Corporate Transparency Act: Looking Ahead

By Stephany Hernandez, Law Clerk

If you own a business, are you prepared to comply with the new federal rules on corporate transparency?  The Corporate Transparency Act (CTA) is aimed at combatting money laundering and other criminal activity, but its broad sweeping rules will affect many traditional businesses. One estimate finds that the CTA will affect more than roughly 25 million existing businesses plus several million new entities each year that will be formed. If you have a business entity, it is time to start considering if you will be affected.

Overview

The Corporate Transparency Act was passed on January 1, 2021, as part of the National Defense Act of 2021. One of the main goals of the CTA is to prevent the use of business entities to launder money. Commencing on January 1, 2024, the CTA will require reporting companies to report their beneficial ownership to a national, secure database operated by the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).[1] Failure to comply with the reporting requirements can lead to criminal and civil penalties of up to $500 per day, up to $10,000 maximum, or imprisonment for no more than 2 years, or both.[2]

Reporting Companies

The CTA identifies two types of reporting companies: domestic and foreign.  Domestic reporting companies include: a corporation, limited liability company, or other entity that is created by the filing of a document with the secretary of state or any similar office under the law of a state or Indian tribe.[3] While certain entities, such as limited partnerships, are not specifically called out, under the final rules, if the creation of the entity requires filing with the secretary of state, then that entity will likely be subject to the reporting requirements.[4]

A foreign reporting company is any corporation, limited liability company, or any other entity formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or similar office.[5] In addition, there are 23 exemptions that will not be subject to the filing requirements. Some examples of the exemption are large operating companies, companies already subject to SEC regulations, and banks just to name a few.

What information must be reported:

• Company full legal name
• Company address
• Jurisdiction of formation and registration
• Company identification number (i.e., Employer Identification Number)

Beneficial Owners and Applicants

Perhaps the most important component of the CTA is the disclosure of beneficial owners. Beneficial owners are defined as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such report company.”[6] The definition of beneficial owner is very broad and thus can include senior officers of a reporting company, as well as trustees acting on behalf of a trust.[7] There are exemptions to beneficial owners: minor children (provided a parent or legal guardian is reported as a beneficial owner), nominee, intermediaries, custodians, and agents acting on behalf of others, employees, inheritors, and creditors.[8]

Beyond the individuals who exercise substantial control and those who have at least 25% ownership interest, the CTA will also require disclosure of company applicants. A company applicant is an individual who files the documents that create or register the reporting company and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.[9] The disclosure of the company applicants will not be required for existing companies at the time of the effective date of January 1, 2024.

What information must be reported:

• Name
• Date of Birth
• Complete Current Address
• Unique Identifying Number and Image from Identification Document (i.e., passport or driver’s license)

Filing

All reporting companies created or registered before January 1, 2024 will have one year to comply with the filing requirements. Any reporting company created or registered after January 1, 2024 will have 30 days to comply with the filing requirements. Further, reporting companies will have 30 days to correct any information filed.

In the meantime…

It is important to take a survey of the current state of your business if you believe you will be subject to the CTA. Begin identifying your beneficial owners and perhaps begin developing processes to ensure that any changes in ownership are being properly monitored and recorded. If you would like assistance or to further discuss the CTA, please contact us.

[1] Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498 (Sept. 30, 2022).

[2] 31 U.S.C. 5336(h)(3)

[3] 87 Fed. Reg. 59537.

[4] Id. at 59537-59538.

[5] Id.

[6] Id. at 59525.

[7] Id. at 59526, 59529, 59532.

[8] Id. at 59533 – 59535.

[9] Id. at 59536.