On January 1, 2021, Congress enacted the Corporate Transparency Act (CTA), a bipartisan effort to combat financial crimes such as tax evasion, money laundering, corruption and terrorist financing by requiring a broad range of business entities to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury. This requirement was not effective immediately but will go into effect beginning January 1, 2024 for entities created on or after that date and on January 1, 2025 for existing entities.
The CTA defines a “reporting company” as a domestic entity created by filing a document with a secretary of state or a foreign entity registered to do business in the U.S. This definition encompasses corporations, LLCs, LLPs, and limited partnerships. Notably, it does not include most general partnerships, trusts or sole proprietorships that are created without the need for filing with the secretary of state. There are 23 specific exemptions from the definition of a reporting company, most of which exempt businesses that are already subject to significant government oversight and regulation including public companies, banks, credit unions, government entities, insurance companies, public accounting firms, companies registered with the SEC, public utilities, and tax-exempt 501(c) entities. In addition, there is an exemption for large operating companies with more than 20 U.S. based full-time employees and more than $5 million in U.S. gross receipts or sales.
Each reporting company is required to report information about its “beneficial owners”, a category that includes people with substantial control, people with direct or indirect ownership of at least 25% of the company’s equity interests, and “company applicants”, i.e., individuals who prepared and/or filed the application to the secretary of state. A beneficial owner must be a natural person, not another company or entity.
The information about beneficial owners that must be reported includes legal name; date of birth; residential address (this cannot be a P.O. box but can be an office address for a company applicant only); and a unique identifying number such as a driver’s license or passport number, including a scanned copy of the form of identification. Company information must also be reported, including the company’s full name, all trade and d/b/a names, the street address of the principal place of business, the jurisdiction of its formation and its TIN.
Beginning January 1, 2024, new companies will have 30 days after formation to report beneficial ownership information to FinCEN. Companies that are already in existence on that date will have until January 1, 2025 to report. A reporting company must report changes in its beneficial owner information within 30 days of any change or the information will be deemed inaccurate. There are onerous penalties for failure to comply on time and/or to keep information updated. The penalty for willfully providing or attempting to provide false or fraudulent beneficial owner information is $500 per day, up to $10,000, and possible imprisonment for up to 2 years.
There is no need to act now to prepare these reports as FinCEN will not accept them until January 1, 2024, but it may be time to consider whether you expect to have reporting obligations when the time comes and what information you will need to collect in order to comply. Anyone forming a new company or LLC may want to consider these upcoming requirements in their planning and beneficiaries of old entities such as LLCs that are no longer active might consider whether to shut them down before reporting is required.
We will revisit this new requirement in individual client meetings as the onset of the reporting requirement nears.
By Elizabeth R. Hefferon