On January 1, 2024, the Corporate Transparency Act (the “CTA”) will go into effect. The CTA is a U.S. law (31 U.S. Code § 5336), enacted January 1, 2021, that aims to combat money laundering and other illicit activities. The CTA requires reporting entities to disclose certain beneficial ownership information and other data to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. While FinCEN is still finalizing details of CTA implementation, it is important that business entities begin planning now to ensure timely compliance and avoid unnecessary surprises.
Who is subject to the CTA?
Subject to certain exemptions outlined below, the CTA applies to domestic corporations, partnerships, LLCs, and all other entities created by a filing with a secretary of state or equivalent office, as well as foreign entities that are registered to do business in any U.S. state (collectively, “Reporting Companies”).
What must a Reporting Company disclose to FinCEN?
Each Reporting Company will be required to provide general company-level information, including its legal name, any DBAs, street address, jurisdiction of formation, and Taxpayer Identification Number. More importantly, a Reporting Company will also be required to file information regarding each of its “Beneficial Owners,” including name, date of birth, street address (in most cases, a residential address), unique identification number (e.g., passport or driver’s license number), and an image of the document containing such unique identification number.
Under the CTA, a Beneficial Owner is any individual who directly or indirectly (i) owns or controls 25% or more of the equity in the Reporting Company, or (ii) exercises “substantial control” over the Reporting Company (which includes service as a senior officer, holding authority to appoint or remove any senior officer or majority of the board of directors, or having the power to direct or have substantial influence over important decisions).
Which entities are exempt from reporting under the CTA?
As we’ll discuss in more detail in future alerts, the CTA exempts several categories of entities from the definition of “Reporting Company,” including:
- public companies;
- banks and credit unions;
- insurance companies;
- certain entities registered with the SEC or CFTC (and certain pooled investment vehicles advised by such entities);
- certain types of tax-exempt entities; and
- wholly-owned subsidiaries of entities that are otherwise exempt from the CTA.
The CTA also exempts certain large operating companies if they: (i) employ more than 20 full-time employees in the United States; (ii) have an operating presence at a physical U.S. office; and (iii) have filed a U.S. federal income tax or information return for the previous year demonstrating more than $5 million in gross receipts or sales (excluding gross receipts or sales from non-U.S. sources).
When are Reporting Companies required to make their initial filings under the CTA?
Existing entities formed or registered before January 1, 2024, have until January 1, 2025 to file their initial report with FinCEN. Reporting Companies formed or registered on or after January 1, 2024, will have only 30 days to file their initial report. Going forward, any corrections or updates to a previously filed report must be made within 30 days as well.
What steps can companies take to begin preparing now?
All businesses should first work with counsel to review their existing entities and determine which, if any, will be subject to CTA reporting requirements. Businesses with one or more Reporting Companies (or who expect to form additional entities that may be subject to CTA reporting) should consider:
- Collecting information that will be required to be reported in 2024 on behalf of each Reporting Company.
- Revising entity documents to include provisions designed to facilitate reporting under the CTA (including covenants to cooperate and provide necessary information, indemnification provisions related to a person’s failure to cooperate or for providing false information, and consent for the Reporting Company to disclose identifying information regarding such party to FinCEN to the extent required).
- Coordinating with registered agents and other service providers to ensure timely and accurate filings.
- Staying up-to-date as FinCEN provides additional guidance and rolls out its secure filing system for CTA reporting.
Stay tuned for future articles to help you understand the new reporting requirements and manage compliance going forward.
The above information is only a high-level overview. See www.fincen.gov/boi for additional information. FinCEN is still developing its regulatory framework and will continue to issue additional guidance regarding the CTA.