Effective Jan. 1, 2024, the Corporate Transparency Act (“CTA”) will require certain entities to report the names and other personal information of its owners and “company applicants” to the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Most small corporations, limited partnerships and LLCs—including those established simply for tax or estate planning purposes—will be required to comply with the CTA reporting requirements.
What is the CTA?
The CTA is part of the National Defense Authorization Act enacted on Jan. 1, 2021, to provide transparency into business entities and assist law enforcement efforts to counter money laundering, terrorism, drug trafficking and other illegal activities. The CTA requires “reporting companies” to provide FinCEN with information on individuals who are: (i) the “beneficial owners” of the entity and (ii) “company applicants” who have filed an application to create the entity or register it to do business. FinCEN will use this information to create and maintain a national registry that will provide authorized users, such as law enforcement agencies and financial institutions, access to the identities of these individuals who directly or indirectly own or control a company.
Which entities qualify as “reporting companies”?
A “reporting company” is any corporation, LLC or other similar entity created by filing a document with a secretary of state or similar office in any state or territory or with a federally recognized tribal government, or that is formed under the laws of a foreign country and registered to do business in the United States.
Which entities are exempt?
Not all entities are required to report. Twenty-three categories of entities are exempt from reporting, including public companies, registered broker-dealers, certain investment companies, banks, money-transmitting businesses, commodity trading companies, pooled investment vehicles, 501(c) tax-exempt entities, inactive business entities and insurance companies. A comprehensive list of the exempt entities is available in the Frequently Asked Questions on FinCEN’s website linked here.
Additionally, an entity is exempt if it: (i) is owned or controlled by an exempt entity (with some limited exceptions), or (ii) (A) has more than 20 full-time employees in the United States, (B) reported more than $5,000,000 in gross receipts or sales (including the receipts or sales of subsidiaries and other entities through which such entity operates) on its previous year U.S. tax returns; and (C) operates at a physical office within the U.S.
Based on these exemptions, most small corporations or LLCs will need to comply with the CTA reporting requirements, while larger companies and their subsidiaries and companies that are subject to other regulatory oversight, may be exempt.
Who qualifies as a “beneficial owner”?
A beneficial owner is any individual who directly or indirectly: (i) exercises “substantial control” over the reporting company, or (ii) owns or controls at least 25% of the “ownership interests” of the reporting company. Whether an individual has “substantial control” over a reporting company depends on the power the individual exercises. According to FinCEN’s example, an individual will have substantial control of a reporting company if they direct, determine or exercise substantial influence over the reporting company’s important decisions. This may include senior officers and directors. More information about what qualifies as substantial control may be found in the Beneficial Ownership Information Reporting Regulations at 31 CFR Section 1010.380(d)(1).
What is an “ownership interest”?
The current FinCEN rule takes a broad and expansive view of what is considered an “ownership interest,” and includes typical equity interests such as stock, joint venture interests, LLC or partnership interests, and other similar instruments. It goes further, however, to include instruments that may be non-voting or that carry the right to convert or purchase equity securities or similar interests in the future, including capital or profit interests, convertible instruments, and rights or privileges to acquire equity, capital or other interests in a reporting company (including put rights, call rights, options and other contractual rights).
Under this expansive definition, both individuals who currently hold equity securities and those who have the potential to acquire equity securities in the future are treated as beneficial owners if the potential interest meets the required threshold amounts. Further, a catch-all category will include any individuals that may own or control an ownership interest through a contractual or less formal or an indirect arrangement, such as through joint ownership, through an intermediary or custodian, through a trust or through ownership of an intermediary entity. The full definition of “ownership interest” can be found at 31 CFR Section 1010.380(d)(2)(i).
Who qualifies as a “company applicant”?
A company applicant is: (i) the individual who directly files the document that creates or first registers the reporting company and (ii) the individual who is primarily responsible for directing or controlling the filing of the relevant document.
If only one person filed the relevant document, then only that person is the company applicant. A reporting company will not have more than two company applicants.
What information must be reported?
A reporting company is required to report: (i) its legal name and any trade or fictitious business names (DBAs); (ii) its address; (iii) the jurisdiction in which it was formed or first registered; and (iv) its taxpayer identification number.
For each qualifying beneficial owner and company applicant, the reporting company is required to report the individual’s (i) legal name; (ii) birthdate; (iii) address (in most cases, a residential address); and (iv) an identifying number from the individual’s driver’s license, passport or other approved document, as well as an image of that document.
Who has access to the reported information?
The information reported to FinCEN will be stored in a secure private database and will not be available to the public. The only organizations that will have access to the reported information upon request are: (i) federal law enforcement agencies; (ii) state, local or tribal law enforcement agencies (if authorized by a court order); (iii) federal agencies on behalf of a foreign country (if the request is pursuant to an international agreement); or (iv) financial institutions for customer due diligence purposes and if authorized by the reporting company.
When does the CTA take effect?
FinCEN will begin accepting reports electronically on Jan. 1, 2024. All reporting companies created or registered before Jan. 1, 2024, are required to report by Jan. 1, 2025. Reporting companies created or registered on or after Jan. 1, 2024, are required to file within 30 calendar days of receiving an actual or public notice from the secretary of state or similar office that the company has been created or registered. If at any time a reporting company discovers an inaccuracy in a previously filed report, or if there is a change to previously reported information, the reporting company must file an updated or corrected report with FinCEN within 30 days.
What are the penalties for failing to report under the CTA?
Civil and criminal penalties do not apply to negligent violations, but an individual who willfully fails to report or supplies false information may be subject to civil and criminal penalties, including fines of up to $10,000 and up to two years in prison. As a result, it will be important for reporting companies to capture valid and accurate information from its beneficial owners and company applicants in order to satisfy their reporting obligations under the CTA.
Who must do it?
The obligation to report falls upon each non-exempt “reporting company.” However, attorneys and others who prepare filings for entities will also need to be aware of these reporting requirements and help ensure compliance with the CTA. In the end, if an entity had to file a formation document with a state’s secretary of state or a similar office, or is a foreign company that had to register to do business in the United States, then it will likely need to comply with the CTA.
What steps should be taken now?
Reports to FinCEN do not need to be made at this time and the electronic reporting system is currently under development. Reports will be submitted via the electronic reporting once the CTA becomes effective on Jan. 1, 2024. In the meantime, reporting companies that are currently in existence or that are created prior to Jan. 1, 2024, and professionals that advise such reporting companies, will need to familiarize themselves with the reporting requirements and begin identifying individuals who qualify as beneficial owners and company applicants in order to meet the reporting deadlines mentioned above. Additionally, reporting companies and their advisors must keep in mind that any future changes to individuals who qualify as beneficial owners will also need to be reported to FinCEN as they occur. We recommend reaching out to your professional advisors or the attorneys at Brownstein if you have any questions about the CTA and its reporting requirements and how it may apply to you.
This document is intended to provide you with general information regarding the Corporate Transparency Act. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.