Historically, smaller companies in the United States have had minimal legal compliance obligations to operate. Founders selected the state of incorporation or organization, picked their legal structure, and filed a one- or two-page formation document. With the enactment of the Federal Corporate Transparency Act that has all changed for those companies which are often the most suspicious about disclosures to government agencies.
Reporting Company Requirements
Effective January 1, 2024, the Corporate Transparency Act (CTA) requires certain entities—predominantly smaller and otherwise unregulated companies—to file a report with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), disclosing information about their beneficial owners, persons who ultimately own or control the company, and those individuals who formed the entity. All companies which have been created by filing a document with the secretary of state or similar office under the laws of that state (for foreign entities, the filing of a document to qualify to do business under the laws of that state) are defined as Reporting Companies and will have either 30 days or 1 year to comply, depending on their date of formation.
The CTA contains 23 exemptions. However, most of them apply to entities already subject to substantial federal or state regulations (for example, banks, publicly traded companies, and other entities that file reports with the SEC, and tax-exempt entities).
The “large operating company” exemption applies to an entity that (1) employs more than 20 full-time employees in the United States, (2) has an operating presence at a physical office within the United States, and (3) has filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales.
In order to comply, the following information is required:
Reporting Company: (1) full legal name, (2) any trade or “doing business as” names, (3) complete current street address of the principal place of business, (4) jurisdiction of formation, and (5) taxpayer identification number.
Beneficial Owners must provide their: (1) full legal name, (2) date of birth, (3) complete current residential street address (with exceptions for provisions address disclosures), and (4) either a copy of a current (i) U.S. passport, (ii) state or local ID document, (iii) driver’s license, or (iv) if the individual has none of those, a foreign passport.
A “beneficial owner” is defined as an individual who, directly or indirectly, either (i) exercises substantial control over the reporting company or (ii) owns or controls at least 25% of the ownership interests of the reporting company, including convertible interests. Substantial control means: (i) a senior officer of the company, (ii) having authority over the senior officers or majority of the board of the company, (iii) having significant influence over the company’s material decisions, or (iv) having any other type of significant control over the company.
Excluded from the definition of beneficial owner are: minor children (disclosing the parent or legal guardian’s information instead); individuals acting as nominees; custodians or agents; employees of the company acting solely as employees (not as senior officers); individuals whose only interest in a reporting company is a future interest through a right of inheritance; or creditors of a reporting company (unless the creditor meets other criteria of control).
How to File and Database Access
The initial report and subsequent updates will be filed electronically with FinCEN on a system which is yet-to-be created. FinCEN will not accept reports until January 1, 2024.
Once created, the database will not be publicly accessible, including through Freedom of Information Act requests. Access will be limited to: federal agencies engaged in national security, intelligence, and law enforcement; state law enforcement agencies with a court order; the Treasury Department; financial institutions with the company’s consent; government regulators of financial institutions; and certain foreign authorities requesting information through a U.S. agency.
Filing Deadlines and Penalties
Initial filing is due within 30 days of forming a new entity on or after January 1, 2024, and by January 1, 2025, for entities existing as of January 1, 2024. Updates to the information are due within 30 days of the occurrence of the event triggering the update.
The CTA also establishes civil and criminal penalties for entities that do not comply with the reporting requirements or knowingly provide false information.
How to Prepare
Entities qualifying as reporting companies should review, or establish, their compliance plan. Owners should begin compiling the necessary information and create internal controls and procedures for maintaining, and updating, such information. Founders who are accustomed to a “one-time” filing form will now have to monitor and comply with the ongoing requirements imposed by this new regulation.