[co-authors: Dawson Kirkland, Sarah Morehouse]

Congress passed the Corporate Transparency Act (the “CTA”) in 2020, which aims to prevent U.S. companies from engaging in certain illegal activities, including money laundering and tax fraud, by implementing federal disclosure procedures intended to identify bad actors. New reporting requirements detailed in a rule adopted on September 29, 2022 by the Financial Crimes Enforcement Network (“FinCEN”) pursuant to the CTA will require entities designated as “reporting companies” to file a report to FinCEN with information about the entity, its beneficial owners and the “company applicants” of such entities.

These new filing requirements will become effective on January 1, 2024 for newly formed entities, and will become effective for existing entities on January 1, 2025. This alert provides an overview of these requirements and the steps that covered entities should take to ensure timely compliance.

Who must comply with the CTA filing requirements?

The CTA filing requirements apply to “reporting companies,” the definition of which is expansive, and includes corporations, limited liability companies, and other entities created by the filing of a document with a secretary of state or similar office under the law of a state or Indian Tribe, including, depending on state law, limited liability partnerships (LLPs), business trusts and most limited partnerships. This definition also includes any entities formed under the law of a foreign country that are registered to do business in a state or tribal jurisdiction by the filing of a document with a secretary of state or similar office.

Are any entities exempt from the CTA filing requirements?

The CTA exempts 23 types of entities from the filing requirements, including banks, credit unions, broker-dealers, exchange and clearing agencies, entities registered with the Securities and Exchange Commission (“SEC”), SEC registered investment companies, insurance companies operating within the United States, entities registered under the Commodity Exchange Act, public accounting firms, public utilities, certain pooled investment vehicles, nonprofit and political organizations, tax-exempt entities, governmental authorities, and “large operating companies,” which must (1) have more than 20 employees, (2) have an operating presence at a physical office in the U.S. and (3) have filed federal income tax or information returns in the U.S. for the previous year demonstrating over $5 million in gross receipts or sales from sources in the U.S. The requirement to have more than 20 employees is assessed on an entity-by-entity basis, while the gross receipts or sales requirements can be met by consolidating a group of companies.

Inactive entities, defined as entities that (1) were in existence before January 1, 2020, (2) are not engaged in business activities, (3) do not hold any assets, including ownership interests in any other entities, (4) are not owned by foreign persons, (5) have not had changes in ownership during the immediately preceding 12-month period and (6) have not sent or received more than $1,000 in the immediately preceding 12-month period, are also exempt from reporting. A wholly-owned subsidiary of an exempt entity will also be exempt from reporting.

What information is required to be reported under the CTA filing requirements?

The CTA requires each reporting company to submit a report to FinCEN identifying itself and including certain information about each of its “beneficial owners.” The required information includes the entity’s name, address, jurisdiction of formation or registration, and tax ID number, and each beneficial owner’s name, birthdate, residential address and acceptable identification document (e.g., passport or state-issued ID).

Reporting companies created on or after January 1, 2024 must also report the name, birthdate, current business street address and acceptable identification document of “company applicants.”

What is a “beneficial owner”?

As defined under the CTA, a beneficial owner is an individual who, directly or indirectly (1) exercises substantial control over the entity or (2) owns or controls 25% or more of the ownership interests in the entity, including of convertible interests (debt or equity) and directly held options and warrants. An individual may be deemed to exercise substantial control over the entity if he or she serves as a senior officer, has the ability to appoint or remove senior officers, or has the ability to make or approve important decisions on behalf of the entity. ­For example, an individual who makes decisions regarding the selection or termination of business lines or ventures or major expenditures or investments of the reporting company would be understood to have substantial control.

What is a “company applicant”?

A company applicant is defined as the individual who files the document to create or register a company and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing. For example, in some cases, a company may employ a law firm to prepare and file incorporation documents. If an attorney were to oversee this process and a paralegal completed the direct filing, the company would report these two individuals as company applicants. Anyone indirectly related to filing in this manner would not need to be reported. Likewise, if a company did not employ a law firm or third-party service provider, but instead enlisted the help of a family member or agent, this individual providing direct assistance would be reported as a company applicant as well as the individual directly making the filing. A company applicant is limited to no more than two individuals with respect to the filing creating or registering a particular company.

Who has access to filed information?

Reports filed with FinCEN are held in a non-public registry maintained by FinCEN; however, the information is permitted to be disclosed to certain other types of entities upon request and pursuant to protocols, the final guidance for which is expected to be issued by FinCEN prior to January 1, 2024. The entities authorized to receive information include (1) federal agencies engaged in national security, intelligence, or law enforcement activity for use in furtherance of such activity, (2) state, local, or Tribal law enforcement agencies for authorized use in criminal investigations, (3) federal agencies on behalf of law enforcement agencies, prosecutors, or judges of another country, (4) with the consent of the reporting company, financial institutions subject to customer due diligence requirements, and (5) federal functional regulators and other appropriate regulatory agencies.

What steps should businesses take to comply?

Companies anticipating that the CTA may apply to them should begin discussions about and planning for the new filing requirements well in advance to allow adequate lead time to understand the applicability of the CTA requirements and ensure timely compliance. Entities formed on or after January 1, 2024 will be required to submit filings to FinCEN within thirty days of formation. Entities formed before January 1, 2024 will have until January 1, 2025 to file their initial report. Updates to entity and beneficial ownership information are required to be filed within 30 days of the date of change. Updates are not required for changes to the company applicant’s information. Corrections are required to be filed within 30 days of the date that the reporting company becomes aware of (or has reason to be aware of) the inaccuracy in the prior report.

What are the penalties for noncompliance?

The CTA authorizes civil penalties of up to $500 per day, up to a maximum of $10,000 for any individual who violates the reporting requirements. FinCEN has not provided specific guidance regarding whether this penalty is calculated on a per company basis. If failure to report is willful, or if the report knowingly includes erroneous information, the CTA also authorizes criminal penalties of up to $10,000 and/or two years imprisonment.