Legal Insights and Firm News | Sands Anderson https://www.sandsanderson.com/news/ Experienced Legal Professionals serving Virginia & the Mid-Atlantic for 175 Years Thu, 14 Mar 2024 17:02:00 +0000 en-US hourly 1 https://wordpress.org/?v=6.4.3 Understanding the New Rules of Independent Contractor Classification Law https://www.sandsanderson.com/news/2024/03/14/understanding-the-new-rules-of-independent-contractor-classification-law/ Thu, 14 Mar 2024 14:43:30 +0000 https://www.sandsanderson.com/?p=24554 There are few areas in employment law that remain in a greater state of flux than the question of who a business can properly classify as an independent contractor.  The differences between federal and state law can make the question even more complex.  With federal and state governments increasingly focused on independent contractor misclassification as

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There are few areas in employment law that remain in a greater state of flux than the question of who a business can properly classify as an independent contractor.  The differences between federal and state law can make the question even more complex.  With federal and state governments increasingly focused on independent contractor misclassification as well as the advent of a new federal test, now is the time for Virginia and North Carolina businesses to re-examine their practices to avoid costly monetary and other penalties.

The Department of Labor Rule: Out with the Old and In with the New

In January 2024, the DOL issued its final rule establishing a new “economic reality test” to determine whether a person can properly be characterized as an independent contractor.  This test replaces the prior test put in place during the Trump Administration.  Unlike the prior test that focused on two primary factors, the new test examines the “totality of the circumstances” and does not give primary or pre-determined weight to any of the factors.  This means that unless all the factors support an independent contractor finding, it will be difficult to determine in advance which factor or collection of factors on which the DOL will rely on.  The DOL states that this test will provide the Agency with flexibility.  It is this same lack of certainty, however, that will create challenges for many businesses seeking to understand and quantify their risks.

Under this new multi-factor test, the DOL will determine whether an individual is an independent contractor by analyzing:

  • The individual’s opportunity for profit or loss, depending on managerial skill

Think “business owner.”  An independent contractor will normally make or lose money based on how successfully they perform their duties.  An employee’s pay is normally less dependent on the ebbs and flows of profitability.

  • Investments by the worker in their own equipment or material

Employees normally have equipment provided for them, whereas independent contractors are responsible for the purchase and upkeep of own equipment.  This also includes expense and benefits reimbursement since an independent contractor is normally responsible for their own cost of operation.

  • The degree of permanence and exclusivity of the work relationship

An independent contractor is normally not a person who has been working with a company for a long time.  Rather, they normally perform specific jobs and tasks.  Likewise, an independent contractor is usually someone who is free to work for anyone they wish, whereas an employee is often restricted from working for competitors.

  • The degree of control the business exerts over the worker

It is expected that an employer will supervise and manage their employees. Independent contractor work should have a more “set it and forget it” approach, with a business telling the individual what it wants done and the independent contractor deciding how to perform the work.

  • The extent to which the work performed is integral to the business

How integral to the business is the work at issue? If, for example, you have a painting business, the DOL will likely expect that you employ painters.  One good question for a business analyzing this factor is: Would a customer assume that a worker was an employee based on the work being performed?  If the answer is “definitely yes” but the person is classified as an independent contractor, then the business may need to rethink its approach.

  • The degree of skill required for the work.

The more skill or expertise required for a job, the more likely this factor will weigh in factor of independent contractor status.

Damages and Penalties for Misclassification: What Will This Cost My Business?

Misclassification can prove very costly for businesses. Under federal law, civil penalties for misclassification can include:

  • liability and penalties for unpaid state and federal taxes;
  • liquidated, or double, amounts unpaid wages and overtime to misclassified employees for up to a three-year period and attorney’s fees; and
  • the value of any benefits from which they were improperly excluded, such as health and retirement benefits.

The Virginia Rule: The Deck is Stacked Against You. 

Virginia follows the “Twenty Factor Test” used by the IRS that is familiar to many employers.  Under Virginia law, however, workers are presumed to be employees. Businesses have the burden to prove that a person is properly classified as an independent contractor.  This means that any investigation or audit by the Commonwealth will not be a neutral fact-finding inquiry.  An investigator will treat a complaint of misclassification as valid unless the business is able to demonstrate otherwise through evidence and documentation.

The North Carolina Rule: Look at the Whole Picture

In North Carolina, an independent contractor is someone who, among other things, is engaged in an independent business, has control over when he or she works, independently uses special skills, does specific work at a fixed price, cannot get fired because he or she chooses one method over another to do the work, can use assistants if the person wants, and has full control over his or her assistants. In addition to these factors, North Carolina courts will review the circumstances of the arrangement in their totality.  This approach requires businesses to carefully analyze questions of proper classification on an individualized basis.

Practical Tips for Understanding Independent Contractor Classification.

1. Come to terms with the fact that the Government does not like it when businesses classify employees as independent contractors. Businesses and industry groups point to the value and flexibility that independent contractor classification provides.  The Government (at least the current Administration and its Agencies) sees it differently.  It believes that businesses often use independent contractor classification to avoid tax liability and circumvent myriad of workplace protections, including Civil Rights Laws, Workers’ Compensation, and Unemployment Compensation.  In a press release, the DOL summed up its position stating that“[t]he final rule will help the Wage and Hour Division to continue addressing misclassification and prioritizing the most vulnerable workers who are being misclassified – because that’s what we must do.”  The important thing here, however, is to understand that the Government does not take a neutral approach to whether an independent contractor is a misclassified employee.

2. Avoid the easy mistakes. Although not a guarantee of proper classification, businesses should make sure they steer clear of avoidable mistakes.  Never, for example, use an agreement that refers to a person as a “1099 Employee” this is not a thing.  It is simply evidence of potential misclassification.  Businesses should avoid referring to a contractor as an employee altogether.  Another avoidable mistake is asking an independent contractor to sign a noncompete agreement.  Independent contractors (as independent businesspeople) are normally expected to be able to advertise and work for whomever they choose.

3. Remember your mother’s advice. Growing up, many of us heard a parent say, “Just because your friends are doing it does not mean that you should too.”  This adage also applies to independent contractor status.  Often businesses feel a sense of protection if others in their industry are classifying workers as independent contractors.  Industry practice is not a safe harbor, however.  We have seen this time and again when the DOL engages in targeted enforcement of industries for misclassification such as with the health care and retail industries.  Businesses should likewise take note of any audits or enforcement activity in their industry.

4. Changes in your business practices can result in misclassification. Operating a business often requires an owner to adapt to change in a fast-paced environment. This can also create risks when the business does not examine the impact on personnel decisions and policy changes to independent contractor status.  For example, during a labor shortage, a business may be tempted to offer incentives such as travel reimbursement, money to assist with health insurance, paying worker’s compensation insurance, or purchasing equipment.  While understandable, these decisions can lead to a properly classified independent contractor becoming a misclassified employee.

5. It does not matter what your worker wants. In many instances, workers themselves request (or even demand) that businesses classify them as independent contractors.  They may want the perceived flexibility of not being an employee, or desire more control over their taxes.  It is not up to them.  Federal and state agencies readily assess liability for misclassification even where clear evidence exist that a worker got exactly what they wanted.  The lesson here is to classify correctly regardless of worker preference.         

The laws governing independent contractor status are complex. Simply trying to treat workers fairly is often insufficient to ensure that a business satisfies the rules and tests designed to uncover misclassification. Time and money can be saved by involving competent employment counsel in the process. Likewise, if a problem arises, do not avoid it.  A business should promptly bring in legal counsel when faced with an audit or investigation to help find workable solutions.

