WHAT BUSINESS OWNERS SHOULD KNOW ABOUT THE CORPORATE TRANSPARENCY ACT

By: Scott M. Ceurvels, Esq.

ATTENTION ALL BUSINESS OWNERS

 New Federal Information Reporting Requirements to be Imposed on Privately-Held Companies and Their Owners by the U.S. Department of Treasury

Effective January 1, 2024, corporations, limited liability companies and similar entities (which are not publicly-traded companies) must file detailed information concerning the entity and its owners with the U.S. Department of Treasury. Significant penalties will be imposed on entities and owners for noncompliance with this new reporting requirement.

These obligations arise from the National Defense Authorization Act for Fiscal Year 2021, in which Congress enacted the Corporate Transparency Act (“CTA”) as a component of the Anti-Money Laundering Act of 2020. This article provides a summary of the CTA, the reporting requirements it creates and the penalties that could be imposed in the event of noncompliance.

Purpose. The CTA is intended serve a variety of purposes, from improving national security and anti-money laundering standards to gathering information about entities within the United States with “hidden owners” and setting a clear and universal standard for incorporation practices.

Reporting Obligation. The primary mechanism by which the CTA seeks to achieve these purposes is the establishment of a national registry of beneficial owners of certain entities, referred to as “reporting companies”, which will be required to file with the Financial Crimes Enforcement Network (FinCEN), a bureau within the U.S. Department of Treasury, reports identifying the company’s beneficial owners and information about company applicants. The contents of these reports will be discussed in more detail below.

Reporting Companies. The CTA defines a “reporting company” as any corporation, limited liability company, or other similar entity that is created by filing a document with the Secretary of State or similar office in any state, territory, federally recognized Indian Tribe, or under the laws of a foreign country and registered to do business in the United States.

Beneficial Owners. The CTA defines a “beneficial owner” as an individual who, directly or indirectly:

• Exercises substantial control over the entity; or
• Owns or controls not less than 25 percent equity in the entity.

The CTA also excludes certain individuals from the definition of beneficial ownership, including:

• a minor child (as long as the child’s parent’s or guardian’s information is reported);
• a person acting as an agent on behalf of another;
• a person whose control over the company derives from employment, not ownership;
• a person whose only interest in the company is through a right of inheritance; or
• a creditor of the company (unless they qualify as a “beneficial owner”)

Company Applicants. The “company applicant” is either:

• The person who directly files the document that creates the entity for domestic reporting companies, or the document that first registers the entity to do business in the U.S. if the entity is a foreign reporting company; or
• The person who is primarily responsible for directing or controlling the filing of the relevant document, described above, by another person.

Reporting Requirements. In each report to FinCEN, a reporting company is required to provide the following information for each beneficial owner of the entity:

• Beneficial owner’s full legal name;
• Date of birth;
• Current residential address; and
• A unique identifying number from an acceptable identification document (driver’s license, passport, etc.).

Company applicants will also be required to provide this information, but may provide a business street address rather than a residential address. However, company applicants will only be required to provide this information for entities formed on or after January 1, 2024.

Additionally, certain “company information” is required in the report, including the reporting companies’:

• Full legal name;
• Any trade name;
• Current address of the principal place of business;
• Jurisdiction of formation; and
• Internal Revenue Taxpayer Identification Number (TIN) (including an Employer Identification Number) of the reporting company.

Exceptions. The CTA contains a number of exceptions for entities exempt from reporting, including certain regulated industries which already require similar beneficial ownership information reporting, publicly traded companies, certain investment companies, nonprofits and government entities.

There is also a significant exception that applies to “large operating companies” which meet the following conditions and are therefore exempt from the reporting requirement:

• Employs more than 20 employees;
• Filed in the previous tax year a tax return demonstrating more than $5 million in gross receipts or sales; and
• Has an operating presence at a physical office within the United States.

Effective Date. The date that initial reports to FinCEN are due depends on whether the reporting company is an existing entity or a newly formed one. The final rule implementing the CTA will go into effect on January 1, 2024. Reporting companies in existence prior to this date will have one year, until January 1, 2025, to file their initial reports with FinCEN. Reporting Companies created or registered to do business between January 1, 2024 and December 31, 2024 must file an initial report within 90 days of creation/registration. Reporting Companies created or registered to do business on or after January 1, 2025 must file within 30 days of creation/registration.

Following the filing of a Reporting Company’s initial report, any changes to the information included in previous filings – except for changes with respect to the company applicant(s) – must be reported within 30 days of such change.

Penalties. Providing false information or failing to report complete information to FinCEN can result in fines of $500 per day up to a maximum civil penalty of $10,000 and imprisonment for up to two years. The CTA does contain a safe harbor from liability for the submission of inaccurate information if the person who submitted the report voluntarily corrects the report within 90 days.

For further information regarding your particular circumstances, or if you need assistance with compliance, reach out to your accountant or contact us at (315) 471-8111.

This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.