In 2021, the U.S. Congress passed the Corporate Transparency Act (CTA) as an anti-money laundering measure by implementing significantly expanded ownership and financial information reporting requirements for most U.S. corporations and other entities. The stated purpose of the CTA is to protect the U.S. financial system from illicit use through a Reporting Company’s submission of its Beneficial Ownership Information and disclosing the individual Applicants who created the entity. The effective date of the CTA is January 1, 2024. The Financial Crimes Enforcement Network (FinCEN), an agency of the U. S. Department of the Treasury, administers implementation of the CTA.
WHAT ENTITIES ARE REQUIRED TO REPORT TO FinCEN
A Reporting Company is an entity (corporation, limited liability company or Other Similar Entity) created by filing a document with a Secretary of State, or formed under the laws of a foreign country and registered to do business in the United States. Other Similar Entity is not defined by the CTA but may include LPs, LLCs, LLPs and statutory trusts. Sole proprietorships, certain Trusts and general partnerships are not Reporting Companies if they are not created through a Secretary of State filing. The CTA establishes 23 specific types of entities that are exempt from its reporting requirements. Generally, the exempt companies are subject to separate regulatory and reporting requirements, or are Large Operating Companies as defined by the applicable CTA regulations. Certain Inactive Entities may also be exempt from the CTA’s Reporting Company requirements.
TIME TO FILE INITIAL REPORTS BY A REPORTING COMPANY
Any Reporting Company that exists prior to January 1, 2024 has until the end of 2024 to submit its initial report to FinCEN. Any Reporting Company formed on or after January 1, 2024 has 30 days to file its initial report after receipt of actual notice of its creation, or public notice of creation is provided by the Secretary of State or similar office.
WHAT INFORMATION MUST BE REPORTED
Each Reporting Company must provide and certify the following information: (1) full legal name and any dba or trade name, (2) street address of its principal place of business – post office box or other third party addresses may not be used for this submission, (3) jurisdiction of formation, and (4) Reporting Company TIN. A Foreign Reporting Company must provide a street address in the United States where it conducts business and a foreign tax identification number. In addition, a Reporting Company must also disclose similar information regarding its Beneficial Owner(s) and Applicant(s). Certification means the individual acting as an agent of the Reporting Company is proceeding in good faith after inquiry.
Although final rules regarding the disclosure of this reported information have not yet been issued, information reported to FinCEN will not be generally available to the public. However, it will likely be made available to: (1) federal, state and local law enforcement agencies, (2) foreign law enforcement agencies, (3) financial institutions to facilitate customer due diligence with consent of the involved Reporting Company, (4) federal regulators assessing financial institutions, and (5) employees of the U.S. Department of the Treasury for tax administration and enforcement activities.
In addition, a Reporting Company has an affirmative obligation to submit updates or corrections to any report within 30 days of when it becomes aware of or has reason to know any required information is not accurate.
WHO IS A BENEFICAL OWNER OR APPLICANT AND WHAT INFORMATION MUST BE REPORTED FOR EACH
A Beneficial Owner is any individual who directly or indirectly exercises substantial control over a Reporting Company, or owns or controls at least 25% of the ownership interest in the Reporting Company based on the total combined voting of all classes of ownership interests through contract, arrangement or otherwise, unless an exclusion or exception applies. FinCEN expects a Reporting Company will always identify at least one Beneficial Owner that exercises substantial control. For each Beneficial Owner, the following must be provided: (1) name, (2) date of birth, (3) residential street address, and (4) a unique identifying number and image from the identification document from which the unique identifying number is taken. Special rules apply in certain circumstances for the identification of Beneficial Owners of Reporting Companies owned by specialized entities such as Trusts, and such rules are beyond the scope of this Alert.
An Applicant is any person that directly files a document to create or register a Reporting Company and the individual primarily responsible for directing or controlling such filing for the formation of a Reporting Company. For each Applicant, the same identifying information required for a Beneficial Owner must be submitted by a Reporting Company except that the Applicant’s business address, rather than a residential address, may be used. Applicants for Reporting Companies created or registered before January 1, 2024 need not be reported to FinCEN.
WHAT ARE THE PENALITIES FOR FAILING TO REPORT OR UPDATE REPORTS
The CTA makes it unlawful for the Reporting Company and its Responsible Individuals to fail to report complete and accurate information, or fail to update Beneficial Ownership Information within 30 days of any change to previously reported information. Responsible Individuals include most corporate officers. Safe harbor protection may apply if inaccurate information is submitted and corrected by a Reporting Company within 90 days of submission. Civil penalties include a fine of $500 per day for each day a violation is outstanding up to a maximum of $10,000, and criminal penalties of up to two years of imprisonment.