The attorneys on Sands Anderson’s Labor and Employment Team stand ready to assist employers navigating the laws governing independent contractor status.

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Margaret F. Hardy Honored by Virginia Lawyers Weekly in Its Inaugural Circle of Excellence https://www.sandsanderson.com/news/2024/02/28/margaret-f-hardy-honored-by-virginia-lawyers-weekly-in-its-inaugural-circle-of-excellence/ Wed, 28 Feb 2024 15:25:27 +0000 https://www.sandsanderson.com/?p=24537 RICHMOND, Va. (February 28, 2024) — Sands Anderson is pleased to announce that Margaret F. Hardy, president and shareholder of the firm, was recognized by Virginia Lawyers Weekly at the Influential Women of Law awards. Hardy was acknowledged as a recipient of the Circle of Excellence award. While Virginia Lawyers Weekly honors Influential Women of Law

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RICHMOND, Va. (February 28, 2024) — Sands Anderson is pleased to announce that Margaret F. Hardy, president and shareholder of the firm, was recognized by Virginia Lawyers Weekly at the Influential Women of Law awards. Hardy was acknowledged as a recipient of the Circle of Excellence award.

While Virginia Lawyers Weekly honors Influential Women of Law each year, the Circle of Excellence is new this year and recognizes former Influential Women of Law who have maintained a level of achievement and record of leadership.

Hardy holds the distinction of being Sands Anderson’s first female president in its 182-year history. Her roles at Sands Anderson have included Leader of the healthcare group, Managing Shareholder of the Fredericksburg office, and member of the Associate Council Committee. In these capacities, she has been dedicated to mentoring and advocating for women within the firm.

A registered nurse for 15 years before graduating from law school, Hardy’s experience offers a unique perspective when representing healthcare clients in complex medical malpractice actions and investigations and proceedings before the Department of Health Professions.

Hardy is the Past President of the Virginia Women Attorneys’ Association and currently leads the conference committee. She is consistently included in Virginia Business magazine’s “Legal Elite” for health law and listed in Super Lawyers® for medical malpractice defense. She was also named among Virginia Lawyers Weekly’s Influential Women of Virginia in 2013.

Hardy received her nursing diploma from Johnston-Willis Hospital School of Nursing, her undergraduate degree from the University of Richmond, a master’s degree in business administration from Old Dominion University, and her law degree from William & Mary.

The Influential Women of Law program honors women attorneys and judges for their excellent work on behalf of the justice system and for their clients, their commitment to their communities and their service to the profession.

About Sands Anderson PC
Sands Anderson PC is a Mid-Atlantic law firm that guides clients with united support for their complete legal needs. As a consultative ally, we represent businesses, government entities, insurance companies, healthcare organizations, and individuals from our five offices located throughout Virginia and in North Carolina. We are a true team of legal professionals committed to a collaborative and inclusive workplace, as well as supporting the economic growth of the communities where we operate. For more information, visit sandsanderson.com.

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Court Slashes Attorney Fees, Slams ChatGPT https://www.sandsanderson.com/news/2024/02/27/court-slashes-attorney-fees-slams-chatgpt/ Tue, 27 Feb 2024 21:23:23 +0000 https://www.sandsanderson.com/?p=24532 US District Judge Engelmayer, from the Southern District of New York, put on a bit of a clinic last week when ruling on an attorney fee application in J.G. v. New York City Department of Education.  The plaintiff’s law firm won for their client, J.G., a special education Individuals with Disabilities Education Act case.  The

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US District Judge Engelmayer, from the Southern District of New York, put on a bit of a clinic last week when ruling on an attorney fee application in J.G. v. New York City Department of Education.  The plaintiff’s law firm won for their client, J.G., a special education Individuals with Disabilities Education Act case.  The firm then applied to recover attorneys’ fees for JG, as they’re entitled to do.  It didn’t go, though, like they thought it would.

The firm asked for $113,484.62.  The court awarded less than half: $53,050.13.

How the court came to cut the fee so drastically has some important lessons for those of us asking for fee awards and for those of us defending fee applications.

The court began by rejecting J.G.’s lawyers’ suggested hourly rates.  The firm asked for rates as high as $600 an hour for senior lawyers and as low as $225 an hour for paralegals.  That’s a lot of money to most people.  That said, most of us have seen $1,000 per hour rates, once unimaginable, become increasingly common in recent years.  Nevertheless, the court held the rates in this case were too high.

It had its reasons.

At the outset, the court rejected use of four often referenced sources for attorney fees: the Real Rate Report conducted by Wolters Kluwer, the 2022 Litigation Hourly Rate Survey and Report conducted by the National Association of Legal Fee Analysis, the 50th Annual Survey of Law Firm Economics, and the Laffey Matrix.  None were good gauges, the court concluded, of reasonable rates for special education lawyers in New York.  They were either too broad in the kinds of practices they considered or they weren’t focused on the right geographical market for lawyers.

To bolster its claim for its rates, JG’s firm also claimed that the hourly rates it sought were confirmed by a ChatGPT-4 inquiry on the subject.  The court could not have been more dismissive of using that tool:

It suffices to say that the [the plaintiff’s firm’s] invocation of ChatGPT as support for its aggressive fee bid is utterly and unusually unpersuasive. As the firm should have appreciated, treating ChatGPT’ s conclusions as a useful gauge of the reasonable billing rate for the work of a lawyer with a particular background carrying out a bespoke assignment for a client in a niche practice area was misbegotten at the jump. … In claiming here that ChatGPT supports the fee award it urges, the [firm] does not identify the inputs on which ChatGPT relied. It does not reveal whether any of these were similarly imaginary. It does not reveal whether ChatGPT anywhere considered a very real and relevant data point: the uniform bloc of precedent, canvassed below, in which courts in this District and Circuit have rejected as excessive the billing rates the [firm] urges for its timekeepers. The Court therefore rejects out of hand ChatGPT’s conclusions as to the appropriate billing rates here. Barring a paradigm shift in the reliability of this tool, the [firm] is well advised to excise references to ChatGPT from future fee applications.

Not only did the court reduce the plaintiff’s firm’s hourly rates, it also substantially slashed the number of hours the firm could charge.  After reviewing the firm’s invoices, it noted a number of what it called “inefficiencies” in the billing.  These included:

  • Duplicate billing by timekeepers for reviewing the same set of records.
  • Billing 3.9 hours for a “three-page boilerplate complaint.”
  • Unexplained billing of almost 30 hours before drafting a complaint.
  • Billing 15 hours for “a simple 11-page [complaint]” with “boilerplate requests for relief” that “does not reflect sophisticated legal or factual analysis.”
  • Billing 27 hours for preparing declarations that were “disorganized, duplicative, and difficult to parse.”

So, some lessons for these kinds of fee applications?

  • Good fee applications are supported by affidavits or testimony from competent professionals who can confirm market rates for the work being performed.
  • Proof bills to make sure they make sense to a reviewing court. Honestly, proof them to make sure they make sense to your client.  If the description is vague or causes a disinterested reviewer to blanche, ask yourself if the fee is correct or if it needs to be better explained.
  • If you’re thinking about using ChatGPT as a source for this sort of fee application, think again. Keep thinking again until you stop thinking about using ChatGPT.

If you have any questions about this post or litigation and ethics issues, please contact Cullen at (804)783-7235 or CSeltzer@sandsanderson.com.

