Starting from January 1, 2024, nearly all legally established entities, regardless of their type or origin, must disclose details about their owners, executives, and those who control them to the Financial Crimes Enforcement Network (FinCEN).
This disclosure obligation stems from the recently enacted Corporate Transparency Act (CTA), which garnered bipartisan support with the ostensible aim of combatting terrorist financing, money laundering, and other illicit activities.
However, this comprehensive law is poised to challenge private funds, family offices, and angel investors, who have historically preferred to keep their private investments shielded from public disclosure. Businesses meeting the criteria of a "reporting company" under the CTA will have either 30 days or 1 year to comply, depending on the reporting company's formation date.
The CTA introduces both criminal and civil penalties for individuals who knowingly provide false or fraudulent information in connection with the beneficial ownership report and for entities that fail to adhere to reporting requirements.
But what exactly is a "reporting company"?
Reporting companies encompass both domestic and foreign privately held entities. A domestic privately held entity refers to a corporation, limited liability company, or any other entity established by filing documents with the secretary of state or a similar office under the laws of a particular state. Foreign entities include private entities formed under foreign country laws that are registered to conduct business in a U.S. state by filing documents with the secretary of state or a similar office under that state's laws.
Exemptions are also defined under the CTA. The law identifies 23 entity types exempt from the reporting company definition, such as SEC-reporting companies, insurance companies, tax-exempt entities, and subsidiaries of exempt entities. Notably, a "large operating company" is exempt if it employs more than 20 full-time employees in the U.S., has reported over $5 million in gross receipts or sales in the prior year (excluding receipts and sales from sources outside of the U.S.), and operates from physical office premises in the U.S. This exemption primarily benefits well-established businesses, while startups will struggle to meet the criteria based on prior year tax filings. Companies that initially qualify for the large operating company exemption but later fail to meet the criteria will need to file a beneficial owner report, while companies initially designated as reporting companies but subsequently qualifying for the large operating company exemption must file an updated report to reflect this change.
What exactly constitutes a "beneficial owner"?
The CTA mandates that reporting companies provide identifying information for the beneficial owners of the reporting entity. Beneficial owners are individuals who, either: 1) directly or indirectly, exercise "substantial control" over a reporting company; or 2) own or control at least 25 percent of the company's ownership interests.
With respect to “substantial control” any one or more of the following factors suffice including, serving as a senior officer, having authority over senior officers or the majority of the board, exerting substantial influence over important decisions, or exercising any other form of substantial control. The law also extends this definition to individuals indirectly related to the company if they meet these substantial control criteria, such as through intermediary entities.
Certain individuals cannot be considered beneficial owners of a reporting company, including minor children (though information regarding their parents or legal guardians must be reported), individuals acting as nominees, intermediaries, custodians, or agents on behalf of others (in which case the represented individual is the beneficial owner), employees whose substantial control or economic benefits derive solely from employment, individuals with a future interest through inheritance, and creditors (unless they exercise substantial control or have a 25-percent ownership interest).
What about "company applicants"?
Reporting companies must also provide identifying information for their "company applicants." The CTA defines a company applicant as either the individual responsible for filing the documents that create the entity or, in the case of a foreign entity qualified to do business in the U.S., the individual who directly files the document registering the foreign reporting company in a state. Legal counsel can also be considered a company applicant if they meet this criterion. Reporting companies in existence before the CTA's effective date (January 1, 2024) are not required to identify and report company applicants.
So, what information is included in the report?
When filing the report with FinCEN, reporting companies must include the entity's full legal name, any trade or "doing business as" name, the entity's address, its jurisdiction of formation, and its federal taxpayer ID number. Additionally, for each beneficial owner or company applicant, the report must contain their name, date of birth, home address, a unique identifying number with its issuing jurisdiction (e.g., U.S. passport or driver's license), and an image of the document containing the identifying number.
Alternatively, an individual or entity can obtain a FinCEN identifier for subsequent filings instead of providing this information. Reporting companies must file updated reports within 30 days of any changes to previously reported information and correct any inaccuracies within 30 days of becoming aware of them.
When should this information be provided?
Following the CTA's enactment, reporting companies will have either 30 days or one year from the effective date (January 1, 2024) to comply with the reporting requirements, depending on their formation date. Companies created or registered before January 1, 2024, will have one year to comply, while those created or registered on or after January 1, 2024, will have 30 days from the receipt of their creation or registration documents. FinCEN is developing a new IT system called the Beneficial Ownership Secure System to collect and store CTA reports, but it is not yet available.
How does this impact my privacy and/or anonymity?
It's important to note that reports filed with FinCEN will not be accessible to the public and are exempt from Freedom of Information Act requests. However, specific government agencies, including those involved in national security, intelligence, civil and criminal law enforcement, the Department of the Treasury for tax administration, and state and local law enforcement for investigations, will have access to this information. FinCEN may also disclose information to financial institutions to aid in their anti-money laundering compliance efforts.
What are the penalties for non-compliance?
Failure to comply or providing false or fraudulent reports may lead to civil fines of $500 per day for as long as the reports remain inaccurate. Additionally, violators may face criminal penalties of a $10,000 fine or up to 2 years in jail.
Looking ahead, entities qualifying as reporting companies should prepare for CTA implementation by evaluating their compliance plan, compiling reporting information, updating internal policies for effective reporting, and establishing a system to track and update reporting information changes. Prospective acquirers in M&A transactions should verify whether the target is a reporting company and assess its compliance with the CTA. Due to the CTA's increased reporting requirements for small businesses, these entities should also determine if they fall under the reporting company definition and take steps to maintain compliance. Given the broad scope of CTA provisions, ongoing vigilance is crucial to ensure timely and appropriate disclosures.
Should you have any questions about the CTA or related matters, please reach out.