Background

In January 2021, the United States Congress passed the Corporate Transparency Act (CTA) as part of the Anti-Money Laundering Act of 2020. This law, while intended to prevent criminal actors from hiding and laundering money through shell companies, has significant implications for many corporations and small businesses. Beginning January 1, 2024, the Act requires certain entities, or “reporting companies,” to report beneficial ownership information to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) through an online filing. The database will not be accessible to the general public and will be treated as confidential, however it will be made available to authorized law enforcement, national security agencies, and other financial institutions to facilitate due diligence on transactions (but only with the reporting company’s consent and subject to other requirements). Reporting companies under the CTA include corporations and LLCs, as well as other entity types.

Certain entities are exempt from the CTA, primarily entities already regulated by other agencies, such as banks and insurance companies. One exemption is for “large operating companies.” To qualify as a large operating company, the company must have a physical presence or principal office in the U.S., earn $5 million of gross revenue annually, and have at least 20 full time employees.  501(c) organizations recognized by the IRS as tax-exempt under Section 501(a) are also exempt from reporting. If an entity is not exempt, it must make a filing with FinCEN. There is no grandfathering for existing entities. FinCEN recently published a Small Entity Compliance Guide with checklists and tools that can be used to determine if filing is required and provide assistance if it is. 

Reporting Requirements

Reporting companies must provide the full legal name of the company (including trade names), business address, jurisdiction of formation, and a unique identifying number such as an Employer Identification Number (EIN). Reporting companies must also provide information about two categories of people: beneficial owners and company applicants.

A beneficial owner is any individual who, directly or indirectly, either owns or controls at least 25% of the company’s ownership interests or exercises “substantial control” over the company. An individual has “substantial control” if they serve as a senior officer of the company, have authority over the appointment or removal of any senior officer or a majority of the board, or have substantial influence over important decisions made by the reporting company. Note that a company may have only one legal owner but several people who qualify as beneficial owners.

Company applicants are the individuals who file the documents forming the corporation or LLC with the appropriate government agency; this may be an owner of the company or an outside consultant such as a lawyer or accountant.

Each reporting company must provide the following information about all beneficial owners and company applicants: their full legal name, date of birth, current residential or business street address, a unique identifying number from a document such as a passport or driver’s license, and an image of the passport or driver’s license. An individual desiring to keep this information confidential from the reporting company may instead obtain a FinCEN identifier (a unique identifying number issued by FinCEN) by submitting this information directly to FinCEN.  The FinCEN identifier then is provided by the individual to their reporting company for registration under the CTA.

Filing Deadlines

Companies created or registered before January 1, 2024 will have one year to file their beneficial ownership information reports (i.e., on or before January 1, 2025), while companies created or registered on or after January 1, 2024 will have 30 days to file. Note that there is presently a proposed rule that would extend the filing deadline to 90 days if adopted.

However, only reporting companies formed on or after January 1, 2024 are required to report company applicant information; reporting companies formed prior to that date do not need to report company applicants. Note that if any company or beneficial ownership information changes after the initial FinCEN filing is made, the company has only 30 days to report any changes through the secure FinCEN filing system. As of the date of this client alert, the electronic filing system is still in development and has not been published.

Penalties

The penalties for noncompliance, providing false or fraudulent information, or willfully failing to comply are severe, and may include civil penalties of fines up to $500 a day and criminal penalties of fines up to $10,000 and 2 years in prison. The CTA does provide a safe harbor period of 90 days after filing to correct any inaccurate filings.

Next Steps

All companies should review the requirements of the Act and assess whether they are exempt from reporting. If reporting is required, reporting companies should establish internal protocols regarding reporting and begin to gather the information needed to make the filings starting on January 1.

Visit FinCEN.gov for the latest updates on Beneficial Ownership Information reporting.