General Requirements
Beginning January 1, 2024, the Corporate Transparency Act (CTA) requires both existing and newly formed companies to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of Treasury. Newly created companies must also report the person(s) who controlled the filing or directly filed company’s formation documents (“company applicants”).
Existing companies must report their beneficial owners to FinCEN no later than January 1, 2025, and newly formed companies must report their beneficial owners and company applicants within 30 days of when the company is formed. Certain companies that are already subject to other regulatory regimes, such as public companies, banks, investment companies, insurance companies, broker dealers and tax-exempt entities, are exempt from the reporting requirements of the CTA. In addition, any company that (i) employs at least 20 employees in the United States, (ii) has a physical presence in the United States and (iii) has filed for the prior year a federal income tax return demonstrating more than $5,000,000 in gross receipts or sales from U.S. sources, is also exempt from the reporting requirements of the CTA. Finally, companies that are inactive and have not experienced any ownership change or sent or received more than $1,000 in the prior twelve-month period are also exempt from the reporting requirements of the CTA.
Beneficial Owners
All companies that are subject to the reporting requirements of FinCEN (a “reporting company”) must report certain information about their beneficial owners. The CTA defines “beneficial owner” to mean individuals that (i) exercise substantial control over such reporting company, or (ii) own or control, directly or indirectly, at least 25% of the ownership interests of such reporting company.
Any person who is a senior officer, who may appoint or remove a senior officer or a majority of the board of directors or who has substantial influence over important company decisions is considered to exercise substantial control over the reporting company. Senior officers include the President, CEO, CFO, General Counsel, CEO and COO.
For purposes of calculating an individual’s ownership interest (i) all options or similar securities held by such individual will be deemed to be exercised, (ii) such individual’s ownership interest will be the greater of such individual’s percentage of voting or economic rights, and (iii) if such individual’s ownership interest is not calculable with reasonable certainty, then, if such individual holds at least 25% of any class or type of security, such individual will be deemed to hold at least 25% of the ownership interest of the reporting company.
Information Required to be Reported
The CTA requires that reporting companies report to FinCEN certain identifying information regarding the reporting company and its beneficial owners and applicants.
A reporting company must report its (i) full legal name, (ii) any trade name or doing business as names, (iii) business address, (iv) jurisdiction of incorporation or organization, and (v) its taxpayer identification number.
For each beneficial owner or company applicant, a reporting company must report the individual’s (i) full legal name, (ii) date of birth, (iii) current residential address or, in the case of a company applicant who forms companies in the ordinary course of business, a business address, (iv) unique identification number from a passport or other government identification document, and (v) an image of such passport or other government identification document.
If there is any change in any information previously reported to FinCEN regarding a reporting company or its beneficial owners, the information must be updated within 30 days of such a change.
Access to Information Reported to FinCEN
Under proposed rules, FinCEN would provide beneficial ownership information to (i) federal agencies engaged in national security, intelligence or law enforcement in the furtherance of such purposes, (ii) state, local and tribal law enforcement who have received court authorization, (iii) foreign law enforcement agencies, judges, prosecutors and certain other authorities, acting through an intermediate federal agency, (iv) financial institutions and certain self-regulatory organizations who need such information to comply with customer due diligence requirements under applicable law, and (v) any officer or employee of the Treasury Department whose official duties require beneficial ownership information or disclosure or for tax administration. Importantly, the reports will not be accessible to the public and are not subject to Freedom of Information Act (FOIA) requests.
A substantial portion of the burden of the CTA will fall on small companies since larger companies are exempt from the reporting requirement of the CTA as discussed above. Given the significant penalties for non-compliance (fines of $500 per day, up to $10,000, and imprisonment of up to 2 years), the filing requirements should be taken seriously. Now is a good time to line up your professional advisors to ensure that you are fully complying with the Act.
