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The Corporate Transparency Act – What it means for Many Closely Held Businesses in the U.S.
The Corporate Transparency Act (“CTA”), which was enacted in 2021 and went into effect January 1, 2024, is a federal anti-money laundering and financial crimes law which creates certain reporting obligations for closely held companies. If your business is a closely held domestic or foreign corporation, limited liability company or other similar entity, the CTA likely affects you. While proposed rules and guidance on complying with the CTA have been fluctuating, with the CTA now going into effect and with certain final rules being published, the purpose of this communication is to tell you what the CTA means for you and your business, including what you need to do in order to comply with the CTA.
What is the CTA – generally?
Under the CTA, many closely held companies in the U.S. will face significantly expanded reporting requirements through the filing of formal reports. Such reports will need to contain information about the entity itself, as well as the beneficial owners of the entity, and the individual applicants who are responsible for the formation of the entity.
What does the CTA aim to achieve?
The purpose of the CTA is to reduce terrorist financing, money laundering, and other illicit activities through enhanced transparency in entity structures and ownership. The CTA will require new and existing corporations, limited liability companies and other similar entities to disclose information regarding their Beneficial Owners and Applicants. The CTA directs the Secretary of the Treasury to maintain the reported beneficial ownership information in a secure, non-public database. The Financial Crimes Enforcement Network (“FinCEN”) has created its own Beneficial Ownership Secure System to receive, store and maintain beneficial ownership information.
What entities qualify as a “Reporting Company”?
According to the CTA, a “Reporting Company” is a domestic or foreign privately held entity. A “domestic private entity” is any corporation, LLC, or other similar entity created by the filing of a document with a secretary of state or similar office under the laws of that state, and a “foreign private entity” is any private entity formed under the law of a foreign country and registered to do business in the U.S. by filing of a document with a secretary of state or a similar office. Therefore, sole proprietorships, general partnerships and other entities which are not formed by filing documents with a secretary of state or similar office would under the laws of that state not be considered Reporting Companies.
Reporting Companies must provide, as part of their disclosure requirements to FinCEN, (a) their full legal name and any dba or trade name, (b) the street address of their principal place of business in the U.S., which cannot include a PO Box or other third-party address, (c) their jurisdiction of formation, (d) their EIN or tax identification number, and (e) certain information about their “Beneficial Owners” and “Applicants.”
What entities are exempt from the reporting requirements?
Under the CTA, there are a number of exceptions for companies that are considered exempt from the reporting requirements. Generally, these exemptions relate to companies which are (a) already subject to separate regulatory and reporting requirements or (b) are considered large operating companies with a physical presence in the U.S.
Certain churches and qualified non-profit organizations that are considered tax exempt under the Internal Revenue Code, insurance companies, certain public utility providers, banks and credit unions, public companies, inactive and other entities qualify as exempt from the reporting requirements.
The “large operating company” exemption is applicable to any companies with (a) more than 20 full-time employees in the U.S., (b) more than $5 million in gross receipts or sales as reported on the company’s tax returns (as determined by federal income tax principles), and (c) has an operating presence at a physical office in the U.S.
Additionally, a further exemption exists for subsidiary companies whose ownership interest are controlled or wholly owned, directly or indirectly, by one or more certain exempt entities (including large operating companies as identified above).
If any entity that qualifies as an exempted entity for the reporting requirements has or will have direct or indirect ownership interest in a Reporting Company, the Reporting Company must, with respect to the exempted entity, list the name of the exempt entity, but it does not need to report the information with respect to the exempt entity unless otherwise required.
Who qualifies as a “Beneficial Owner”?
The CTA provides that a “Beneficial Owner” is an individual who directly or indirectly (a) exercises substantial control over a Reporting Company, or (b) owns or controls not less than twenty-five percent (25%) of the ownership interests of the Reporting Company. According to the CTA, an individual may exert substantial control over a Reporting Company by both direct and indirect means.
