The Corporate Transparency Act is now poised to take effect on January 1, 2024 (the “Effective Date”), and will immediately impose sweeping new disclosure duties when new entities are formed. During 2024, the other CTA shoe will drop when all entities in existence as of December 31, 2023, that are not exempt from the law must make similar disclosures prior to January 1, 2025.

This new law marks an extraordinary expansion of the government’s collection of data on business entities as part of its effort to combat money laundering and terrorism. At the heart of the law is a requirement that entities reveal every “beneficial owner.”

For lawyers and other professionals who assist in entity formation and regulatory compliance, it is imperative to make plans now to accommodate the additional steps the law will add to the entity formation process.

Background

The CTA was passed by Congress as part of the Anti-Money Laundering Act of 2020. Its purpose is to provide information to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network, commonly known as FinCEN.

The law mandates disclosure regarding the beneficial ownership of entities, such as corporations, limited liability companies, limited partnerships, professional corporations, etc., which are either formed in the United States or are foreign companies that have registered to do business in the United States, to assist FinCEN in identifying entities that may be involved in money laundering, terrorism, tax evasion, organized crime, and/or other illegal activities.

In addition to disclosures regarding beneficial ownership, the CTA requires that certain information be provided to FinCEN regarding any person (i) who actually files documents with a state agency (such as a Secretary of State) to create a new entity or entities after the Effective Date (a “Post-Effective Entity”) and (ii) to the extent applicable, one other individual who either directs or controls such filings, such as an individual equity owner or officer of such an entity or even possibly a lawyer who advised the Post-Effective Entity with respect to its formation (each, an “Applicant”).

What Information Must Be Disclosed?

On September 29, 2022, FinCEN released a final rule (the “Rule”) to implement the provisions of the CTA. In general, the Rule requires that any entity that is determined to be a “Reporting Company” under the law must provide certain information to FinCEN regarding any individual

• who owns 25% or more of such Reporting Company or
• who otherwise directly or indirectly exercises substantial control over the Reporting Company (a “Beneficial Owner”) and, additionally for a Post-Effective Entity, an Applicant.

While much of the Beneficial Owner information to be reported to FinCEN relates to individuals, the obligation to comply on a timely basis is on the Reporting Company. Those Reporting Companies that are already in existence at the time of the Effective Date (a “Pre-Effective Entity”) will be required to make the same disclosures in an Initial Report to FinCEN prior to January 1, 2025. Moreover, each Reporting Company that has a change in Beneficial Owners after the Initial Report has been filed or discovers a need to correct a previous error in a prior filing with FinCEN (collectively, a “Reporting Company Change”) will be required to report the Reporting Company Change to FinCEN within 30 calendar days.

In its lengthy Supplementary Information accompanying the Rule (the “Supplementary Information”), FinCEN estimated that 32,000,000 Pre-Effective Entities will be required to register with FinCEN. The law provides for substantial civil and criminal penalties for failure to comply with FinCEN filing requirements on a timely basis, which includes any individual who causes a violation of the law by a Reporting Company.

What Entities Are Exempt?

Under the CTA and the Rule, every entity, irrespective of whether a Pre-Effective Entity or a Post-Effective Entity, will be considered a Reporting Company unless an applicable exemption applies. The Rule provides for 23 exemptions that include otherwise regulated businesses, such as licensed insurance companies, banks, securities brokers, and public companies. Also exempt are subsidiaries of many of the exempted entities, and truly dormant entities.

There is also a statutory exemption in the CTA for “large operating companies” which are defined as entities with a physical presence in the United States and both more than 20 full-time employees and more than $5 million in gross receipts or sales in the prior fiscal year as reported to the Internal Revenue Service. Therefore, unless exempted under another provision, many Pre-Effective Entities may be deemed to be Reporting Companies simply because they will not have filed a tax return with the IRS or do not have 20 employees prior to the Effective Date.

What Data Must Be Included?

If your entity is a Pre-Effective Entity and is determined to be a Reporting Company, the entity will be required to provide certain information (the “Required Information”) to FinCEN prior to January 1, 2025, regarding the company itself and each Beneficial Owner. (For a Post-Effective Entity that is determined to be a Reporting Company, the Post-Effective Entity will be required to provide the Required Information to FinCEN, not only for the Post-Effective Entity itself and each Beneficial Owner but also for each Applicant). Generally, the Required Information is the name, address (business or residential depending upon the circumstances), date of birth, and some form of identifier, which for the Reporting Company would typically be a taxpayer identification number, and for individual Beneficial Owners and Applicants would be a driver’s license number or passport number, along with an image of the photo identification document containing such number.

For individuals who are Beneficial Owners that may be concerned about providing personal information and photo identification to the Reporting Company for filing with FinCEN, there is a process in the Rule to separately obtain a FinCEN identifier number that can be provided to the Reporting Company as an alternative. FinCEN is providing additional information and providing the opportunity for public comment about obtaining such an identifier number.

What Needs to Be Done Now or in the Future?

As noted above, the Rule is not yet in effect. Therefore, there are no filings due prior to the Effective Date. FinCEN has published draft forms for filings by a Reporting Company for comment. In addition, throughout the Supplementary Information, FinCEN has stated that it will be considering numerous matters for future clarification and guidance, including its ongoing process of setting up the Beneficial Owner reporting infrastructure, the Beneficial Ownership Secure System (BOSS), which has yet to be finalized. Moreover, litigation has already been commenced to challenge the Rule or portions thereof on constitutional and other grounds, which may further affect and complicate the implementation of the CTA and the Rule.

However, now that the Rule has been released, it would be prudent for all individuals and businesses likely to be subject to these new requirements to be aware of the Required Information and documentation that they will certainly need to gather and report to FinCEN after the Effective Date.

If an entity that is to be created in the future has flexibility in the date of its formation and will likely not be exempt from becoming a Reporting Company, it may be possible, after consideration of multiple potential factors, to schedule the date of formation, to the extent practicable, to take advantage of the less onerous requirements for a Pre-Effective Entity. For example, any Pre-Effective Entity that becomes a Reporting Company need not report its Applicants to FinCEN at all and has until December 31, 2024, to file its Initial Report. In contrast, a Post-Effective Entity must file its Initial Report naming its Beneficial Owners and Applicants within 30 days of its formation.

Formation as a Pre-Effective Entity should also be considered if it is anticipated that an entity to be formed will become a Reporting Company and will have a change in the identity of Beneficial Owners reasonably soon after formation, e.g., through the addition of new investors. As a Pre-Effective Entity, a Reporting Company will not be required to disclose its Applicants and can make its Initial Report at any time prior to January 1, 2025, after any change in Beneficial Owners has occurred, thereby potentially avoiding the need to make a separate FinCEN filing to report Reporting Company Changes.

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