On January 1, 2024, a major change went into effect for all sorts of entities in the United States, including certain foreign entities that have established a presence in the United States. The Corporate Transparency Act (“CTA”) became effective as of the new year and it is imperative for businesses to understand its implications.
For years, forming and running a business in the United States often did not require much reporting to government agencies. In fact, many people from outside the United States are caught by surprise with how little must be done from a regulatory compliance point of view.
But starting on January 1, 2024, all “reporting companies” need to make beneficial ownership filings with U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) unless the reporting company can fit into a list of specific exemptions. FinCEN's finalized reporting form and filing process are now available at https://boiefiling.fincen.gov.
Like most new laws, the CTA has a lot of moving parts. We have tried to provide a short FAQ here to help frame the main issues created by the CTA. With that in mind, please be aware that this is a non-exhaustive alert and should not be relied upon by anybody, especially since individual facts and circumstances will impact whether CTA compliance is necessary. We would welcome discussing the CTA with you in detail to explore whether your organization will need to start making beneficial ownership reports and, if so, assist your organization with that process.
What is the purpose of the CTA?
The CTA is an attempt by the U.S. Government to prevent money laundering and related activities within the United States. It requires FinCEN to develop a database tracking beneficial ownership information for reporting companies and, to that end, requires reporting companies to submit filings to FinCEN.
What is a “reporting company”?
A “reporting company” may conjure thoughts of publicly traded companies or other regulated entities (e.g., funds that file Form-ADVs with FINRA), but a reporting company under the CTA is defined to cover just about any corporation, limited liability company, or other entity that is (1) created by the filing of a document with a secretary of state or similar office under the laws of a state or Indian Tribe or (2) formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. If an entity was formed via a filing with a government agency or entity and is doing business in the United States, it likely is a “reporting company” unless it meets the criteria for an exemption (discussed further below).
What needs to be reported on a beneficial ownership filing?
Some of the information is easy, such as the legal name of the reporting company, its address, its jurisdiction of formation/registration, and its taxpayer ID number (e.g., its “FEIN”). From there, it gets more complicated. The CTA requires the report include a list of each individual who is either a “beneficial owner” or “company applicant” of the reporting company that includes the individual’s legal name, date of birth, residential address, and either a unique identifying number (like a passport number) and an image of the document tied to such number (like a copy of the passport) or a “FinCEN identifier.” Individuals can apply for a FinCEN identifier at https://://fincenid.fincen.gov/landing.
If you think, “Ok, most of my stockholders are entities so this will be easy,” please read on. The CTA requires looking through your owners that are entities to the individual at the top of the applicable ownership structure. For example, if Corporation A has two stockholders, Bill Smith and Corporation B and each is a “beneficial owner,” information on Bill Smith will need to be reported and information on the individual(s) that are the beneficial owner(s) of Corporation B will need to be reported. As you can imagine, this can get complicated very quickly.
What is a “beneficial owner”?
Unfortunately, part of the definition is a little fuzzy. The (relatively) clear part is that anybody that owns or controls 25% of the ownership interest of a reporting company is a beneficial owner. The unclear part is that any owner that exercises “substantial control” over the reporting company is also a beneficial owner. “Substantial control,” in turn, is defined broadly and includes any individual that (1) serves as a senior officer of the reporting company, (2) has authority over appointment of any senior officer or a majority of directors of the reporting company, (3) directs, determines, or has substantial influence over “important decisions” of the reporting company, or (4) has any other form of substantial control over the company. Customary protective provisions and/or voting rights are likely to cause the beneficiary of those protections to be deemed a beneficial owner in many cases.
What is a “company applicant”?
Entities formed prior to January 1, 2024, will not be required to report company applicants. For entities formed on or after January 1, 2024, a “company applicant” means the individual(s) who (1) directly files the document creating the reporting company or registering the foreign reporting company with a U.S. jurisdiction and/or (2) has primary responsibility for directing or controlling that filing if more than one individual is involved. Depending on circumstances, this could include the “incorporator” or similar advisor or agent reflected in the applicable entity formation documents, as well as officers, directors or other authorized individuals who authorize or direct such filings.
When are beneficial ownership reports due?
The good news is that if a reporting company exists prior to January 1, 2024, the first beneficial ownership report is not due until January 1, 2025. The bad news is that any reporting entity formed on or after January 1, 2024, must file an initial beneficial ownership filing within 90 days of formation if it is formed during calendar year 2024, or within 30 days of formation if the entity is formed on or after January 1, 2025. If a company initially was exempt from having to file (see below) but somehow ceases to meet the criteria for an exemption, a report must be made within 30 days of the date the company no longer meets an exemption.
After initial reports are made, additional reports are required whenever there is a relevant change (e.g., a financing is closed where new owners acquire interests in a reporting company making them “beneficial owners,” the company becomes aware of a mistake on a prior filing, etc.). The corrective and/or updated reports must be made within 30 days of becoming aware of a mistake or within 30 days of the event that causes the need for an update.
What entities are exempt from filing beneficial ownership reports?
If an entity that fits the general definition of a “reporting company” can fit into one of the exemptions within the CTA, reports are not required. Examples of exempt entities include (1) banks, (2) companies with at least 20 U.S. employees, a U.S. operating presence, and at least $5,000,000 in reported annual gross receipts or sales for the previous year, (3) venture capital fund advisers subject to specifically identified SEC reporting requirements, (4) investment companies or investment advisers subject to specifically identified SEC reporting requirements, (5) pooled investment vehicles operated or advised by other exempt entities, and (6) subsidiaries of exempt entities.
The law includes a total of 23 separate exemptions, so additional potential exemptions may be available depending on an entity’s circumstances. But be aware that each exemption carries its own specific statutory parameters and, therefore, entities that are potentially subject to CTA reporting requirement should carefully assess whether the entity actually meets the exemption requirements.
This seems like a giant headache. If we do not comply, what is the worst thing that can happen to our organization?
Putting aside the fact that CTA compliance is going to be on every due diligence and auditor’s checklist, willful CTA violations are potentially very serious. In fact, they could be criminal offenses.
The CTA states that any person who (1) willfully provides false or fraudulent beneficial ownership information or (2) willfully fails to report complete or updated beneficial ownership information to FinCEN in accordance with the CTA shall be liable for a civil penalty of not more than $500 per day and may be fined up to $10,000 and imprisoned for up to 2 years.
Notably, a person fails to report complete or updated beneficial ownership information if such person (1) causes a reporting company to fail to report required information or (2) is a senior officer of the reporting company at the time of such failure. As such, CTA reporting failures carry potential liability for any senior officer of the reporting company.
After reading this, what should we do?
If you are already part of an entity, your management should consult with its legal advisors to ensure CTA compliance occurs timely (i.e., on or before January 1, 2025 for entities formed before January 1, 2024). If filings are required, many reporting companies will need to gather significant information (requiring significant cooperation) from their beneficial owners. This process will likely take time.
If you are forming an entity during calendar year 2024, you should consult with your legal advisors to ensure CTA compliance occurs within 90 days of formation (and 30 days after any change that would make your initial filing inaccurate).
You likely will want a process to gather all necessary information from owners (and future owners) to ensure your reporting entity has the necessary information to make proper filings with FinCEN. Like the filing of “83(b) elections,” these time periods are non-negotiable.