Corporate Transparency Act

Summary

Effective January 1, 2024, virtually every legal entity in the United States (with a handful of exceptions) MUST disclose information about it's owners, officers, and controlling persons.  The disclosures must be made to a federal agency known as the Financial Crimes Enforcement Network (FinCEN) pursuant to the recently enacted Corporate Transparency Act (CTA).

THE REPORTING REQUIREMENTS ARE EASY.  it can be done on-line
"Reporting Companies"

The CTA broadly defines a reporting company as any corporation, limited liability company, or other similar entity created by filing a document with the secretary of state or similar office in any state or territory or with a federally recognized Indian Tribe or formed under the laws of a foreign country and registered to do business in the United States.

Pending implementing regulations, it is unclear whether limited partnerships are included. As the CTA's focus is on shell companies and other entities with limited or no operations, the CTA provides numerous exceptions for entities from undergoing reporting, including those in a regulated industry (where existing regulatory regimens would already include beneficial ownership reporting), publicly traded companies, investment vehicles operated by investment advisors, nonprofits, and government entities.

Significantly, there is also an exception from required reporting for an entity that (1) employs more than twenty employees; (2) filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales; and (3) has an operating presence at a physical office within the United States.

Moreover, entities that are subsidiaries of such excluded companies are also exempt from these reporting requirements.

Reporting of "Beneficial Owners"

The CTA defines a beneficial owner of an entity as any individual who, directly or indirectly, (1) exercises substantial control over the entity or (2) owns or controls not less than 25 percent equity in the entity.

The phrase "substantial control" is not defined in the CTA, so further regulations should clarify its meaning.

The legislation expressly excludes certain individuals from the definition of beneficial ownership, including (1) a minor child (as long as the child's parent's or guardian's information is reported); (2) an individual acting as an intermediary or agent on behalf of another; (3) a person whose control over a reporting company derives solely from their employment; (4) an individual whose only interest in a reporting company is through a right of inheritance; or (5) a creditor of a reporting company (unless they qualify as a "beneficial owner" through substantial control or equity ownership).

In each report to FinCEN, a reporting company must provide each beneficial owner's name, date of birth, residential or business address, and a unique identifying number from an acceptable identification document (such as a state driver's license or passport).

The date on which a reporting company's report to FinCEN is due depends on whether it is an existing entity or a newly formed one.  After the effective date of FinCEN's forthcoming regulations - which are due within a year after enactment of the CTA - new reporting companies will be required to report their beneficial owners' information at formation.

Existing entities will need to provide such information within two years from the promulgation of the new regulations.  A reporting company will also need to update its information within a year of any change to its beneficial ownership.

Penalties for Violating CTA

Companies subject to the CTA and their counsel should be cognizant of the steep penalties for violating the reporting requirements of the Act. Willfully providing false information to FinCEN or failing to report complete information to FinCEN can result in fines up to $10,000 and imprisonment for up to two years.

The CTA contains a safe harbor from such civil and criminal liability for the submission of inaccurate information if the person who submitted the report voluntarily and promptly corrects the report within 90 days.