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(Un)reasonable Accommodations: 3 Takeaways From the Fourth Circuit’s Tartaro-McGowan Decision https://www.sandsanderson.com/news/2024/02/20/unreasonable-accommodations-3-takeaways-from-the-fourth-circuits-tartaro-mcgowan-decision/ Tue, 20 Feb 2024 22:03:13 +0000 https://www.sandsanderson.com/?p=24513 The Fourth Circuit has handed down a decision that provides helpful guidance to employers seeking to provide reasonable accommodations in compliance with the Americans with Disabilities Act (ADA). In Tartaro-McGowan v. Inova Home Health, 91 F.4th 158 (4th Cir. 2024), a nurse for a home health agency had arthritis and wanted to avoid tasks that

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The Fourth Circuit has handed down a decision that provides helpful guidance to employers seeking to provide reasonable accommodations in compliance with the Americans with Disabilities Act (ADA).

In Tartaro-McGowan v. Inova Home Health, 91 F.4th 158 (4th Cir. 2024), a nurse for a home health agency had arthritis and wanted to avoid tasks that required her to bend or put stress on her knees. She requested as an accommodation that she be exempt from caring for patients in their homes. The request was problematic for several reasons.

The biggest problem was that Tartaro-McGowan made her request during the height of the COVID-19 pandemic when there were severe staffing shortages. Her employer needed all the home health nurses it could find, and reallocating her duties wasn’t an option. It also didn’t make sense to take her off the home health rotation, because there were several home health duties she could still do within her physical limitations. Plus, her employer was willing to let her screen the patients she served to ensure she wouldn’t have to bend excessively.

The Fourth Circuit ultimately found in favor of the home health agency, determining that the company offered Tartaro-McGowan a reasonable accommodation. The court’s analysis contains good lessons for employers who receive unreasonable accommodation requests, and here are three takeaways:

1. Every accommodation request must be given individualized treatment.

The Fourth Circuit emphasized that its decision was made against the backdrop of the “exceptional circumstances” of the pandemic, “coupled with the ultimate discretion that employers enjoy in selecting between potential accommodation alternatives.” The court’s repeated references to the “particular circumstances” of the case serve as a reminder that there’s no cookie cutter approach to accommodation requests.

If employers are going to ensure that they make the best judgment calls possible, they can’t rely on what they’ve done with similar requests or allow personal feelings to get involved. They need to consider the unique demands of the employee’s position, determine the precise limitations caused by the employee’s disability, and put the effort into exploring the best accommodation for that person. As the court held, “The ADA requires reasonableness, not perfection. Reasonableness does not demand that an accommodation have an airtight solution to every contingency conceivable. Its dictates are tethered to the practical realities of each case[.]”

2. An employer needs to remember that a record is being built, and its reasonableness may eventually save the day.

Something the Fourth Circuit made a point to mention was Tartaro-McGowan’s unwillingness to cooperate when her employer came up with alternative accommodations. The court explicitly noted, “Perhaps [she] would have a stronger argument had she actually given Defendants’ proposed accommodation a chance.” In that case, she might have proven that the employer’s proposal was unreasonable. Instead, she rejected its ideas and didn’t propose any of her own when invited to do so.

It’s frustrating when an employee is resistant to reasonable suggestions for accommodations, but employers should remain professional and helpful throughout the process. Remember that Tartaro-McGowan’s unreasonable responses to her employer ultimately ended up being part of the basis for the court finding in the employer’s favor. That’s why management needs to remember that its earnest and non-reactive efforts during these interactions may one day be the difference between success or failure in court.

3.The employer is in the driver’s seat (for the most part) when negotiating accommodations.

The Fourth Circuit emphasized (as it has before) that with accommodations, there are often “many possible solutions [and] . . . the employer, exercising sound judgment, possesses the ultimate discretion over these alternatives.” That is, the employee isn’t entitled to her preferred accommodation. As the court explained, “[A]s long as the employer’s chosen accommodation is reasonable, even if not perfect, our inquiry is at an end.”

Even so, declining an employee’s request can be costly in terms of the internal distraction that comes with conflict and potential litigation. No matter how confident the employer may feel about its proposed accommodation, the risks that come with rejecting an employee’s request aren’t always obvious. If there’s any lesson that comes from Tartaro-McGowan, it’s that moving forward with an accommodation plan can be tricky and is best done with the advice of counsel.

Contact Joshua Rogers or a member of the Sands Anderson Employment Team for assistance navigating ADA issues or other employment law matters.

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Word Limits and Page Limits are Real: The Rules Against “Incorporating Arguments by Reference” https://www.sandsanderson.com/news/2024/02/20/word-limits-and-page-limits-are-real-the-rules-against-incorporating-arguments-by-reference/ Tue, 20 Feb 2024 20:40:29 +0000 https://www.sandsanderson.com/?p=24510 You might think 50 pages or 12,300 words, in the Virginia Court of Appeals, or 30 pages or 13,000 words, in the federal courts of appeals, would be more than enough space for a lawyer to get out an argument. If you do, you’re probably underestimating lawyers’ capacity to natter on. Most of us will

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You might think 50 pages or 12,300 words, in the Virginia Court of Appeals, or 30 pages or 13,000 words, in the federal courts of appeals, would be more than enough space for a lawyer to get out an argument. If you do, you’re probably underestimating lawyers’ capacity to natter on. Most of us will admit to having complained about the onerous restrictions of court rules that limit pages or words in a brief.

Which is why we might be tempted to “incorporate by reference” an argument made in an earlier brief or a separate filing in a piece of litigation. We tell ourselves that “incorporating by reference,” is just efficient. It spares megabytes in pdfs and pulp from trees. But we also figure that by pointing to some other document, that has really important words in it that we don’t have space in our brief to use, we’re cleverly getting around the court’s page and word limits.

The US Court of Appeals for the Federal Circuit recently reminded us that we’re not as clever as we think.

In Promptu Systems Corp. v. Comcast Cable, the Federal Circuit admonished counsel for Comcast that “[w]e have repeatedly held that incorporating argument by reference ‘cannot be used to exceed word count’ [and that it] is ‘fundamentally unfair to allow a party to use incorporation to exceed word count.’ That is exactly what would have occurred here had [Comcast] been allowed to in[1]corporate by reference almost 2,000 words from a brief in a separate case.”

Counsel for Comcast, who explained he did not know about the Court’s precedent prohibiting incorporating other arguments by reference, narrowly escaped being sanctioned by the Court. But the Court’s order put the world on notice, or at least the world consisting of practitioners in the Federal Circuit, that future violators are likely to be punished.

Note that the Federal Circuit’s rule stems from its interpretation of Federal Rule of Appellate Procedure 28 which permits incorporation of arguments by reference only in cases where there are multiple appellants or multiple appellees. In those cases, and only those cases, one party may incorporate by reference the argument of another party. That permissible and limited use of “incorporation by reference,” implies that other attempts to do the same thing are forbidden.

No such fancy footwork is necessary to get to the same result in Virginia appellate practice. In the Supreme Court of Virginia, incorporation of arguments by reference is outright prohibited by Rule 5:26(f). Ditto for the Court of Appeals of Virginia in Rule 5A:19.

Finally, Polonius was right that “brevity is the soul of wit and tediousness the limbs and outward flourishes.” The Supreme Court agreed, a few hundred years later, that “[b]revity is enjoined as the outstanding characteristic of good pleading.”  Point taken.  Speak better.  Incorporate less.

If you have any questions about this post or other appellate issues, please contact Cullen at (804)783-7235 or CSeltzer@sandsanderson.com .

