The CTA Reporting Company
The “gateway” to the CTA is status as a “reporting company”; a reporting company is obligated to file beneficial ownership information reports (“BOIRs”) with FinCEN’s Beneficial Ownership Secure System (“BOSS”) database through its interface. Conversely, an organization that is not a reporting company never enters into the range of responsibility to file BOIRs.
What is a reporting company is initially defined in the CTA, namely:
(11) Reporting Company.—The term “reporting company”—
(A) means a corporation, limited liability company, or other similar entity that is—
(i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe[.]
From that source the Reporting Regulations (unfortunately) modified the definition, defining a "domestic reporting company" as:
(i) The term ‘‘domestic reporting company” means any entity that is:
(A) A corporation;
(B) A limited liability company; or
(C) Created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.
FinCEN/Treasury did itself no favors in modifying the definition of a reporting company in the course of drafting the Reporting Regulations, as it may be read as a reporting company is any of (i) all corporations, (ii) all limited liability companies, and (iii) any other “entity” that is “created” by a secretary of state filing. FinCEN, in an FAQ, clarified that the interpretation of the Reporting Regulation’s definition of a reporting company is limited to those organizations created by a secretary of state filing and does not extend to every corporation or LLC.
No state requires a secretary of state or similar filing in order for a general partnership to come into existence. This rule is elemental in that partnership is a default category; when persons enter into a business relationship that satisfies the terms of what is a partnership, then a partnership comes into being, unless they elect to structure their relationship in another way such as a corporation or LLC. There being no secretary of state or similar filing in order to “create” a general partnership, it necessarily follows that a general partnership is not a CTA reporting company, a conclusion FinCEN/Treasury has recognized.
Against this background is what is apparently only a single statement from FinCEN to the effect that an LLP is a reporting company. On closer analysis that statement, to the extent it addresses LLPs, is incorrect.
LLPs Are Not Created by a Secretary of State Filing and Therefore Are Not “Reporting Companies”
No business organization is “created” by an election by a partnership to be an LLP. Rather, there was a partnership that was not an LLP, and then there is a partnership that is an LLP, and it may come to pass that there is a partnership that once was but is no longer an LLP; throughout all of those conditions there was a single partnership. That the partnership exists and then elects into LLP status is clear from the statutory language. The Revised Uniform Partnership Act (1997) provides: “[a] partnership may become a limited liability partnership pursuant to this section.” The partnership exists by agreement of the partners, and thereafter determines that it will be and makes the filing necessary to be an LLP. Since the partnership existed without the requirement of a state or other filing, and the already existing partnership files a document by which it elects in LLP status, it follows that a partnership is not “created” by the partnership’s filing of that election. This point was addressed in the Official Comments to RUPA § 201 in 1997 when it was observed:
Thus, just as there is no “new” partnership resulting from membership changes, the filing of a statement of qualification does not create a “new” partnership. The filing partnership continues to be the same partnership entity that existed before the filing. Similarly, the amendment or cancellation of a statement of qualification under Section 105(d) or the revocation of a statement of qualification under Section 1003(c) does not terminate the partnership and create a “new” partnership. See Section 1003(d). Accordingly, a partnership remains the same entity regardless of a filing, cancellation, or revocation of a statement of qualification.
Numerous courts have applied these principles to determine that a partnership that has elected to be an LLP is the same partnership that preceded that election.
This appreciation of the nature of the LLP is consistent with its roots. Recall that every organizational form is a construct, a combination of characteristics that satisfies a particular need, and as recounted above the “need” was for a structure that was and is a general partnership but with an altered rule of partner vicarious liability. If it was not a general partnership, the structure would have been outside the scope of permissible forms for the professional practices that needed (or at least wanted) the new rule.
Long before the CTA and the question of its treatment of LLPs, the Permanent Editorial Board for the Uniform Commercial Code (the “PEB”) considered the question of whether the election by a partnership to become an LLP via the filing of a statement of qualification is the formation or organization of an entity, a question of importance in the context of the Uniform Commercial Code because it determines the controlling law. Finding the election to be an LLP is not the organization of a new venture, the PEB wrote:
It follows that the statement of qualification filed with the State and by which a partnership becomes a limited liability partnership under the 1997 UPA is not a “public organic record” under the 2010 amendments to Article 9. The statement of qualification is not a record filed with the State to “form or organize” the partnership. It is the association of the partners that forms the partnership, not any record publicly filed with the State. Both conceptually and legally, a partnership is formed wholly apart from the filing of a statement of qualification with the State. Because a limited liability partnership is not formed or organized by the filing of a public organic record, it cannot be a “registered organization” under the 2010 amendments to Article 9.
So the statutory language governing a partnership’s election of LLP status, the cases interpreting that language, the Official Comment to that provision of the Revised Uniform Partnership Act (1997), the comments of leading experts in the field, and the PEB considering the language have all agreed that an LLP is not a separate organization “created” by the election to be an LLP. Against that there is, well, really nothing except FinCEN’s unsupported assertion that LLPs are reporting companies.
It bears noting that the Department of the Treasury, in its own regulations, acknowledges that an LLP is just a type of partnership, stating: “A partnership form of registration is available for two or more individuals who are doing business as a partnership, including a limited liability partnership.” At the same time other of its regulations, namely those under the customer due diligence requirements, provides that “legal entity customer” means: “a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account.” If FinCEN is to be taken at its word, and LLPs are not general partnerships, them an LLP is not a “legal entity customer” for which a bank has customer due diligence obligations; conversely if an LLP is but a subset of general partnerships, they are included. Further, clearly FinCEN knows how to write a regulation (and how to influence the drafting of a statute such as the CTA) to include entities created by a secretary of state filing and general partnerships.
FinCEN has estimated that there may be more than 32 million firms existing on January 1, 2024, that will be classified as reporting companies required to file BOIRs into the BOSS database and interface. All else being equal, those totals will not include any general partnerships that have elected to be limited liability partnerships. While some may view this treatment of LLPs as exposing a significant gap in the CTA’s coverage, that viewpoint does not alter the reach of the statutory language.