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If you currently own an interest in a corporation, limited liability company, or similar entity, OR if you plan to create and/or organize such an entity in the future, OR if you acquire ownership in such an entity in the future, this expansive legislation applies to you.
The Corporate Transparency Act (CTA) was passed on January 1, 2021, as part of new anti-money laundering legislation included in the federal National Defense Authorization Act (NDAA). Through the CTA, Congress directed the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to establish and maintain a national registry of beneficial owners of entities that are deemed “reporting companies.”
The stated purpose of this new legislation is to prevent individuals from concealing their ownership of business entities through the use of shell companies, including to facilitate illicit activities, such as money laundering, financing terrorism, human and drug trafficking, and securities fraud. However, the CTA’s reach will impact just about every single owner of a business.
The CTA requires “reporting companies” to file a report with FinCEN containing personal identifying information about the company’s beneficial owners and applicants.
What is a Reporting Company?
The CTA broadly defines a reporting company as any corporation, limited liability company, or other similar entity created by filing a document with the secretary of state or similar office in any state or territory or with a federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to do business in the United States.
In addition to corporations and LLCs, it is expected that the definition of reporting company will include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships.
The CTA provides 23 exemptions from reporting to FinCEN, including publicly traded companies, investment vehicles operated by investment advisors, nonprofits, government entities, and other entities in heavily regulated industries, such as insurance and banking.
Importantly, there is also an exception for entities that (1) employ more than twenty employees; (2) filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales; and (3) have an operating presence at a physical office within the United States.
Entities that are subsidiaries of such excluded companies are also exempt from the CTA’s reporting requirements.
What Information Must be Provided?
In its report to FinCEN, a reporting company must provide the entity’s full legal name, any trade or DBAs, its current address, the jurisdiction of formation, and its IRS taxpayer identification number (including its FEIN).
The report must also include the following information for all of the company’s beneficial owners and the company applicant:
- Full legal name;
- Date of birth;
- Current address;
- Unique identifying number and the issuing jurisdiction from one of the following documents: (1) a non-expired United States passport, (2) a non-expired identification document issued to the individual by a state, local government, or Indian tribe for the purpose of identifying the individual, (3) a non-expired driver’s license issued by a state, or (4) a non-expired passport issued by a foreign government, if the individual does not possess any of the other documents; and
- An image of the document from the list above.
Who is a Beneficial Owner?
A “beneficial owner” includes “any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least twenty-five (25) percent of the ownership interests of a reporting company.”
The CTA requires the identification of each and every beneficial owner. As such, all individuals that exercise substantial control or own or control at least 25 percent of the reporting company must be identified.
Since the law was passed in 2021, FinCEN has provided further details as to the definitions of “substantial control” and “ownership interests.” For example, an individual exercises substantial control if the individual:
- Serves as a senior officer;
- Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or a similar body);
- Directs, determines, or has substantial influence over important decisions made by the reporting company.
Additionally, individuals may indirectly exercise substantial control as a trustee or through other arrangements or contractual relationships.
The definition of “beneficial owner” does not include (1) minor children, (2) individuals acting as nominees, intermediaries, custodians or agents on behalf of another individual, (3) employees acting solely as employees and not as senior officers, (4) individuals whose only interest in a reporting company is a future interest through a right of inheritance, and (5) creditors.
Who is a Company Applicant?
The “company applicant” is (1) the individual who directly files the document that creates the entity (e.g., Articles of Incorporation or Organization), AND (2) the individual who is primarily responsible for directing or controlling the filing of the relevant document if more than one individual is involved in the filing of the document. In many cases, company applicants may be those employed by a business formation service or a law firm, unless an individual is completing the entity formation steps without outside help.
Unlike with beneficial owners, the CTA limits company applicants to one or two individuals. If a reporting company was created or registered before January 1, 2024, the reporting company is not required to report information regarding its company applicant.
What are the Potential Penalties?
Under the CTA, it is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information OR to willfully fail to report complete or update beneficial ownership information.
The penalties include a civil penalty of not more than $500 for each day that the violation continues and criminal penalties of not more than $10,000 and imprisonment for not more than 2 years.
What is the Timeline of the CTA’s Reporting Requirements?
Reporting begins on January 1, 2024. All domestic and foreign reporting companies created or registered on or after January 1, 2024, have to file their initial report within 30 calendar days of receiving notice of their creation or registration.
Additionally, all domestic and foreign reporting companies created or registered before January 1, 2024 (which would include all companies in existence now) have to file their initial report no later than January 1, 2025.
FinCEN continues to issue rules and regulations that supplement and clarify the obligations and requirements under the CTA. Our team here at FSBR will continue to monitor the rules and regulations as they are issued.
If you have any questions regarding whether or not you qualify as a beneficial owner or company applicant of a reporting company, whether your entity may be exempt from reporting under the CTA, or any other question related to compliance under the CTA, please contact FSBR’s team of business lawyers, including Hannah Morgan.
By Hannah Morgan
This publication is intended for educational purposes only. This communication highlights specific areas of law and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.
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