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The Corporate Transparency Act goes into effect on January 1, 2024, and may require your business to report ownership information to the government. Understanding the implications of the CTA is critical for all businesses, as a failure to comply with the CTA’s reporting requirements may lead to criminal and civil penalties. Please contact us if you have any questions regarding the CTA and your reporting obligations.

Introduction

To put it simply, the CTA requires “reporting companies” to file a report through the United States Treasury Department’s Financial Crimes Enforcement Network’s (FinCEN) national registry containing personal identifying information about the company’s beneficial owners and company applicants. As of today’s date, FinCEN’s national registry has not gone live.

What is the Timeline of the CTA’s Reporting Requirements?

Reporting obligations begin on January 1, 2024. All domestic and foreign reporting companies created or registered on or after January 1, 2024, will have 90 calendar days after their creation to file their initial report.

Importantly, all domestic and foreign reporting companies created or registered before January 1, 2024, will have to file their initial report no later than January 1, 2025.

Even though compliance begins on January 1, 2024, FinCEN continues to issue rules and regulations that supplement and clarify the obligations and requirements under the CTA. Our business attorneys at FSBR will continue to monitor the rules and regulations as they are issued.

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.

The CTA does provide 23 exemptions from reporting, most of which involve entities already subject to regulation by governmental authorities, such as 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 exemption for “large operating companies,” which are 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.

What Information Must be Reported?

An initial report of a reporting company must include certain information for:

1. The reporting company;
2. Each and every “beneficial owner” of the reporting company; and
3. One or two individuals that qualify as a “company applicant” for the reporting company

In its initial report, a reporting company must provide the entity’s full legal name, any trade names or DBAs, the street address of the company’s principal place of business, 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(s):

• 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.”

As mentioned above, 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.

FinCEN has identified a three-step process to determine a reporting company’s beneficial owners:

1. Identify individuals who exercise substantial control over the company.
2. Identity the types of ownership interests in the company and the individuals who hold those ownership interests.
3. Calculate the percentage of ownership interests held directly or indirectly by individuals who own or control, directly or indirectly, at least 25% of the ownership interests of the company.

In more recent regulations, FinCEN has provided 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); or
• 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.

Under the CTA and its implementing regulations, “ownership interest” is broadly construed to include any equity, stock, or similar interest (whether such interest confers voting rights or not), any capital or profit interest, any instrument convertible into ownership interest, any option to purchase or sell ownership interests, or “any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.” For purposes of determining whether the 25% threshold has been met with respect to an individual, all (a) options or similar interests are deemed exercised, and (b) ownership interests are aggregated.

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.

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.