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Former Assistant United States Attorney Joshua L. Rogers Joins Sands Anderson in North Carolina https://www.sandsanderson.com/news/2024/02/13/former-assistant-united-states-attorney-joshua-l-rogers-joins-sands-anderson-in-north-carolina/ Tue, 13 Feb 2024 14:56:43 +0000 https://www.sandsanderson.com/?p=24498 Durham, NC (February 13, 2024) – Sands Anderson PC today announced Joshua L. Rogers has joined the firm as Counsel. Rogers helps small- and medium-sized companies and governmental entities create healthy work environments where management and staff flourish together. He will be based in Sands Anderson’s Durham office. As a member of Sands Anderson’s Employment Team,

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Durham, NC (February 13, 2024) – Sands Anderson PC today announced Joshua L. Rogers has joined the firm as Counsel. Rogers helps small- and medium-sized companies and governmental entities create healthy work environments where management and staff flourish together. He will be based in Sands Anderson’s Durham office.

As a member of Sands Anderson’s Employment Team, Rogers will counsel North Carolina companies on a wide range of employment law issues including internal investigations, accommodation requests, employee complaints, and other personnel decisions.

He is also a skilled litigator whose clients appreciate his ability to guide them from the earliest stages of an administrative complaint through trial and the appellate process. His wealth of experience includes litigating claims under Title VII, the ADA, ADEA, and Pregnancy Discrimination Act, as well as Section 1983.

Before entering private practice, Joshua served for nearly two decades with the U.S. Department of Justice, defending federal agencies at all stages of litigation. While there, he conducted investigations into the circumstances surrounding employment claims, recommended corrective measures, and advised management on litigation risks. He also represented management interests in discovery, at trial, and in appeals.

“Joshua is a talented employment attorney and capable litigator who will expand our firm’s abilities to better serve clients on a variety of matters in North Carolina,” said Firm President Margaret F. Hardy. “We are delighted to welcome him and excited about the continued expansion of our Durham office.”

The Durham office of Sands Anderson welcomed Ashley L. Anderson, an attorney focused on community economic development and public finance, just last month.

Rogers received his juris doctor from the University of Mississippi School of Law and his bachelor’s degree from the University of Southern Mississippi. He can be reached at jrogers@sandsanderson.com.

About Sands Anderson PC
Sands Anderson PC is a Mid-Atlantic law firm that guides clients with united support for their complete legal needs. As a consultative ally, we represent businesses, government entities, insurance companies, healthcare organizations, and individuals from our five offices located throughout Virginia and in North Carolina. We are a true team of legal professionals committed to a collaborative and inclusive workplace, as well as supporting the economic growth of the communities where we operate. For more information, visit sandsanderson.com.

 

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The Corporate Transparency Act: FAQs https://www.sandsanderson.com/news/2024/02/06/the-corporate-transparency-act-faqs/ Tue, 06 Feb 2024 19:22:35 +0000 https://www.sandsanderson.com/?p=24447 More information on the Corporate Transparency Act can also be found here: Corporate Transparency Act: A Primer.  The Corporate Transparency Act (“CTA”) is a newly effective federal law that requires certain entities to report their owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Below are the frequently asked questions we

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More information on the Corporate Transparency Act can also be found here: Corporate Transparency Act: A Primer

The Corporate Transparency Act (“CTA”) is a newly effective federal law that requires certain entities to report their owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Below are the frequently asked questions we have been addressing with clients. As we receive additional questions or FinCEN provides additional guidance, we will update the information provided.

1. What is the CTA?

 The CTA is a federal statute enacted as part of the Anti-Money Laundering Act of 2020. The intent of the CTA is to enhance the ownership transparency on entities to combat criminal, corruption, and terrorist activities. The entities that must report their Beneficial Owners are Reporting Companies. Generally, the federal government wants to know who owns or controls certain entities to prevent bad actors from using shell companies to hide their activities. The CTA is very broad and sweeps in many legitimate entities.

The reporting obligations under the CTA began January 1, 2024 and FinCEN’s website for receiving Beneficial Ownership Information Reports (“BOIR”) is live. Here is the link to the FinCEN website.

2. What is a Reporting Company?

A Reporting Company is an entity that must file a BOIR with FinCEN. Reporting Companies are divided into two groups: (1) Domestic Reporting Companies and (2) Foreign Reporting Companies.

A Domestic Reporting Company is generally any entity that is created by filing a document with a secretary of state or similar office in the U.S. For Virginia, filings with the Commonwealth of Virginia State Corporation Commission are a filing with “the secretary of state or similar office.” For North Carolina, an entity created through a filing with the North Carolina Secretary of State would be a Domestic Reporting Company.

A Foreign Reporting Company is generally any entity formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or similar office.

3. Can Reporting Companies be exempt from reporting?

 Most of the exemptions from reporting are for entities that are already subject to separate regulatory obligations to report ownership information. The 23 exemptions are as follows:

· Securities reporting issuer · Other Exchange Act registered entity · Financial market utility
· Governmental authority · Investment company or investment adviser · Pooled investment vehicle
· Bank · Venture capital fund adviser · Tax-exempt entity (exclusively certain 501(c), 527(a), and 4947(a) entities)
· Credit union · Insurance company · Entity assisting a tax-exempt entity
· Depository institution holding company · State-licensed insurance producer · Large operating company
· Money services business · Commodity Exchange Act registered entity · Subsidiary of certain exempt entities (wholly owned by certain entities exempt from reporting)
· Broker or dealer in securities · Accounting firm · Inactive entity
· Securities exchange or clearing agency · Public utility

The qualifications for each exemption are detailed and fact specific. Entities should consult their legal advisors as to whether they may meet the criteria for particular exemptions. The exemptions are narrowly tailored and many entities may not qualify for any exemption. Exemption qualification is generally analyzed on an entity-by-entity basis. An entity can gain or lose its exempt status depending on changes to the entity and its owners.

Exemptions of note are:

A. Tax-exempt entity: To qualify, the entity must be one of the following:

  1. An organization that is described in Section 501(c) of the Internal Revenue Code of 1986, as amended (“Code”) (determined without regard to Section 508(a) of the Code) and exempt from tax under Section 501(a) of the Code.
  2. An organization that is described in Section 501(c) of the Code, and was exempt from tax under Section 501(a) of the Code, but lost its tax-exempt status less than 180 days ago.
  3. A political organization, as defined in Section 527(e)(1) of the Code, that is exempt from tax under Section 527(a) of the Code.
  4. A trust described in paragraph (1) or (2) of Section 4947(a) of the Code.

Not all entities that are exempt from taxation qualify as “tax-exempt entities” for the CTA reporting exemption. For example, many homeowner associations (or HOAs) are exempt from taxation, but do not qualify for the “tax-exempt entity” exemption from the BOIR filing obligation because they are not tax-exempt under Section 501(c)(3) of the Code (nor any of the other Code sections listed above).

B. Large Operating Company: To qualify, the entity must meet all of the following criteria:

  1. Employ more than 20 full-time employees in the U.S.;
  2. Have an operating presence at a physical office within the U.S.; and
  3. Have filed a federal income tax return (or informational return) for the prior year for more than $5 million of U.S. gross receipts or sales.

The gross receipts or sales may be aggregated in certain circumstances, but the employees are counted on an entity-to-entity basis.

C. Inactive entity: To qualify, the entity must meet all of the following criteria:

  1. The entity was in existence on or before January 1, 2020.
  2. The entity is not engaged in active business.
  3. The entity is not owned by a foreign person, whether directly or indirectly, wholly or partially.
  4. The entity has not experienced any change in ownership in the preceding 12-month period.
  5. The entity has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period.
  6. The entity does not otherwise hold any kind or type of assets, whether in the U.S. or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

4. What is a “Beneficial Owner”?

A Beneficial Owner is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise:

  1. Exercises Substantial Control over a Reporting Company; or
  2. Owns or controls at least 25% of the Ownership Interests of the Reporting Company.

