest, devise, descent, or
inheritance).  Where applicable, counsel may need to inquire whether an
ownership interest in a reporting company was acquired by gift, devise or
descent as part of a determination of beneficial ownership in a community
property estate.   

Including Spouses in the Identification of Beneficial Owners

Following the guidance in Section 380(d)(ii)(A) of the Reporting Rule, which
requires the identification of each beneficial who has an “undivided interest in
[an] ownership interest” that is more than 25% of the entire ownership interest,
reporting companies should include both spouses if either spouse would be a
beneficial owner and if that spouse is married and resides in one of the nine
community property states and if the applicable community property law does not
exclude the ownership interest from the community property of the marriage.

Importantly, this rule of including community property would not impact the
reporting company’s identification of beneficial owners who have substantial
control by virtue of circumstances that do not involve an ownership interest. 
For example, if an individual is a beneficial owner because that individual is a
senior officer of the reporting company, the fact that the individual has a
spouse and resides in a community property state would be irrelevant.  The
non-senior officer spouse would not have any control or influence over the
reporting company.

In contrast, an individual might be a beneficial owner (even if their ownership
percentage was less than 25%) if their ownership interest gave them substantial
influence over major decisions of the reporting company.  For example, an
investor might have an ownership interest tied to a veto right over major
decisions.  Such an investor would be a beneficial owner because of the
substantial control that comes from the veto right (even if the investor’s
percentage interest was below 25%).  If that investor were married in a
community property state, absent some agreement to the contrary, the investor’s
spouse would have a power to vote the investor’s interest and should also be
designated as a beneficial owner by the reporting company.

Reporting companies should, consequently, question their beneficial owners
regarding their marital status and state of residence.  That inquiry may also
need to focus on the means by which the beneficial owner acquired the ownership
interest in the reporting company. The reporting company should consider, for
each beneficial owner who is married in a community property state, whether that
beneficial owner’s spouse should also be designated and reported as a beneficial
owner.

In addition, if any spouses are designated as beneficial owners are a result of
the community property rule, the reporting company should incorporate those
spouses into whatever tracking and reporting mechanism the reporting company
utilizes to track changes in beneficial ownership and changes in beneficial
owner BOI.

Alternative Approaches

Many reporting companies are implementing changes in corporate governance to
account for the information flows required by the CTA.  Reporting companies can
adopt a compliance policy and amend their constituent documents so that
investors are required, as a matter of contract, to provide the reporting
company with BOI information for their beneficial owners.

Such compliance policies can also involve reporting mechanisms and tracking
systems, so that any change in beneficial ownership, or any change in a
beneficial owner’s reported data, is brought to the attention of the reporting
company’s management.  Such a system makes it possible for management to ensure
that the reporting company files an amendment to a prior BOI report when it
does.

With respect to the community property rule, it might be possible to avoid
having to report the BOI of a spouse who is not involved in the business by
having the two spouses enter into a separate property agreement through which
one spouse might renounce or transfer to the other spouse that spouse’s
community property interest in shares. Of course, the parties should consult the
applicable state law to determine the enforceability of such agreements,
especially in the context of a dissolution proceeding. Counsel should also
consider the prudence of such an approach in view of the policy reflected in the
Reporting Rule that tends to include as a beneficial owner all close cases. 
Because of the potential criminal penalties that could attach to an effort to
exclude a beneficial owner who ought to have been included, it might be prudent
to seek a no-action letter from FinCEN before relying on any side agreement that
would exclude an individual from beneficial owner status. 

Conclusion

The CTA is going to usher in a new regime of corporate governance, requiring
corporations, LLCs, and limited partnerships to impose data reporting
obligations on their investors and their affiliates.  Investors that are not
natural persons will need to provide information about their beneficial owners. 
Beneficial owners who are natural persons will need to disclose their
residential address and marital status, among other data points. This new regime
will require reporting companies to consider aspects of beneficial ownership
that were previously outside the scope of their concern.  A beneficial owner’s
marital status and whether that beneficial owner lives in a community property
state is a key example.  Reporting companies and the counsel who advise them
should consider community property ownership when analyzing beneficial ownership
disclosures.

 


Search Search

LATEST POSTS

Are All Company Board Members Considered Beneficial Owners?
March 18, 2024
FinCEN REPORT is Named an Atlanta Startup To Watch in 2024
March 12, 2024
BOI Reporting Deadlines for Companies Formed in January 2024
March 11, 2024
How Accounting Firms Can Help Clients with the CTA
March 5, 2024
Is the Corporate Transparency Act Unconstitutional?
March 4, 2024
Corporate Transparency & the States: California SB 1201
February 23, 2024

OVERVIEW

FinCEN REPORT is an online filing service for reporting companies that must file
beneficial ownership reports under the Corporate Transparency Act beginning
January 1, 2024. 

SUPPORT

 * Business Owners
 * Firms
 * Associations

COMPANY

 * About
 * Team
 * Solutions
 * Podcast
 * Blog
 * Contact

GET IN TOUCH

 * 1600 Parkwood Cir SE #200
 * Atlanta, GA 30339
 * hello@FincenREPORT.com
 * 1-845-393-4623

Copyright © 2024 FinCEN REPORT, All rights reserved. Powered by EWISE
Communications.
 * Term of Service
 * Privacy Policy