There are certain exceptions, however, as to who qualifies as a Beneficial Owner, including: (a) an individual acting solely as an employee of the Reporting Company and whose control over or economic benefits from such entity is derived solely from the employment status of the person (provided such person is not a senior officer); (b) an individual whose interest in a Reporting Company is a future interest through a right of inheritance; (c) minors; (d) creditors of Reporting Company; and (e) an individual acting solely as a nominee, intermediary, custodian or agent on behalf of another.
Who qualifies as an “Applicant”?
The CTA provides that an “Applicant” of a Reporting Company is a person that directly files the document to create or register the Reporting Company, and the individual primarily responsible for the directing or controlling of such filing or any individual who files an application to register a foreign company to do business in the U.S.
Application
Timing Requirements for Existing Entities – Any reporting company that has been formed or registered before the effective date of the CTA (January 1, 2024), will be required to submit to the FinCEN a report that contains the information required by the CTA no later than January 1, 2025.
Timing Requirements for New Entities – Any Reporting Company that has been formed or registered after the effective date of the CTA (January 1, 2024) will be required to submit to FinCEN a report that contains the information required by the CTA not later than the date that is ninety (90) calendar days (which drops to 30 days for businesses formed after January 1, 2025) after the earlier of (a) the date which the Reporting Company receives actual notice that it has been registered to do business, or (b) the date on which a secretary of state or similar office first provides public notice that the Reporting Company has been registered to do business. Once the information has been submitted, for both new and existing entities, there is an ongoing obligation to submit updates or corrections to any information previously submitted within thirty (30) days of becoming aware of the need to update or correct such information.
Required Information for Beneficial Owners and Applicants – The report provided to FinCEN by a Reporting Company must identify for each Beneficial Owner and Applicant: (a) their full name, (b) date of birth, (c) current residential street address, (d) unique identifying number (such as a passport number, driver’s license number, etc.), and the issuing jurisdiction of such identifying number, and (e) an image of the document from which the identifying number was obtained, except that, an Applicant’s business address, rather than their residential address may be used. If a Beneficial Owner or an Applicant has obtained a FinCEN identifier, the Reporting Company may include the FinCEN identifier in lieu of the other required information for Beneficial Owners and Applicants.
A FinCEN identifier is a unique number assigned by FinCEN to a Beneficial Owner or Applicant. When applying for a FinCEN identifier, the individual must provide all of the information set forth above.
Penalties for Failure to Comply
It is unlawful for any person or Reporting Company to “willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN” or “willfully fail to report complete or updated beneficial ownership information.”
Both civil and criminal penalties can be enforced for reporting violations. Any person that intentionally fails to comply with the reporting procedures described above can be liable for fines and penalties up to $500 for every day that the violation has not been remedied and may be fined up to $10,000, imprisoned for no more than two years, or both. Additionally, in the event of an unlawful disclosure of beneficial ownership information, fines and penalties may be assessed up to $250,000.
If You Believe that You Are a Beneficial Owner of a Reporting Company, What Should You Do Next?
If you believe that you are a Beneficial Owner of a Reporting Company, your next step should be to communicate with the management of your company to ensure that they are consulting with the company’s legal counsel to further evaluate whether CTA applies to you. If it does, the company should complete and submit a beneficial ownership report that will be available for completion through a secure filing system on FinCEN’s website (which system is currently being developed by FinCEN). Although FinCEN expects that many Reporting Companies will be able to submit their beneficial ownership information on their own using FinCEN’s issued guidance, you should not hesitate to consult with your legal counsel for assistance in meeting your reporting obligations.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
Matthew R. Hull, Esq., Christopher R Hunt, Esq., John M. Tucker, Esq., Jason F. Haupt, Esq., Michael T. Callahan, Esq., Nathan C. Newcomer, Esq.
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
4775 Munson St. NW
Canton, Ohio 44718
Phone: 330-497-0700