The definitions of “Substantial Control” and “Ownership Interests” were intentionally made very broad by FinCEN. For example, an individual exercises “Substantial Control” over a Reporting Company if the individual meets any of four general criteria: (1) the individual is a senior officer; (2) the individual has authority to appoint or remove certain officers or a majority of directors of the Reporting Company; (3) the individual is an important decision-maker, which includes decisions regarding the business, finances, or structure of the Reporting Company; or (4) the individual has any other form of substantial control over the Reporting Company. Ownership Interests includes any issued, but unexercised options.

Reporting Companies should consult with their legal advisors as to who may be a Beneficial Owner because the rules are not intuitive and cast a wide net. For example, the President of a corporation who is an employee, but not an owner, is likely a Beneficial Owner as a result of being a “senior officer.”

5. What kind of information must be reported?

If the entity is a Reporting Company and no exemption applies, then two kinds of information must be reported to FinCEN in a BOIR for entities existing (or registered for Foreign Reporting Companies) before January 1, 2024:

  1. Information about the Reporting Company such as the entity’s name, address, state of formation (or registration), and its taxpayer identification number.
  2. The Reporting Company must also report the full legal name, date of birth, current residential address, a driver’s license or passport number, and a scanned copy of such driver’s license or passport of each Beneficial Owner of the Reporting Company.

For entities formed (or registered for Foreign Reporting Companies) on or after January 1, 2024, the Reporting Company must also report the full legal name, date of birth, current address, a driver’s license or passport number, and a scanned copy of such driver’s license or passport of each Company Applicant of the Reporting Company.

As a substitute for the information listed above, a Reporting Company, Beneficial Owner, or Company Applicant may provide their unique “FinCEN Identifier”.

6. Who is a Company Applicant?

A Reporting Company may have a maximum of two Company Applicants. A Company Applicant is:

  1. The individual who directly files the document that creates (or registers) the Reporting Company; and
  2. If more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing.

Company Applicant reporting only applies to entities formed (or registered for Foreign Reporting Companies) on or after January 1, 2024.

7. What is the deadline for initial report to FinCEN?

Deadlines for the initial BOIR vary based on when the Reporting Company was formed (or registered to do business in a U.S. state for a Foreign Reporting Company).

Domestic Reporting Companies

Reporting Company Formation Timing Requirement for Initial BOIR
Domestic Reporting Company formed before January 1, 2024 Must file initial BOIR by January 1, 2025
Domestic Reporting Company formed on or after January 1, 2024 and before January 1, 2025 Must file initial BOIR within 90 calendar days of formation
Domestic Reporting Company formed on or after January 1, 2025 Must file initial BOIR within 30 calendar days of formation

Foreign Reporting Companies

Reporting Company Formation Timing Requirement for Initial BOIR
Foreign Reporting Company registered before January 1, 2024 Must file initial BOIR by January 1, 2025
Foreign Reporting Company registered on or after January 1, 2024 and before January 1, 2025 Must file initial BOIR within 90 calendar days of registration
Foreign Reporting Company registered on or after January 1, 2025 Must file initial BOIR within 30 calendar days of formation

8. This a one-time report, right?

No, but the BOIR is not an annual report. After the initial BOIR is filed with FinCEN, the Reporting Company must report (a) any corrections to its BOIR within 30 days after the Reporting Company becomes aware of or had reason to know an inaccuracy and (b) any changes to its BOIR regarding the Reporting Company or the Beneficial Owners within 30 days of the change. Changes to the Reporting Company can include a change in name, address, reporting exemption status, etc. Changes to Beneficial Owners can include changes in residential address, death, ownership interest transfers (i.e., sales or purchases), officers or directors of the Reporting Company, etc.

The Company Applicant information is only provided once upon the filing of the initial BOIR for applicable Reporting Companies and need not be updated for changes.

9. Are there penalties for not filing?

Yes, there are federal criminal and civil penalties for noncompliance. A person who willfully violates the reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues and to criminal penalties of up to 2 years imprisonment and a fine of up to $10,000. Potential violations include willfully failing to file a BOIR, willfully filing false beneficial ownership information, or willfully failing to correct or update previously reported beneficial ownership information. Both entities and individuals, including individuals that cause the filing failure or are a senior officer of the Reporting Company at the time of the failure, can be held liable.

A Beneficial Owner can be held liable for refusing to provide the required information to the Reporting Company. FinCEN can bring an enforcement action against an individual who willfully causes a Reporting Company’s failure to submit complete or update beneficial ownership information to FinCEN.

Entities should consider whether to update their organizational and employment documents to include language requiring Beneficial Owners to provide their information for the Reporting Company to make a timely, complete, and accurate BOIR.

10. I don’t want my information available to the public. Who has access to the BOIRs?

The BOIRs are not on a publicly accessible database. FinCEN released regulations that restrict access to the BOIRs for certain reasons to federal, state, local, and tribal officials, as well as certain foreign officials who submit a request through a U.S. federal government agency, financial institutions with the consent of the Reporting Company, regulators of financial institutions, and the Department of Treasury.

There are civil and criminal penalties for any person who knowingly discloses or uses information obtained through a BOIR submitted to FinCEN without authorization.

Wondering where to find more information and help with CTA issues?

Sands Anderson has a team focused on addressing CTA-related questions for clients. If you have questions or need advice regarding the CTA, please reach out to your Sands Anderson contact and they will route you to a team member.

For additional resources from Sands Anderson, below are some helpful links:

  • Corporate Transparency Act: A Primer: Link
  • HOAs Inadvertently Caught in Federal Crossfire: Ten Things You Need to Know About Community Associations and the Corporate Transparency Act: Link

For additional resources from FinCEN, below are some helpful links:

FinCEN has been updating its guidance regularly.

Sands Anderson’s Corporate Transactions Team stands ready to help clients solve their CTA questions and make sense of this new, broad compliance requirement. We look forward to assisting you and your entities.

Disclaimer: The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your legal advisers. This summary is not intended, and should not be construed, as accounting, business, financial, investment, legal, tax, or other professional advice, services, or opinion provided by Sands Anderson PC. Sands Anderson PC shall not be responsible for any loss incurred by any person who relies on this summary.

 

 

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Sands Anderson Unveils Contemporary New Office Space in Richmond https://www.sandsanderson.com/news/2024/02/05/sands-anderson-unveils-contemporary-new-office-space-in-richmond/ Mon, 05 Feb 2024 21:06:28 +0000 https://www.sandsanderson.com/?p=24444 RICHMOND, Va. (February 5, 2024) – Sands Anderson is pleased to announce it has moved to a new office in Richmond, Virginia. The firm’s 90+ lawyers and legal professionals in Richmond now occupy the 22nd and 23rd floors of Truist Place at 919 E. Main Street. The new office boasts upgraded conference rooms and state-of-the-art

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RICHMOND, Va. (February 5, 2024) – Sands Anderson is pleased to announce it has moved to a new office in Richmond, Virginia.

The firm’s 90+ lawyers and legal professionals in Richmond now occupy the 22nd and 23rd floors of Truist Place at 919 E. Main Street. The new office boasts upgraded conference rooms and state-of-the-art technology, alongside renovated office suites and collaboration spaces.

Prior to occupying the new space, Sands Anderson spent the last nine months extensively renovating both floors. The office’s new contemporary and open design features natural light and ample event space.

Sands Anderson’s move aligns with the firm’s plan to raise the profile of its business, government, and litigation practices.

