Summary
The Corporate Transparency Act requires reporting of certain entities by January 1, 2024 for some entities and January 1, 2025 for others. Enacted as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for Fiscal Year 2021, the Corporate Transparency Act (CTA) requires certain entities—basically smaller and otherwise unregulated companies—to file a report with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). This report identifies the entities’ beneficial owners, the persons who ultimately own or control the company, and provides similar identifying information about those individuals who formed the entity. The Act further authorizes FinCEN to disclose this information to certain government authorities and to financial institutions for select purposes. The Corporate Transparency Act requires certain corporations, limited liability companies and other similar entities to report the beneficial ownership information to FinCEN. The law aims to prevent and combat money laundering, terrorist financing, corruption, tax fraud and other illicit activity. The law applies to domestic entities and foreign entities doing business in the U.S.
Congress believes illicit actors frequently use corporate structures such as shell and front companies to hide their identities and move money through the U.S. financial system. Prior to the CTA, there were no uniform beneficial ownership information reporting requirements in the United States, which hindered law enforcement’s ability to investigate entities being used for illegal purposes.
For new entities, these filing requirements are effective January 1, 2024. Existing entities are given until January 1, 2025, to report. With the new entities’ filing deadline less than a year away, those who might need to report should be proactive in ensuring that they are compliant.
This discussion is an overview of the reporting requirements under the CTA and subsequent guidance and is based on current guidance at the date of publication.
Reporting Requirements
Reporting companies include corporations, LLCs and entities that are created or registered to do business by filing a document with a secretary of state or any similar office. Also likely included, depending on applicable state law and subject to any exemptions, are limited partnerships, LLPs, business trusts or statutory trusts, and possibly general partnerships (if they file a document with a secretary of state or similar office). Both domestic and foreign entities registered to do business in the United States are included. Dormant entities might be required to file depending on whether or not they meet the inactive test.
Exemptions
There are numerous exemptions from the reporting requirements, including governmental authorities, banks, credit unions, money services businesses, broker-dealers, securities reporting issuers, Securities Exchange Act registered entity, investment companies or investment advisers, venture capital fund advisers, insurance companies, Commodity Exchange Act registered entities, tax-exempt entities, large operating companies and certain subsidiaries.
Information Required to be Reported
Reporting company: full name, DBA, address, jurisdiction of formation or registration, TIN or other unique tax ID number shown.
Beneficial owners: full name, DOB, address, photo ID with ID number shown.
There is a special rule for reporting companies owned by one or more exempt entities that states that if an individual is deemed to be a “beneficial owner” exclusively due to his or her ownership of the exempt entity, then the name of the exempt entity may be reported in lieu of the otherwise required information. (The rule specifically states the ownership being the exclusive reason to withhold personal information and provide information regarding the exempt entity. Accordingly, these entities will still need to provide information on those exercising substantial control over the entity under the rules.)
Company applicants (new reporting companies only, but limited): full name, DOB, address, photo ID with ID number shown.
Beneficial owners are: a) an individual who, directly or indirectly, exercises substantial control over the reporting company; b) includes senior officers (president, CEO, COO, CFO, GC); c) those with the ability to make important decisions on behalf of the reporting company; d) An individual who, directly or indirectly, owns or controls at least 25% of the ownership interests of the reporting company, including of convertible interests irrespective of whether these convertible interests are debt or equity, along with directly held options and warrants; and e) certain trust arrangements, or those individuals or entities acting as an intermediary, custodian or agent on behalf of another.
Definition of Control
An individual is deemed to have control or ownership of trust assets if the individual is serving as trustee or otherwise has authority to dispose of trust property. A trust beneficiary who is the sole permissible recipient of trust income and principal, or who has authority to withdraw trust assets, is deemed to have ownership or control of the trust property. The grantor of a trust is deemed to have ownership or control if the grantor has the authority to revoke the trust or otherwise withdraw trust assets.
Penalties
New companies have until January 1, 2024, to file, and they must file the initial report within 30 days of creation or registration. Existing reporting companies have until January 1, 2025, to file an initial report. Updates and corrections to beneficial ownership information require the filing of a report within 30 days. Penalties for noncompliance or misuse of beneficial ownership information fall under two categories: a) Civil and criminal penalties for willful reporting violations, including fines of up to $10,000 and imprisonment for not more than two years; and Civil and criminal penalties for unauthorized disclosure and use of beneficial ownership information also exist. The rules for filing contain many nuances which can determine who must report under the CTA. Guidance provided to date has errored toward overreporting, as the purpose of these reporting requirements is to broadly begin tracking ownership of the relevant entities.