Attention: Your business may soon have to meet new reporting requirements that take effect on January 1, 2024. Under the Corporate Transparency Act (CTA), which was enacted in 2021, certain companies are required to provide information related to their “beneficial owners” — the individuals who ultimately own or control the company — to the Financial Crimes Enforcement Network (FinCEN). Failure to do so may result in civil or criminal penalties or both.
The CTA is intended to reduce exposure to serious crimes, including terrorist financing, money laundering and other nefarious activities. But it could also open the door to inspection of family offices, investment angels and other private individuals who have generally been shielded from scrutiny in the past. A business that’s characterized a “reporting company” has either 30 days or one year to comply with the new rules.
The CTA rules generally apply to both domestic and foreign privately held reporting companies. For these purposes, a reporting company includes any corporation, limited liability company or other legal entity created through documents filed with the appropriate state authorities. A foreign entity includes any private entity formed in a foreign country that’s properly registered to do business in a U.S. state.
The complete list of entities that are exempt from the reporting rules is too lengthy to list here — ranging from government units to not-for-profit organizations to insurance companies and more. Notably, an exemption was created for a “large operating company” that employs more than 20 employees on a full-time basis, has more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources), and physically operates in the United States. However, many of these companies already must meet other reporting requirements providing comparable information.
If an entity initially qualifies for the large operating company exemption but subsequently falls short, it must then file a beneficial owner report. On the other hand, an entity that might not currently qualify can update its status with FinCEN and obtain an exemption.
Under the CTA, a nonexempt entity must provide identifying information about its beneficial owners. A beneficial owner is defined as someone who, directly or indirectly, exercises substantial control over a reporting company, or owns or controls at least 25% of its ownership interests. An individual has substantial control of a reporting company if he or she:
- Is a senior officer of the company,
- Has authority over the senior officers or a majority of the board of a company,
- Has substantial influence over the company’s important decisions, and
- Has any other type of substantial control over the company.
This generally includes individuals who are directly related to ownership interests in the company, but indirect control may also result in classification as a beneficial owner. See “Who Isn’t a Beneficial Owner?” at right for a list of individuals excluded from the definition of a beneficial owner.
The CTA requires reporting companies to provide identifying information about their company applicants. A company applicant is defined as someone who is:
- Responsible for filing the documents that created the entity (for a foreign entity, this is the person who directly files the document that first registers the foreign reporting company to conduct business in a state), or
- Primarily responsible for directing or controlling filing of the relevant formation or registration document by another.
This rule often encompasses legal personnel acting in a business capacity.
Other Important Issues
The reporting requirements are extensive. Specifically, the report to FinCEN must include the following information:
- The legal name of the entity (or any trade or doing-business-as name),
- The address of the entity,
- The jurisdiction where the entity was formed,
- The entity’s Taxpayer Identification Number, and
- The name, address, date of birth, unique identifying number information of the beneficial owners (such as a U.S. passport or state driver’s license number), and an image of the document that contains the identifying number.
Reporting companies have either 30 days or one year from the effective date (January 1, 2024) to comply with the reporting requirements. Beneficial ownership information won’t be accepted by FinCEN until the effective date.
The determination of whether a reporting company has 30 days or one year to comply depends on its date of formation. Reporting companies created or registered prior to January 1, 2024, have one year to comply with the CTA by filing initial reports. Those created or registered on or after January 1, 2024, will have 30 days upon receipt of their creation or registration documents to file the initial reports.
After the initial filing, reporting companies then have 30 days to file an updated report after any change with respect to information previously reported. In addition, reporting companies must correct inaccurate information in previously filed reports within 30 days after the date the reporting company becomes aware of the error.
Important: Reports filed with FinCEN aren’t available to the general public. However, certain government agencies will have access to the information, including those involved in national security, intelligence and law enforcement, as well as the IRS and U.S. Treasury Department.
What are the penalties for failing to comply with the new reporting rules? An omission or fraudulent report could result in civil fines of $500 a day for as long as the reports are missing or remain inaccurate. Failure to comply may also trigger criminal penalties of a $10,000 fine or even jail time of two years.
What should your company do now to ensure compliance? Evaluate your current situation. If you determine that your business must meet these obligations, collect the required information, update and refine internal policies for accurately reporting the data, and establish a system for monitoring the reporting processes. For additional guidance, contact your professional business advisors.
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