“We are pleased to have found a physical space that represents who we are today,” said Firm President Margaret Hardy. “Our new Richmond office is welcoming, modern, efficient, and practical. We look forward to continuing to build our firm and serving our clients from this space while also staying downtown, where we have always been.”

Brian Pitney, a Sands Anderson Shareholder and Board Member, added, “As Richmond’s longest tenured law firm, we’re proud of how far our firm has come in the last 180 years and are excited for this new chapter in Sands Anderson’s journey.”

About Sands Anderson PC
Sands Anderson PC is a Mid-Atlantic law firm that guides clients with united support for their complete legal needs. As a consultative ally, we represent businesses, government entities, insurance companies, healthcare organizations, and individuals from our five offices located throughout Virginia and in North Carolina. We are a true team of legal professionals committed to a collaborative and inclusive workplace, as well as supporting the economic growth of the communities where we operate. For more information, visit sandsanderson.com.

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The Corporate Transparency Act: A Primer https://www.sandsanderson.com/news/2024/02/02/corporate-transparency-act-a-primer/ Fri, 02 Feb 2024 17:24:49 +0000 https://www.sandsanderson.com/?p=24409 More information on the Corporate Transparency Act can also be found here: Corporate Transparency Act: FAQs  I. Introduction and Purpose of the CTA This is a basic primer describing the Corporate Transparency Act (“CTA“) which was enacted into federal law on January 1, 2021 as part of the Anti-Money Laundering Act of 2020 and became

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More information on the Corporate Transparency Act can also be found here: Corporate Transparency Act: FAQs 

I. Introduction and Purpose of the CTA

This is a basic primer describing the Corporate Transparency Act (“CTA“) which was enacted into federal law on January 1, 2021 as part of the Anti-Money Laundering Act of 2020 and became effective January 1, 2024.  The purpose of this Primer is to describe the CTA for the benefit of business owners and operators in simple straightforward language with a focus on the actions needed to comply with the requirements of the CTA.

For context, the stated purpose of the CTA as published in the federal regulations is to enhance beneficial ownership transparency in the U.S. in order to: “protect the U.S. financial system from illicit use and impede malign actors from abusing legal entities, like shell companies, to conceal proceeds of corrupt and criminal acts.”

 The CTA is intended to provide law enforcement with information about business enterprises and the ownership of those enterprises for the purpose of providing law enforcement with this information for detecting, preventing, and punishing money laundering, terrorism, human trafficking and use of U.S. businesses to mask the identities of the individuals who own and control the entities and who ultimately are behind such crimes. Concealing such information can undermine U.S. national security, economic fairness, and the integrity of the U.S. financial system.

The CTA establishes a federal standard for incorporation practices that require disclosure of ownership information at the point of incorporation or organization of business enterprises on the state level. This is a federal law and not a series of state laws, and is the first of its kind to monitor and maintain a database of ownership of small and early-stage business entities.

NOTE: The use of capitalized terms in this Primer is to distinguish certain terms that have specific definitions under the CTA and its regulations, but which are not capitalized in the statute or the regulations. Legal citations are not provided for the statute or regulations quoted but are available upon request.

II. Obligations and Penalties of the New Law

Reporting obligations are at the core of the CTA. The essential tasks required are for owners, managers, and officers of business entities to file certain types of reports with U.S. Department of the Treasury’s Financial Crimes Enforcement Network (known as “FinCEN“) to be maintained in a federal database.

Specifically, the statute requires certain types of domestic and foreign entities, called “Reporting Companies” to submit specified reports to FinCEN regarding the entity itself and its owners.  The ownership information is defined as “Beneficial Ownership Information” or “BOI” of the Reporting Company.  It’s important to remember that the Reporting Company is the responsible party obligated to file the reports and not the advisors, lawyers, or accountants who serve the Reporting Company. Under the CTA, Reporting Companies are required to report to FinCEN certain identifying information pertaining to its “Beneficial Owners” and “Company Applicants” as defined by the CTA.   Including providing evidence of the authenticity of the Beneficial Owners and Company Applicants in the form of personal identifying documents, such as driver’s licenses or passports.

There are serious penalties for willfully violating the statute. The CTA makes it unlawful for any person to willfully provide, or attempt to provide, false or fraudulent BOI to FinCEN, or to willfully fail to report complete or updated BOI to FinCEN. There are federal civil and criminal offenses for violations of the CTA. Willful violations may result in a civil penalty of up to $500 for each day a violation continues or has not been cured ($15,000 per month) and fines up to $10,000 and imprisonment for up to two years (or both) for a criminal violation.

These penalties apply to “any person,” which includes individuals and entities, including the Reporting Company itself, who causes the failure to comply with the statute or any person who is a “Senior Officer of the entity at the time of the failure.”  “Senior Officer” is defined below in this primer.

Advisors to the Reporting Company, such as attorneys or accountants, will need to advise and assist the owners and officers of the business to prepare the certifications for filing because there are legal and other technical interpretations needed for any Reporting Company to comply with the CTA. However, the ultimate requirement for the filings are the responsibility of the Reporting Company.  The certification on the Beneficial Ownership Information Report (“BOIR”), which is the form that is filed online with FinCEN, states the following:

I certify that I am authorized to file this BOIR on behalf of the reporting company. I further certify, on behalf of the reporting company, that the information contained in this BOIR is true, correct, and complete.”

III. The Three Reporting Categories

The CTA requires that the Reporting Company report information to FinCEN about three general groups of entities or individuals:

  1. The Reporting Company itself;
  2. The Beneficial Owner Information (BOI); and
  3. The Company Applicants.

IV. Reporting Companies and the Exceptions – Who Must Report?

A. Reporting Companies

The first step for the owners and operators of any business entity is to determine if the CTA applies to their entity.

“Reporting Company” means any entity that is a corporation, limited liability company, or “other similar entity,” so the definition is fairly broad. “Other similar entities” means any entity that is created (in the case of a domestic Reporting Company) or registered to do business in the U.S. (in the case of a foreign Reporting Company) through a filing with a secretary of state (or any similar office) in a U.S. jurisdiction, such as the Virginia State Corporation Commission for Virginians.

The standard specified by the CTA is “whether an entity is created by a filing…”  So, a filing that forms an entity with any state triggers the reporting requirements.  Other types of state filings for entities, such as amendments, qualifications to do business, or domestications, do not trigger reporting requirements – only the creation or registration of an entity.

Reporting Companies, include but are not limited to:

  • Corporations;
  • Limited Liability Companies;
  • Limited Partnerships;
  • Business Trusts;
  • Any other entity that is created by the filing of a document with a secretary of state or any similar office under the law of a state.

B. Exceptions

There are 23 specified exceptions from the filing requirements that are listed in the statute. The main exemptions are for industries and entities that are already heavily regulated and otherwise must report entity information to the U.S. Government such as banks, public utilities, broker-dealers, publicly traded companies, and similar entities. The most important of these exemptions for present purposes are: (i) Inactive Entities; (ii) Tax Exempt Entities; (iii) “Large Operating Companies,” and (iv) Wholly Owned Subsidiaries of Exempt Entities.

1. Inactive Entities. (Must meet all six criteria below to qualify):

  • Entity was in existence on or before January 1, 2020;
  • Not presently engaged in active business;
  • Not owned by a foreign person, whether directly or indirectly, wholly or partially;
  • No change in ownership in the preceding 12-month period;
  • Has not “sent or received” any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period; AND
  • Does not otherwise hold any kind or type of assets, including any ownership interest in any entity.

2. Tax Exempt Entities. These are generally Internal Rev. Code 501 (c) organizations but with certain qualifications. Some trusts are exempt from filing reports.

