Article by: Josh Lawler, Gerold Libby, Carla Pareja Paris

The Corporate Transparency Act, 31 U.S.C. §5336 (“CTA”), comes into effect January 1, 2024.

The CTA mandates that entities, both existing and newly formed U.S. business entities, as well as foreign business entities registered in the U.S., must file reports of beneficial ownership with the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department. Certain important exceptions apply.

The new reporting requirements aim to enhance corporate transparency and combat financial crimes such as money laundering, tax fraud, terrorist financing, and other illicit activities. FinCEN will compile information in these reports in a FinCEN database which will not be publicly available, but which will, generally, be available to law enforcement authorities.

Who Needs to Report?

Domestic companies formed by the filing of a document with a Secretary of State or similar office of a U.S. State or Indian tribal jurisdiction (e.g. corporations, LLCs, etc.).

Foreign companies formed under the laws of a jurisdiction outside of the United States registered to do business under any U.S. State or tribal jurisdiction by the filing of a document with a Secretary of State or similar office of a U.S. State or Indian tribal jurisdiction.

Exemptions

The CTA establishes important exemptions for its reporting obligations. Many of these exemptions apply to entities whose beneficial ownership is otherwise required to be disclosed in some manner. Thus, banks, insurance companies, publicly traded companies, domestic governmental entities, and non-profit entities, among others, are generally exempt.

There is also an exemption for so-called “large operating companies” i.e., entities that have:

(a) more than 20 full-time employees in the U.S.,
(b) reported over $5 million of U.S. revenue on a consolidated basis to the U.S. Internal Revenue Service in the previous year, and
(c) an operating presence at a physical location within the U.S.

What Information Do You Need To Report?

(a) Information about a reporting company: full legal name, any trade or “doing business as” (d/b/a) names, the complete current street address of the principal place of business, the jurisdiction of formation, and the applicable taxpayer identification number.
(b) Information about beneficial owners and company applicants: full legal name, date of birth, current residential or business street address, and “unique identifying number” from an acceptable identification document (e.g., passport, driver’s license or other government-issued identification document) or a so-called “FinCEN identifier”, and an image of the document from which the unique identifying number was obtained, for each “beneficial owner” (as defined in the CTA and discussed below) and at least one “company applicant” (also as defined in the CTA and discussed below) of the reporting company.

Who is a Beneficial Owner?

Beneficial owners are individuals who directly or indirectly own or control 25% or more of a reporting company or exercise “substantial control” over a reporting company, with certain exceptions.

Who is a Company Applicant?

A “company applicant” is:

(a) the individual who directly files the document that creates an entity which is a reporting company, or the document that first registers such an entity to do business in the United States, and
(b) the individual who is primarily responsible for directing or controlling the filing of that document by another person if more than one individual is involved in the filing of the document.

When Do You Need to Report The Information?

A reporting company established before January 1, 2024 must report information about its beneficial owners by January 1, 2025. A reporting company established on or after January 1, 2024 must report information about its beneficial owners and its company applicants within 30 days from the date on which it receives actual or public notice that its establishment has become effective; provided however, that by an announcement on November 30, 2023, FinCEN has extended this filing period for reporting companies established in 2024, to 90 days.
Beyond these initial reporting requirements, reporting companies must report any change in beneficial ownership information within 30 calendar days after such change.

Penalties for Noncompliance

The CTA provides for both civil and criminal penalties for willfully providing false information, failing to provide complete information or failing to update information. Civil penalties include fines up to a maximum of $10,000, and criminal penalties include imprisonment for up to two years. Further, an individual may be liable under the CTA if he/she caused the failure or was a senior officer at the time of the failure.

What Are Next Steps for Clients?

To ensure compliance, we recommend taking the following steps:

(a) Review your corporate structure and ownership to determine whether your business is a reporting company for purposes of the CTA.
(b) Determine whether any exemption to the CTA reporting requirements may be available.
(c) If you determine that your company is in fact a reporting company and that no exemptions apply, identify all beneficial owners and company applicants.
(d) File the necessary reports.

Our firm is available to assist you in navigating these issues, addressing your questions, and ensuring that obligations under the CTA are met.

Should you have immediate concerns or wish to discuss specific implications of the CTA, please don’t hesitate to contact us. We appreciate your trust in our firm and look forward to helping you adapt to these new regulatory requirements.