Important New Filings Will Be Required Beginning in 2024

The United States does not currently have a centralized repository of data about who owns and operates legal entities within its borders. That soon will change.

The Corporate Transparency Act (“CTA”), passed by Congress in 2021, will require certain companies to file reports with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) detailing information on the company as well as its beneficial owners. FinCEN is the bureau of the United States Treasury Department that will be responsible for creating and maintaining the governmental database. 

On September 30, 2022, FinCEN published its final regulations implementing the beneficial ownership reporting requirements of the CTA (the “Final Rule”).  The Final Rule goes into effect on January 1, 2024.

When the Final Rule becomes effective on January 1, 2024, certain domestic and foreign companies will be required to file reports with FinCEN that set forth the beneficial owners of the company, the company applicants, and file updates to report material changes in beneficial ownership.  The Final Rule outlines which entities are required to file, the requisite information to be reported, timelines for submitting reports, and sets forth both civil and criminal penalties for non-compliance. 

In summary, the CTA will create a national database of companies in the U.S. that identifies the persons who are behind the companies as owners or control persons.  The law is part of an increasing effort to improve national security through combating  purported money-laundering, terrorism, tax evasion, and other financial crimes.  At this time, the FinCEN data will not be of public record or searchable by the public, but it will be available to a variety of governmental and law enforcement agencies. 

1. Who Must File?

If an entity was formed by a filing with a state level department or agency, it likely will be a reporting company.  The CTA requires certain domestic and foreign entities to file reports with FinCEN. These entities include:

• Corporations;
• Limited liability companies (LLCs);
• Limited partnerships (LPs);
• Limited liability partnerships (LLPs); and even
• Business trusts

Under the CTA and Final Rule, the reporting obligation or duty falls on the reporting Company itself.

This new law will affect virtually all small family businesses, including LLCs, partnerships, and other entities designed only as holding companies, such as to hold real estate.  Even if an entity has only one owner and that entity is disregarded for federal income tax purposes — such as a single-member LLC — that entity still will have to file reports with FinCEN. 

The CTA does exempt 23 types or categories of companies from reporting. These include entities such as:

• Non-profits
• Publicly traded companies
• Certain banks or trust companies
• Companies that are already required to file reports with FinCEN
• Companies that are already required to register with the Securities and Exchange Commission (SEC)
• Domestic companies with: 20+ employees; $5 million or more in annual gross revenue; and a physical presence in the U.S.

2. What Information Must Be Filed?

The reports filed with FinCEN will include information about the reporting company itself, as well as the “company applicants” and “beneficial owners”.

• Reporting company information includes the company’s full legal name, any names under which it does business, a principal business address, the jurisdiction of formation, and a taxpayer identification number.
• For new formations, company applicant information includes the name, date of birth, street address, and unique identifying number of the individual who filed the formation or registration documents for the new company.  This may be both the organizer of the company as well as her or his attorney and/or paralegal.
• Beneficial owner information includes the name, date of birth, street address, and unique identifying number of any individual who (i) exercises “substantial control” over the company or (ii) owns or controls 25% or more of the company.  Thus there are two types of beneficial owners, determined via control or ownership.  Those who exercise “substantial control” are defined as senior officers, ones who have authority over appointment or removal of senior officers or majority of board of directors, those who direct, determine, or have substantial influence over important decisions, and any other person who has substantial control (direct or indirect) over the Reporting Company.  “Senior officers” are defined as the President, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function (typically not secretary or treasurer).

3. When Must the Reports Be Filed?

For existing companies (i.e. formed before December 31, 2023), the initial report must be filed by January 1, 2025.

For new companies formed on or after January 1, 2024, the initial report must be filed within thirty (30) days of formation.

Companies must also file updates to their reports if there are any changes in beneficial ownership information previously reported (e.g. a partner buy-out, a stock sale, M&A, a change in senior officer, and the like). These updates must be filed within thirty (30) days of the material change.

4. Penalties for Non-compliance

The penalties for noncompliance with the CTA can be severe. Companies that fail to file the required reports or that file false or misleading information may be subject to civil fines of up to $500 per day, criminal fines of up to $10,000, and/or imprisonment for up to two years.

5. Conclusion

The CTA as implemented through the Final Rule is a significant new law that will require existing and new companies to disclose information about their beneficial owners. 

Companies should start preparing now to comply with the law and evaluate whether they are exempt from reporting. They should identify their beneficial owners and gather the required beneficial owner information to file the initial report. They should also develop a process for monitoring and updating their beneficial ownership information on an ongoing basis in a timely manner.

If you have an ownership interest in a closely held entity, such as an LLC, corporation, or limited partnership, or if you exert significant control over any such entity (such as serving as a senior officer, director, LLC manager, chief financial officer, or even investment trustee) then you very well may be subject to these requirements as a person having significant control, even if you have no equity ownership.  Take action today.