With 2024 almost upon us, this means that for millions of companies across the United States, new compliance requirements under the Corporate Transparency Act (“CTA”) are about to take effect. In fact, the Financial Crimes Enforcement Network (“FinCEN”), the bureau under the Treasury Department tasked with enforcing the CTA, believes that over 32 million businesses, both foreign and domestic, will be required to comply with new reporting requirements or be subject to civil fines or even criminal penalties.
This means that private sector businesses operating in the United States should understand whether they fall within the scope of the new regulations. This is especially important for small for-profit businesses currently (or soon to be) operating within the United States, as these entities will likely be disproportionally impacted given the way the new regulations have been designed.
What Is the CTA?
The CTA is the Treasury Department’s most recent tool which will be used to identify and combat domestic money laundering and sanction evasion schemes. Under the CTA, certain non-exempt domestic and foreign entities (referred to as “reporting companies”) will be required to disclose information (referred to as beneficial ownership information, or “BOI”) regarding the identity of individuals who directly or indirectly own substantial interest in, or hold substantial control over, these reporting companies.
The CTA marks a significant departure in how FinCEN gathers information. Prior to the CTA, a company was only obligated to report certain information if it was directly solicited by the bureau. Starting on January 1, 2024, however, millions of companies will now have an affirmative obligation to file a report with the bureau unless they fall under a specific exemption under the Act.
Who Is Required to Report?
The CTA identifies two categories of companies required to report: domestic reporting companies and foreign reporting companies.
A domestic reporting company is any non-exempt corporation, limited liability company, or other similar entity that is created by the filing of a document with a secretary of state or a similar office under the law of State or Indian Tribe.
A foreign reporting company is any similar type of entity that is formed under the laws of a foreign country and registered to do business in the United States by the filing of a document with the secretary of state (or similar office).
Who Is Exempt from the CTA’s Reporting Requirements?
The CTA identifies twenty-three statutory exemptions from the Act’s reporting requirements. These entities are described below.
The CTA also permits the Treasury Secretary, with the written concurrence of the Attorney General and the Homeland Security Secretary, to exclude by regulation additional types of entities. However, FinCEN has not proposed exemptions for any additional types of entities beyond those specified by the CTA. Additionally, FinCEN has not implemented any procedures for a company that believes it meets one of the aforementioned exemptions to be certified as exempt by the bureau.
What Information Is Required to be Reported?
Under the CTA, all non-exempt reporting companies will be required to report information on the company itself, as well as information on any beneficial owners of the company. Company information includes: (1) the name of the reporting company, (2) any trade name or DBA name of the reporting company, (3) the business street address of the reporting company, and (4) the TIN issued by the IRS for the reporting company.
For a beneficial owner, the reporting company is required to report: (1) the full legal name, (2) date of birth, (3) current residential or business street address, and (4) the document number of a specified type of identification document for each beneficial owner.
In addition to the information described above, domestic reporting companies created on or after January 1, 2024, must also report information about its “company applicants.” A company applicant is defined as any individual who will directly file the reporting company’s BOI report with FinCEN or will direct or control the filing. The filing information required for a company applicant is similar to the BOI information described above.
Who Is Considered a Beneficial Owner?
The CTA considers an individual a beneficial owner if they own or control at least 25% of the ownership interests of a reporting company. Individuals who exercise “substantial control” over a reporting company are also considered beneficial owners. Substantial control includes individuals who either: (1) serve as a senior officer of a reporting company, (2) have authority over appointment or removal of any senior officer, (3) directs, determines, or has substantial influence over important matters of the reporting company, or (4) has any other form of substantial control over the reporting company.
Trusts are generally excepted from the reporting requirements, as they generally do not file registration documents with a State, however, a trust that owns more than 25% of a reporting company is required to make a BOI filing with FinCEN. Additionally, beneficiaries of the trust, as well as anyone who has authority to dispose of trust assets, are required under the Act to be disclosed as beneficial owners.
The CTA also provides for several exemptions to the definition of beneficial owner, including: (1) minor children (provided that a parent or guardian’s information is reported), (2) individuals acting as a nominee, intermediary, custodian, or agent on behalf of another individual, (3) individuals acting solely as an employee of a reporting company in specified circumstances, (4) individuals whose only interest in a reporting company is a future interest through a right of inheritance, or (5) creditors of a reporting company.
When Is a Reporting Company Required to Report?
Reporting requirements under the CTA differ based on: (1) when the reporting company was created, AND (2) what type of report will be filed (e.g., an initial report, updated report providing new information, or a report correcting erroneous information previously filed).
Domestic reporting companies created before January 1, 2024, and foreign reporting companies registered in the United States before January 1, 2024, must file an initial report by January 1, 2025. These entities are required to file an updated report no later than 30 calendar days from the date of the change in information, or a corrective report no later than 14 calendar days from the date it knew, or should have known, that the information was inaccurate.
Domestic reporting companies created on or after January 1, 2024, or foreign reporting companies registered in the United States on or after January 1, 2024, must file initial reports within 30 calendar days of formation or registration, except that reporting companies formed during calendar year 2024 will have 90 days within formation or registration to file initial reports. In either event, updated reports or corrective reports should be filed within 30 calendar days or 14 calendar days, respectively.
An entity that was lawfully exempt but no longer qualifies under an exemption must file an initial report within 30 calendar days from the first date that the entity no longer qualifies for any exemption. For example, if a company that employed 25 full-time employees and met all of the additional criteria under the “large operating company” exemption, eliminates five or more full-time employee positions, it would have 30 days to file its initial report with FinCEN.
Penalties for Non-Compliance with the Reporting Requirements of the CTA
The CTA makes it unlawful for any person to willfully provide, or attempt to provide, false or fraudulent BOI to FinCEN, or to willfully fail to report complete or updated BOI. Any failure by a non-exempt reporting company to comply with the requirements of the CTA can result in both civil and criminal penalties. Reporting companies can face fines up to $500 per day of non-compliance, as well as a penalty not to exceed $10,000 and/or up to two years in prison. The CTA contains a safe harbor provision for any erroneous information that is corrected within 90 days of the original incorrect filing.
Conclusion
The CTA will soon impose mandatory reporting requirements on millions of foreign and domestic companies operating in the United States. It is important for corporations, partnerships, and limited liability companies to be proactive, not only in understanding the new reporting requirements, but whether or not they fall within the scope of CTA compliance. Impacted companies should plan ahead to ensure that costs are budgeted to ensure they comply with these new regulations. Companies that believe they may be required to report under the Act will be well served to engage outside counsel to advise and assist with these new reporting requirements.