November 17, 2023

Understanding the New Reporting Obligations Under the Corporate Transparency Act

Kenneth Ashton, Brian Blaylock, Adam Greenup, Brett Johnson, Garth Stevens, John Weston P.C.

Snell & Wilmer

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With 2024 almost upon us, this means that for millions of companies across the United States, new compliance requirements under the Corporate Transparency Act (“CTA”) are about to take effect. In fact, the Financial Crimes Enforcement Network (“FinCEN”), the bureau under the Treasury Department tasked with enforcing the CTA, believes that over 32 million businesses, both foreign and domestic, will be required to comply with new reporting requirements or be subject to civil fines or even criminal penalties.

This means that private sector businesses operating in the United States should understand whether they fall within the scope of the new regulations. This is especially important for small for-profit businesses currently (or soon to be) operating within the United States, as these entities will likely be disproportionally impacted given the way the new regulations have been designed.

What Is the CTA?
The CTA is the Treasury Department’s most recent tool which will be used to identify and combat domestic money laundering and sanction evasion schemes. Under the CTA, certain non-exempt domestic and foreign entities (referred to as “reporting companies”) will be required to disclose information (referred to as beneficial ownership information, or “BOI”) regarding the identity of individuals who directly or indirectly own substantial interest in, or hold substantial control over, these reporting companies.

The CTA marks a significant departure in how FinCEN gathers information. Prior to the CTA, a company was only obligated to report certain information if it was directly solicited by the bureau. Starting on January 1, 2024, however, millions of companies will now have an affirmative obligation to file a report with the bureau unless they fall under a specific exemption under the Act.

Who Is Required to Report?
The CTA identifies two categories of companies required to report: domestic reporting companies and foreign reporting companies.

A domestic reporting company is any non-exempt corporation, limited liability company, or other similar entity that is created by the filing of a document with a secretary of state or a similar office under the law of State or Indian Tribe.

A foreign reporting company is any similar type of entity that is formed under the laws of a foreign country and registered to do business in the United States by the filing of a document with the secretary of state (or similar office).

Who Is Exempt from the CTA’s Reporting Requirements?
The CTA identifies twenty-three statutory exemptions from the Act’s reporting requirements. These entities are described below.

