Congress enacted the Corporate Transparency Act (“CTA”) as part of the Anti-Money Laundering Act of 2020. The purpose of the CTA is to better enable critical national security, intelligence and law enforcement efforts to counter money laundering, the financing of terrorism and other illicit activity by creating a federal framework for reporting, storing and disclosing beneficial ownership information of certain entities which, under prior law, were not otherwise subject to federal regulation and reporting.

The CTA takes effect on January 1, 2024, and requires certain entities to report and disclose specified information to the United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The report must identify the entity’s beneficial owners (i.e., the natural persons who own and control the entity) and information about who formed the entity.

The scope of the CTA is very broad. Even small businesses that do not engage in business with foreign-owned entities are included in the definition of a “reporting company” (as described below) and will be required to file with FinCEN.

Please consult the following for an overview of the new requirements under the CTA.

What is a “Reporting Company?”

Under the CTA, a reporting company is defined as a corporation, a limited liability company, or other entity that is (1) formed by filing documents with a secretary of state or similar office of a state or Indian tribe, or (2) formed under the law of a foreign country and registered to do business in the United States. Other entities likely to be included in this definition are limited partnerships, limited liability partnerships, business trusts and statutory trusts.

Are there Exemptions?

FinCEN has provided an extensive list of entities exempted from the category of “reporting company.” These exceptions include: (1) publicly traded companies, (2) banks, (3) credit unions, (4) governmental entities, (5) insurance companies operating in the U.S., (6) securities brokers, (7) public utility companies, (8) certain investment advisers, (9) venture capital fund advisers, (10) accounting firms, (11) pooled investment vehicles, (12) inactive entities not owned by a foreign person, (13) tax-exempt entities (such as nonprofits, political organizations, and certain trusts), (14) subsidiaries of exempt entities and (15) entities that employ more than 20 employees, operate at a physical office in the United States, and filed federal tax returns demonstrating more than $5 million in gross receipts or sales.

What is Required to Be Reported and When?

Reporting companies will be required to deliver to FinCEN a report containing the following information:

• Entity’s full legal name
• Trade names
• A complete current address
• The jurisdiction in which it was formed or jurisdiction in which a foreign company first registers
• Internal Revenue Service Taxpayer Identification Number

Additionally, reporting companies must report the following information to FinCEN about each beneficial owner and company applicant of the reporting company:

• Full legal name
• Date of birth
• Current business or residential address
• A unique identifying number from an acceptable identification document (i.e., passport, driver’s license, etc.)

Compliance with the reporting requirements depends on the formation date of each reporting company. For entities formed prior to January 1, 2024, reports must be filed no later than January 1, 2025. For entities formed on or after January 1, 2024, reports must be filed within 90 calendar days of formation. For entities formed after January 1, 2025, reports must be filed within 30 days of formation. Reports must be updated within 30 days of a change in beneficial ownership in all cases.

Who is a “Beneficial Owner”?

CTA defines a beneficial owner as an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests. Those with “control” also include (a) senior officers such as the CEO, COO, CFO; (b) those with the ability to make important decisions on behalf of the reporting company; and (c) certain trust arrangements or individuals.

The CTA excludes certain individuals and entities from the term “beneficial owner” including minor children (if a parent or legal guardian’s information is reported), individuals acting as nominees, intermediaries, custodians or agents, employees acting solely as employees and not as senior officers, individuals whose only interest in a reporting company is a future interest through a right of inheritance, or creditors of a reporting company (unless the creditor otherwise meets the definition of beneficial owner by exercising substantial control or by owning or controlling 25% or more of the entity’s ownership interests).

A “company applicant” is an individual who directly files the formation documents for the reporting company, such as a law firm.

Failure to File

Failure to comply with the CTA reporting requirements will result in severe penalties, including civil penalties up to $500 for each day the failure to file continues (up to $10,000) and criminal penalties of up to two years of imprisonment and potential fines.

Takeaways

Because reporting companies formed after January 1, 2024 must report beneficial ownership information within 90 calendar days of formation, reporting companies will need to gather beneficial ownership information at the time of formation.

It is recommended that existing companies start to gather beneficial ownership information and consider adopting a compliance policy to require shareholders, members, and managers of the company to provide and update necessary information that must be reported to FinCEN.

Even companies that are presently exempt from the requirements should consider implementing policies that mandate their shareholders, members, and managers to provide the necessary information, as the facts and circumstances which form the basis for the company’s exemption may change.

Reports must be filed online on FinCEN’s website which, as of this writing, is not available. We are ready to assist you with your filing needs should you have any questions when the filing portal becomes available.