Do you own an interest in a company? Manage a company? Help organize companies? Know someone else who does? If you answered yes to any of these questions, you need to be aware of the Corporate Transparency Act (“CTA”).
The CTA was enacted as part of the Anti‑Money Laundering Act of 2020 on January 1, 2021 and requires certain companies to disclose beneficial ownership information and information about the parties who formed the organization to the US Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) commencing January 1, 2024.
Domestic entities including corporations, limited liability companies, limited partnerships, business trusts and other entities formed by filing a document with the secretary of state or a similar office, and entities organized in a foreign jurisdiction but registered to do business in any state or tribal jurisdiction are considered Reporting Companies. Sole proprietorships and general partnerships are generally not considered Reporting Companies since they are not entities formed by a secretary of state filing.
The CTA exempts several categories of companies from the definition of Reporting Company including Large Operating Companies, Inactive Entities, and many kinds of highly regulated companies such as public companies, registered investment advisors and investment companies, banks and insurance companies. Large Operating Companies are those with more than 20 full time employees in the U.S., a physical tax paying presence in the U.S. and gross receipts or sales in excess of $5 million. Inactive Entities are those formed prior to January 1, 2020, not actively engaged in business, with only domestic owners, who have not experienced any ownership change in the prior 12 months, have generated less than $1,000 in the prior 12 months and have no ownership in any other assets or entities. Exemptions are also available for certain types of non-profits, other charitable companies and certain other companies. Additionally, entities that are controlled or wholly owned by one or more companies exempt from CTA requirements (other than pooled investment vehicles, money transmitting businesses, entities providing financial assistance to tax-exempt entities or inactive entities) are also generally exempt.
The CTA requires disclosure of a Reporting Company’s Beneficial Owners, and for entities created after January 1, 2024, the Company Applicants. Beneficial Owner is defined as any individual who directly or indirectly either exercises Substantial Control over the Reporting Company or owns more than 25% of the total ownership interests on a fully diluted basis.
Substantial Control means a (i) Senior Officer, (ii) anyone who has authority over the appointment or removal of a Senior Officer or a majority of the board (or similar body like the board of managers of an LLC), or (iii) anyone who directs, determines or has substantial influence over important decisions of the Reporting Company. While all individuals with Substantial Control must be reported, all Reporting Companies must identify at least one person with Substantial Control. Control can be shown by board or manager representation, ownership of voting control, rights associated with any financing arrangement, control over one or more intermediary entities that controls the Reporting Company, other arrangements with individuals or entities acting as nominees or any other contractual arrangement. Senior Officer means president, chief financial officers, general counsel, chief executive officer, chief operating officer or other officer who performs a similar function.
There are five categories of individuals exempt from the definition of Beneficial Owner. First, minors are exempt, provided their parent or guardian reports the required information. Second, nominees, intermediaries, custodians and agents are exempt provided that the beneficial owner for whom they are acting reports. Third, employees who are not Senior Officers who only have control or economic benefits as a result of their employment status are exempt. Likewise, heirs whose only interest is a future right through inheritance are exempt. Finally, creditors who only have a right to be paid a predetermined sum of money who meet the definition of Beneficial Owner due to a loan covenant or similar provision are exempt.
The Company Applicant is the person who creates a domestic reporting company or first registered a foreign company to do business in the U.S. This may include the law firm staff or in-house staff who prepares and files the formation document as well as any person who either self-files or directs the formation of the Reporting Company.
An individual who is a Beneficial Owner or Company Applicant may obtain a FinCEN identifier by providing the required information to FinCEN. Thereafter, the individual can provide their FinCEN Identifier to Reporting Companies rather than their personal information. Reporting Companies can also obtain FinCEN identifiers in some cases. The FinCEN application process will be launched on January 1, 2024 via an electronic web form.
Each Reporting Company formed on or after January 1, 2024 must file an initial report within 30 days of the date of formation, or for foreign Reporting Companies, 30 days from the date is registered with the Secretary of State in the United States; however, for new entities organized during 2024, the deadline has recently been extended to 90 days. This extension was authorized to give everyone a little extra time to learn how to use the new filing system and to collect the required information.
Reporting Companies formed prior to January 1, 2024 will have until January 1, 2025 to file their initial report. Updates to the Beneficial Owner information or other details provided on previously filed reports must be made within 30 days.
You can find additional information about the CTA and the CTA filing requirements on these government websites:
Failure to timely comply with reporting obligations or providing incorrect information can result in both civil and criminal penalties to reporting companies and individuals up to $500,000 when part of a significant pattern of illegal activity.
