The Corporate Transparency Act
The Corporate Transparency Act (“CTA”) which was enacted into law in 2021. The Financial Crimes Enforcement Network (“FinCEN”) is responsible for administering the CTA and putting out final rules as to its implementation. Beginning January 1, 2024, most closely held companies in the United States will face significantly expanded reporting requirements, and for the first time, most of these companies will be required to report beneficial ownership information to the United States government. Attorneys Matt Hull and Mike Callahan have created this article to explain this new law which has far reaching implications to many business owners.
Overview of the CTA
What does the CTA aim to achieve? The CTA will require new and existing corporations, limited liability companies, and other similar entities that qualify as a reporting company to disclose information about their beneficial owners, senior officers and applicants. The intent of the law is to prevent wrongdoers from exploiting United States corporations and limited liability companies for criminal gain and to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving United States corporations and limited liability companies. The UK and EU have had similar reporting requirements in place for some time.
What entities qualify as a “Reporting Company”? “Reporting Companies” are companies that must abide by the reporting requirements, including any corporation, LLC (including single member LLCs), or other similar entity that is either (a) created by the filing of a document with a secretary of state, or (b) formed under the law of a foreign country and registered to do business in the United States. Therefore, sole proprietorships, general partnerships, and other entities which are not formed by filing documents with a secretary of state would not be considered Reporting Companies. Reporting Companies must provide (a) their full legal name, any doing business as names and trade names, (b) the street address of their principal place of business in the United States, which cannot include a PO Box, (c) their jurisdiction of formation, and (d) their EIN or tax identification number. Reporting Companies must also disclose certain information about their “Beneficial Owners” and “Applicants.”
Who qualifies as a “Beneficial Owner”? Subject to certain exceptions, a “Beneficial Owner” generally means an individual who directly or indirectly: (a) exercises substantial control over a Reporting Company (which includes senior officers or managers, such as a CFO, CEO, COO, etc. even if they do not have an ownership interest), or (b) owns or controls 25% or more of the Reporting Company.
Who qualifies as an “Applicant”? An “Applicant” of a Reporting Company is a person that directly files the document and the individual primarily responsible for directing or controlling the filing, which can include the business owner forming a company and also the attorney and/or paralegal who assists the business owner in forming the entity.
Timing Requirements for Existing Entities. Any Reporting Company that has been formed before January 1, 2024, will be required to submit to the FinCEN a report that contains the information required by the CTA not later than January 1, 2025. Existing companies will not, however, need to report who their “Applicant” was when the company was originally formed.
Timing Requirements for New Entities. Any reporting company that has been formed after 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 30 calendar days after the date which (a) the reporting company receives actual notice that it has been registered to do business, or (b) the date the secretary of state first provides public notice that the entity has been registered to do business. This means new entities will need to obtain their EIN within the CTA’s reporting timelines. The reporting obligations are an ongoing obligation, meaning new and existing entities will also have an obligation to submit updates or corrections to any information previously submitted within 30 days of becoming aware of the need to update such information (such as a change in ownership or senior officers).
Required Information for Beneficial Owners and Applicants. The report provided to FinCEN must identify for each Beneficial Owner and Applicant: (a) their full name, (b) date of birth, (c) residential 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, in certain instances an Applicant’s business address, rather than their residential address may be used.
Exempted Entities. There are a number of exceptions for companies that are considered exempt. Generally, these exemptions relate to companies which are already subject to separate regulatory reporting requirements or are considered large operating companies. A common exemption many companies will qualify under is the “large operating company” exemption, which is applicable to companies with (a) more than 20 full-time employees in the United States, (b) more than $5 million in gross receipts or sales, and (c) have a physical office in the United States. 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 entities and other certain entities also qualify as exempt from the reporting requirements.
Penalties for Failure to Comply
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.
Therefore, if you own an entity or establish an entity, it is important that you contact your attorney to make sure you are in compliance with this new law.
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.
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
4775 Munson St. NW | 50 North Street NE, Suite 101
Canton, Ohio 44718 Massillon, OH 44646
Phone: (330) 244-4494