3. Large Operating Companies. (Must meet all 3 criteria below to qualify)

  • Employs more than 20 full-time employees in the U.S. (not consolidated with other entities);
  • Previous year’s consolidated federal tax return demonstrates more than $5 million of “gross receipts or sales in the aggregate” excluding from sources outside the U.S. (using consolidated return for a group) — note that a tax return for the entity needs to be filed so single member LLCs would not qualify); AND
  • “An operating presence at a physical office” in the U.S.

Because of this exemption Reporting Companies are generally small to medium-sized private entities that are not otherwise regulated or required to provide information covered by the CTA to the U.S. Government.

4. Subsidiaries That are Owned 100% by an Exempt Entity.

V. Beneficial Owner Information.  Who Is a Beneficial Owner?

The CTA defines “Beneficial Owner” using a two-prong definition, either of which may be used to define a Beneficial Owner:  ownership or control of 25% of the ownership interests or the exercise of “Substantial Control” of the Reporting Company.

A. An individual who owns or controls at least 25% of the ownership interests of a Reporting Company.

Ownership interests include:

  • Equity, stock, or similar instruments
  • Any capital or profits interest in an entity
  • Any instrument convertible into any share of equity
  • Any put, call, straddle, or other option, to buy or sell any equity interest as set forth in 1,2, and 3 above
  • Other instruments, contacts, arrangements, understandings, relationships, or mechanisms used to establish ownership

Ownership or control” of ownership interest may be direct or indirect ownership or control through any contract, arrangement, understanding, or other relationship or in any other way, including:

  1. Joint ownership;
  2. Ownership through another individual acting as a nominee, intermediary, custodian, or agent;
  3. For trusts holding ownership interest in a Reporting Company the Beneficial Owner could be a trustee, a beneficiary, or a grantor as:
    (i)  A trustee of the trust or other individual with the authority to dispose of trust assets;
    (ii)  A beneficiary who is the sole permissible recipient of income and principal from the trust or as a beneficiary who has the right to demand a distribution of or withdrawal of substantially all of the assets from the trust; or
    (iii)  A grantor or settlor who has the right to revote the trust or otherwise withdraw the assets from the trust.
  4. Ownership or control of one or more intermediary entities that separately or collectively own or control ownership interests of the Reporting Company.

Ownership is calculated as if all options and warrants are fully exercised, so the ownership is determined on a fully diluted basis.

The applicable percentage is the greater of the total (i) voting power of all classes of ownership interests, or (ii) combined value of the ownership interests of the individual, that is, the ownership calculation is by vote or by value.

If ownership interests cannot be determined with reasonable certainty then an individual who owns or controls 25% of any class or type of ownership interest of the Reporting Company will count as a Beneficial Owner.

B. Any individual who, directly or indirectly, exercises “Substantial Control” over the Reporting Company.

This prong of the definition of Beneficial Owner requires more information and analysis than the 25% prong. Substantial Control” is defined by any one or more of the following, a person who:

  1. Serves as a “Senior Officer” of the Reporting Company. “Senior Officer” means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title who performs a similar function.  This does not include corporate secretaries and treasurers, unless these officers exercise control in other ways. The key is “…performing the functions of a Senior Officer, or otherwise has authority indicative of substantial control.”
  2. Has authority over the appointment or removal of any Senior Officer or a majority of the board of directors (or similar body, for example a board of managers in an LLC);
  3. Directs, determines, or has substantial influence over important decisions made by the Reporting Company, including the following decisions regarding:
    a.  The nature, scope, and attributes of the business of the Reporting Company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;
    b. The reorganization, dissolution, or merger of the Reporting Company;
    c. Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the Reporting Company;
    d. The selection or termination of business lines or ventures, or geographic focus, of the Reporting Company;
    e. Compensation schemes and incentive programs for Senior Officers;
    f. The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;
    g. Amendments of any substantial governance documents of the Reporting Company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or
  4. The catch all category – anyone who has any other form of substantial control over the Reporting Company.

Control can be “direct or indirect” through the following means:

  • Board representation
  • Ownership or control of a majority of the voting power or voting rights
  • Control over intermediary entities
  • Formal or informal business relationships or arrangements
  • Contracts, voting agreements, understandings or arrangements

The CTA regulations don’t comment on whether each individual or groups of individuals who are members of a board of directors or managers meet the criteria of substantial control.  For example, does an individual board member who can vote together with other board members constitute a Beneficial Owner by him or herself, even if their control is only effective when voting with a group of like-minded directors or managers who constitute a majority?  The answer is not clear in the statute or regulations.

The regulations specify that FinCEN requirements are “…intended to prevent sophisticated bad actors from structuring their relationships to exercise substantial control of Reporting Companies with the formalities typically associated with such control in ordinary companies.”

VI. Applicant.  Who Is a Company Applicant?

A  Company Applicant is:

  1. The individual who “directly files the document (Articles of Incorporation, Articles of Organization, or similar filings) to create or register the Reporting Company;” and
  2. The individual who is “primarily responsible for directing or controlling such filing” if more than one individual is involved in the filing process to create a company.

A Reporting Company can have either have either one or two Company Applicants.

For purposes of two applicants, the person who files plus the person most responsible for causing the filing are each defined as a Company Applicant.

For any non-U.S. Reporting Company, any individual who files the document that first registers the foreign reporting company in the U.S., including any individual who “directs or controls” that filing is the Company Applicant.

In Virginia this would explicitly apply to “incorporators” and “organizers” who file  Articles of Incorporation or Articles of Organization.

VII. Content of the Reports Filed with FinCEN. What Must Be Reported?

A. Reporting Company Information

  1. Name
  2. Trade name or DBA
  3. Address of principal place of business
  4. IRS Taxpayer Identification Number (EIN)

Reporting requirements do NOT require filing Social Security Identification Numbers.

B. Beneficial Owner and Company Applicant Information

  1. Full legal name of the individual
  2. Date of birth
  3. Complete current address (street address)
  4. An image of the Company Applicant’s photo ID which must be either a non-expired passport or a non-expired driver’s license.

The applicant must file a copy of the document from which the unique identifying number was obtained (a photocopy of passport or driver’s license).

Once the driver’s license or Passport is on file with FinCEN, the Reporting Company, Beneficial Owner, or the Company Applicant can obtain a FinCEN Identifier to avoid presenting a driver’s license or passport photo for each filing, as explained in more detail below.

An important exception to reporting of Company Applicant Information is that Reporting Companies created or registered to the state reporting agency before January 1, 2024 are not required to report information for any Company Applicant.

VIII. Types of Reports. What Are the Types of Reports To Be Filed?

A. “Initial Reports” are required for:

  1. Reporting Companies created and registered after Jan. 1, 2024
  2. Reporting Companies created and registered before Jan. 1, 2024
  3. Foreign Reporting Companies registered to do business in the U.S.
  4. Any entity that no longer meets the criteria for any exemption, an entity that moves from exempt statue to non-exempt status.

B. “Updated Reports” are required for:

  1. Any changes to required information previously submitted to FinCEN concerning Reporting Companies or Beneficial Owners, including moving from being an exempt company to a Reporting Company or vice versa.
  2. Changes to the Beneficial Ownership of a Reporting Company (for example: deaths, buyouts, ownership percentage changes, address changes, name changes).
  3. Any changes in the reported information (for example: address changes, name changes, driver’s license photo, or ID numbers on driver’s license or passport).

C. “Corrected Reports” are required for:

Correcting inaccuracies in any report previously filed.

