Henson Efron attorneys Sequoia Butler and Scott Emory warn that starting January 1, 2024, the Corporate Transparency Act (CTA) mandates that many newly formed entities report detailed ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau within the Department of Treasury. Reporting for entities formed prior to January 1, 2024, starts January 1, 2025.

WHY?

Enacted on January 1, 2021, the CTA’s goal is to prevent money laundering, tax fraud, asset hiding, and other illicit activities by enhancing transparency in entity structure. It seeks to balance the provision of beneficial ownership information to authorized parties, like law enforcement, with minimal burden on companies.

WHO MUST REPORT?

Generally smaller, privately held, nonregulated entities are included under this requirement and can be domestic or foreign. Domestic companies required to report are defined as corporations, LLCs, or other entities created by the filing of a document with the secretary of state or any similar office under the law of a state, Indian tribe, or U.S. territory. Foreign reporting companies are defined as corporations, LLCs or other entities formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a state, Indian tribe, or U.S. territory.

There are 23 exemptions that would relieve an entity from the CTA’s reporting obligations. Most are for companies that are subject to substantial federal or state regulation where the required information is already known. Large operating entities employing at least 21 full-time employees, reporting revenues of more than $5 million in gross receipts or sales, and operating at a physical location in the United States are also excluded from these reporting requirements as well as inactive entities as further defined by FinCEN.

WHAT’S REQUIRED?

Submission of required information will be through a secure filing system prescribed by FinCEN, which is currently under development. The following information is required:

• Company Information: General information including full legal name, any trade name or “doing business as” name, complete U.S. address, jurisdiction of formation or first registration, and IRS-issued Taxpayer Identification Number.
• Beneficial Owner and Company Applicant Information: Full legal name, date of birth, complete current address, unique identifying number, and image of a non-expired government-issued document (such as a U.S. passport or state driver’s license).

After the initial requirements are met, a reporting company is obligated to file updated or corrected information within 30 calendar days after a change or error is discovered in information for the company, a beneficial owner, or in the event the company becomes exempt from reporting.

WHO’S A BENEFICIAL OWNER?

A beneficial owner is any individual who, directly or indirectly, either exercises substantial control over a reporting company, or owns or controls at least 25% of the ownership interest. For this purpose, an individual has substantial control if they meet any of four criteria: (1) is a senior officer of the company; (2) has authority to appoint or remove certain officers or a majority of directors of the company; (3) is an important decision-maker; or (4) has any other form of substantial control over the company. Ownership interest includes (1) equity, stock, or voting rights, (2) capital or profit interest, (3) convertible instruments, (4) option or privilege, or (5) any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.

WHO’S A COMPANY APPLICANT?

A company applicant is the individual who directly files the document that creates or registers the company and, if different, the individual primarily responsible for directing or controlling the filing of the organizing document. The same information is required for company applicants as for beneficial owners, except the applicant may use the business address rather than their personal address. No more than two company applicants are required to report.

Company applicant information is only required for reporting companies formed on or after January 1, 2024.

COMPLIANCE

Reporting companies formed or registered prior to January 1, 2024, have until January 1, 2025, to initially report, while companies formed or registered on or after January 1, 2024, have 30 days from the date of organization to submit the required information to FinCEN. Note: There is an outstanding proposal by FinCEN to extend the 30-day deadline to 90 days for calendar year 2024.

Providing false information or not reporting at all can subject an individual and entity to both civil penalties of $500 for each day the violation continues and a criminal penalty of a fine of not more than $10,000, not more than 2 years in jail, or both.

CONCLUSION

The purpose of this article is to provide a high-level summary of the CTA and certain reporting obligations. Navigating the CTA can be complex and if you are unsure about its impact on you, reach out to the Henson Efron business law team for assistance. We are here to help.