Exempt Entity	Description
1. Securities Issuers	Any issuer of securities that is: (a) an issuer of a class of securities registered under Sec. 12 of the Securities Exchange Act of 1934, or (b) required to file supplementary and periodic information under Sec. 15(d) of the Securities Exchange Act of 1934.
2. Domestic Governmental Authorities	Any entity that: (a) is established under the laws of the United States, Indian Tribe, State, or political subdivision of a State, or under an interstate compact between two or more States, AND (b) exercises governmental authority on behalf of the United States or any such Indian Tribe, State, or political subdivision.
3. Banks	Any bank, as defined in: (a) Sec. 3 of the Federal Deposit Insurance Act, (b) Sec. 2(a) of the Investment Company Act of 1940, or (c) Sec. 202(a) of the Investment Advisers Act of 1940.
4. Domestic Credit Unions	Any Federal credit union or State credit union, as those terms are defined in Sec. 101 of the Federal Credit Union Act.
5. Depository Institution Holding Companies	Any bank holding company: (a) as defined in Sec. 2 of the Bank Holding Company Act of 1956, or (b) any savings and loan holding company as defined in Sec. 10(a) of the Homeowners’ Loan Act.
6. Money Transmitting businesses	Any money transmitting business: (a) registered with FinCEN under 31 U.S.C. 5330, AND (b) any money services business registered with FinCEN under 31 C.F.R. 1022.380.
7. Brokers or Dealers in securities	Any broker or dealer, as those terms are defined in Sec. 3 of the Securities Exchange Act of 1934, that is registered under Sec. 15 of that Act.
8. Securities Exchange or Clearing Agencies	An exchange or clearing agency, as those terms are defined in Sec. 3 of the Securities Exchange Act of 1934, that is registered under Secs. 6 or 17A of that Act.
9. Other Entities Registered Pursuant to the Securities Exchange Act of 1934	Any entity other than that described in Exemption 1 (Securities Reporting Issuer), Exemption 7 (broker or dealer in securities), or Exemption 8 (Securities Exchange or Clearing Agency) that is registered with the SEC under the Securities Exchange Act of 1934.
10. Registered Investment Companies and Advisers	Any entity that is: (a) an investment company as defined under Sec. 3 of the Investment Company Act of 1940 or is an investment adviser as defined in Sec. 202 of the Investment Advisers Act of 1940, AND (b) registered with the SEC under the Investment Company Act of 1940 or the Investment Advisers Act of 1940.
11. Venture Capital Fund Advisers	Any investment adviser that: (a) is described in Section 203(l) of the Investment Advisers Act of 1940, AND (b) has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the SEC.
12. Insurance Companies	Any insurance company as defined in Sec. 2 of the Investment Company Act of 1940.
13. State Licensed Insurance Producers	Any entity that is: (a) an insurance producer that is authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State, AND (b) has an operating presence at a physical office within the United States.
14. Entities Registered Pursuant to the Commodity Exchange Act	Any entity that: (a) is a registered entity as defined in Sec. 1a of the Commodity Exchange Act, or (b) is either a (i) Futures Commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor, each as defined under Sec. 1a of the Commodity Exchange Act, or a retail foreign exchange dealer as described in Sec. 2(c)(2)(B) of the Commodity Exchange Act AND (ii) is registered with the Commodity Futures Trading Commission under the Commodity Exchange Act.
15. Accounting Firms	Any public accounting firm registered in accordance with Sec. 102 of the Sarbanes-Oxley Act of 2002.
16. Public Utilities	Any entity that is a regulated public utility as defined in 26 U.S.C. 7701(a)(33)(A) that provides telecommunication services, electrical power, natural gas, or water and sewer services within the United States.
17. Financial Market Utilities	Any financial market utility designated by the Financial Stability Oversight Council under Sec. 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
18. Pooled Investment Vehicles	Any entity that is: (a) any investment company, as defined under the Investment Company Act of 1940, or (b) any company that would be an investment company under that authority but for the exclusion provided therein and is identified by its legal name by the applicable investment adviser in the requisite Securities and Exchange Commission form.
19. Tax Exempt Entities	Any entity that is: (a) an organization that is described in Sec. 501(c) of the Internal Revenue Code of 1986 (determined without regard to Sec. 508(a) of the Code) and exempt from tax under Sec. 501(a) of the Code, except that in the case of any such organization that ceases to be described in Sec. 501(c) and exempt from tax under Sec. 501(a), such organization shall be considered to continue to be described as a tax-exempt entity for the 180-day period beginning on the date of the loss of such tax-exempt status, or (b) a political organization, as defined in Sec. 527(e)(1) of the Code, that is exempt from tax under Sec. 527(a) of the Code, or (c) a trust described in paragraph (1) or (2) of Sec. 4947(a) of the Code.
20. Entities Assisting a Tax-Exempt Entity	An entity that: (a) operates exclusively to provide financial assistance to, or hold governance rights over, a tax-exempt entity, AND (b) is a U.S. person, AND (c) is beneficially owned or controlled exclusively by one or more U.S. persons that are U.S. citizens or lawfully admitted for permanent residence, AND (d) derives at least a majority of its funding or revenue from one or more U.S. persons that are U.S. citizens or lawfully admitted for permanent residence.
21. Large Operating Companies	An entity that: (a) employs more than 20 employees on a full-time basis as defined in 26 C.F.R. 54.4980H-1(a) and 54.4980H-3, except that the term “United States” as used in those sections of the C.F.R. have the meaning provided in 31 C.F.R. 1010.100(hhh), AND (b) has an operating presence at a physical office within the United States, AND (c) filed in the previous year federal income tax returns in the United States demonstrating more than $5 million in gross receipts or sales in the aggregate (including the receipts or sales of other entities owned by the entity and through which the entity operates. FinCEN declines to permit companies to consolidate employee headcounts across affiliated entities.
22. Subsidiaries of Certain Exempt Entities	Any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities described in all exemptions listed above, except for Exemption 6 (Money Transmitting businesses), Exemption 18 (Pooled Investment Vehicles), or Exemption 20 (Entities Assisting a Tax-Exempt Entity).
23. Inactive Businesses	Any entity that: (a) was in existence on or before January 1, 2020, AND (b) is not engaged in active business, AND (c) is not owned by a foreign person, whether directly or indirectly, wholly or partially, AND (d) has not experienced any change in ownership in the preceding twelve-month period, AND (e) has not sent or received any funds in an amount greater than $1,000 either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period, AND (f) does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation limited liability company, or similar entity.

The CTA also permits the Treasury Secretary, with the written concurrence of the Attorney General and the Homeland Security Secretary, to exclude by regulation additional types of entities. However, FinCEN has not proposed exemptions for any additional types of entities beyond those specified by the CTA. Additionally, FinCEN has not implemented any procedures for a company that believes it meets one of the aforementioned exemptions to be certified as exempt by the bureau.