IX. Reporting Deadlines.   When Do the Reports Need To Be Filed?

A. Initial Reports

  1. Reporting Companies that are created or registered after Jan. 1, 2024, the Initial Report must be filed no later than 90 calendar days from the earlier of the receipt of “actual notice” or the when the state provides “first public notice” of the filing with the state agency (State Corporation Commission in Virginia) of the Articles of Incorporation, Articles of Organization, or other state formation filing.   This 90-day time deadline applies only to Initial Reports filed during 2024.  After January 1, 2025 the deadline to file Initial Reports will be 30 calendar days after creation or registration of the Reporting Company.
  2. Reporting Companies created or registered prior to Jan. 1, 2024 must file its Initial Report prior to January 1, 2025. Therefore, all of the existing Reporting Companies created prior to Jan. 1, 2024 must file Initial Reports in calendar year 2024.

B. Updated Reports

30 calendar days after the date on which the change occurs.

C. Corrected Reports

30 calendar days after the Reporting Company “becomes aware” or has “reason to know” of the mistake or inaccuracy. However, the 30-day corrected reports are deemed to be filed on time if it is filed no later than 90 calendar days after the date on which the inaccurate report was filed regardless of when discovered.

X. Obtaining a FinCEN Identifier and Filing Reports. Where and How Can Reporting Companies File These FinCEN Reports?

A FinCEN identifier (a unique number identifying an individual or entity) may be obtained by the Reporting Company and any individual Beneficial Owner or Company Applicant. Once obtained, an existing FinCEN identifier may be supplied by the Reporting Company in lieu of the detailed individual information for any “Beneficial Owner” and any “Company Applicant,” which means without having to send a photocopy of your driver’s license or passport again.  Once you have the FinCEN Identifier you would only need to provide your identifier.  Your data underlying your FinCEN number would already be on file with FinCEN.

  1. The Application can be made online in a simple, menu-driven, application process.
  2. The up-to-date FAQs on Beneficial Ownership Information Reporting is located on the web at www.fincen.gov/boi-faqs.

By incorporating or organizing an entity with a state, the Company Applicant will not be seamlessly brought to FinCEN to complete the FinCEN application. The federal and state processes currently are not consolidated.  The incorporations with the state are separate from the FinCEN filing. Virginia SCC FAQs are now available here: Virginia SCC – CTA FAQs. Virginia does provide an abbreviated notice and reminder concerning the CTA filing but information filed with Virginia is not ported or otherwise made available to FinCEN for use in making the FinCEN filing. The Reporting Company must go to the FinCEN URL and start the application process separately.  BOI E-FILING is located at www.fincen.gov.

XI. The BOSS Database. What Is That?

The Beneficial Ownership Secure System (“BOSS”) is the database of information collected by FinCEN under the CTA. It is not opened to the public for browsing or searching, but only for filing FinCEN reports.

The data is maintained by FinCEN for no fewer than five years after the date on which the Reporting Company terminates.

XII. Reported Information. Who is Authorized to Access Reported Information?

The Secretary of the Treasury has announced that the department will establish, by regulation, certain protocols and processes to protect the security and confidentiality of any Beneficial Ownership Information but these regulations have yet to be published.

Information on the FinCEN Database is not publicly available but may be released under certain conditions. Before FinCEN will release reported information, it must receive, through appropriate protocols, the following:

  1. A request from any federal Agency engaged in national security, intelligence, or law enforcement activity, for use in furtherance of such activities.
  2. A request from officers and employees of the Department of the Treasury, including the IRS, for tax administration purposes.
  3. A request from a state, local, or tribal law enforcement agency if a court of competent jurisdiction has authorized the law enforcement agency to seek the information in criminal or civil investigation.
  4. A request from the federal agency on behalf of a law enforcement agency, prosecutor, or judge of another country under an international treaty, agreement, or convention.
  5. A request made by a financial institution subject to customer due diligence requirements, with the consent of the Reporting Company.

There are penalties for improper access to the information in the BOSS Database.

Our experienced Transactions Team at Sands Anderson is ready to help you to interpret this significant law and help you and your business to comply with its requirements.  Please contact a member of our Corporate Transactions Team on the Sands Anderson website, if you have questions about the Corporate Transparency Act.

This Primer is for general informational purposes only, and does not constitute the provision of accounting, business, financial, investment, legal, tax, or other professional advice or services.  This summary is not intended to substitute for the individualized professional advice for your particular business or personal circumstances. Please consult your professional advisors before making any decisions that may affect your business or individual finances.  Sands Anderson PC shall not be responsible for any loss incurred by any person who relies on this Primer.

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Risk Assessments in Healthcare: Where Legal Requirements Also Make Good Business Sense!   https://www.sandsanderson.com/news/2024/02/01/risk-assessments-in-healthcare-where-legal-requirements-also-make-good-business-sense/ Thu, 01 Feb 2024 16:25:54 +0000 https://www.sandsanderson.com/?p=24405 While some of the legal requirements on your organization can seem overly burdensome, there are times when legal requirements also align nicely with what makes good business sense. Risk assessments in the healthcare industry are a good example of that alignment.   The Law The HIPAA Security Rule requires (among other things) that all Covered

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While some of the legal requirements on your organization can seem overly burdensome, there are times when legal requirements also align nicely with what makes good business sense. Risk assessments in the healthcare industry are a good example of that alignment.  

The Law

The HIPAA Security Rule requires (among other things) that all Covered Entities (CEs) and Business Associates (BAs) conduct a thorough assessment of the potential risks and vulnerabilities to the confidentiality, integrity, and availability of electronic protected health information (ePHI). See 45 C.F.R. § 164.308(a)(1)(ii)(A). The Security Rule also requires that CEs and BAs implement security measures to appropriately reduce risks and vulnerabilities. See 45 C.F.R. § 164.308(a)(1)(ii)(B).

Good Business Sense  

As a practical matter, conducting a risk assessment and implementing appropriate changes is also a smart business move. Reducing risks and vulnerabilities helps an organization better protect its data, systems, and operations, as well as its customers, patients, members, end users, employees, and business partners – all things that will ultimately impact the bottom line.

To effectively reduce risks and vulnerabilities, an organization must first identify what are the realistic risks and threats to, and vulnerabilities within, the organization. That’s where the risk assessment comes into play. The risk assessment, whether completed with internal resources or through the services of a qualified third party, is the tool that allows the organization to get a realistic picture of “what’s out there” and what could adversely affect the organization. After obtaining the realistic picture of risks, threats and vulnerabilities, the organization can then review its current security posture to determine how it currently addresses (or does not address) the identified risks, threats and vulnerabilities.  At that point, the organization will be able to identify and prioritize the changes that should be made to appropriately reduce risk.

Combining Legal and Technical

Decisions regarding which security measures, policies and procedures to change or implement are best made with the benefit of both technical and legal advice. The technical advice component will help an organization identify and implement technical solutions and data security measures, policies and procedures that provide meaningful protection for the organization’s data and systems. The legal advice component will help an organization ensure that the potential solutions and security measures, policies and procedures meet the required legal standards, and help the organization understand the legal risks associated with security-related decisions and potential adverse events.

Ultimately, an organization needs to be confident that its approach to security is both practically appropriate and legally sufficient.

Pro Tip for Assessments  

Prior to conducting a risk assessment, an organization should discuss the endeavor with counsel. Depending upon the circumstances, an organization might be able to protect from later disclosure to third parties (e.g., plaintiffs!) certain discussions and information developed during the assessment.                 

 Bobby Turnage leads Sands Anderson’s Cybersecurity and Technology Team.  If you have questions about this post, or any data security, data privacy or technology issues please contact Bobby or one of our Cybersecurity and Technology Team members.           

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