What Information Is Required to be Reported?
Under the CTA, all non-exempt reporting companies will be required to report information on the company itself, as well as information on any beneficial owners of the company. Company information includes: (1) the name of the reporting company, (2) any trade name or DBA name of the reporting company, (3) the business street address of the reporting company, and (4) the TIN issued by the IRS for the reporting company.

For a beneficial owner, the reporting company is required to report: (1) the full legal name, (2) date of birth, (3) current residential or business street address, and (4) the document number of a specified type of identification document for each beneficial owner.

In addition to the information described above, domestic reporting companies created on or after January 1, 2024, must also report information about its “company applicants.” A company applicant is defined as any individual who will directly file the reporting company’s BOI report with FinCEN or will direct or control the filing. The filing information required for a company applicant is similar to the BOI information described above.

Who Is Considered a Beneficial Owner?
The CTA considers an individual a beneficial owner if they own or control at least 25% of the ownership interests of a reporting company. Individuals who exercise “substantial control” over a reporting company are also considered beneficial owners. Substantial control includes individuals who either: (1) serve as a senior officer of a reporting company, (2) have authority over appointment or removal of any senior officer, (3) directs, determines, or has substantial influence over important matters of the reporting company, or (4) has any other form of substantial control over the reporting company.

Trusts are generally excepted from the reporting requirements, as they generally do not file registration documents with a State, however, a trust that owns more than 25% of a reporting company is required to make a BOI filing with FinCEN. Additionally, beneficiaries of the trust, as well as anyone who has authority to dispose of trust assets, are required under the Act to be disclosed as beneficial owners.

The CTA also provides for several exemptions to the definition of beneficial owner, including: (1) minor children (provided that a parent or guardian’s information is reported), (2) individuals acting as a nominee, intermediary, custodian, or agent on behalf of another individual, (3) individuals acting solely as an employee of a reporting company in specified circumstances, (4) individuals whose only interest in a reporting company is a future interest through a right of inheritance, or (5) creditors of a reporting company.

When Is a Reporting Company Required to Report?
Reporting requirements under the CTA differ based on: (1) when the reporting company was created, AND (2) what type of report will be filed (e.g., an initial report, updated report providing new information, or a report correcting erroneous information previously filed).

Domestic reporting companies created before January 1, 2024, and foreign reporting companies registered in the United States before January 1, 2024, must file an initial report by January 1, 2025. These entities are required to file an updated report no later than 30 calendar days from the date of the change in information, or a corrective report no later than 14 calendar days from the date it knew, or should have known, that the information was inaccurate.

Domestic reporting companies created on or after January 1, 2024, or foreign reporting companies registered in the United States on or after January 1, 2024, must file initial reports within 30 calendar days of formation or registration, except that reporting companies formed during calendar year 2024 will have 90 days within formation or registration to file initial reports. In either event, updated reports or corrective reports should be filed within 30 calendar days or 14 calendar days, respectively.

An entity that was lawfully exempt but no longer qualifies under an exemption must file an initial report within 30 calendar days from the first date that the entity no longer qualifies for any exemption. For example, if a company that employed 25 full-time employees and met all of the additional criteria under the “large operating company” exemption, eliminates five or more full-time employee positions, it would have 30 days to file its initial report with FinCEN.

Penalties for Non-Compliance with the Reporting Requirements of the CTA
The CTA makes it unlawful for any person to willfully provide, or attempt to provide, false or fraudulent BOI to FinCEN, or to willfully fail to report complete or updated BOI. Any failure by a non-exempt reporting company to comply with the requirements of the CTA can result in both civil and criminal penalties. Reporting companies can face fines up to $500 per day of non-compliance, as well as a penalty not to exceed $10,000 and/or up to two years in prison. The CTA contains a safe harbor provision for any erroneous information that is corrected within 90 days of the original incorrect filing.

Conclusion
The CTA will soon impose mandatory reporting requirements on millions of foreign and domestic companies operating in the United States. It is important for corporations, partnerships, and limited liability companies to be proactive, not only in understanding the new reporting requirements, but whether or not they fall within the scope of CTA compliance. Impacted companies should plan ahead to ensure that costs are budgeted to ensure they comply with these new regulations. Companies that believe they may be required to report under the Act will be well served to engage outside counsel to advise and assist with these new reporting requirements.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.