The Corporate Transparency Act was enacted to combat money laundering, fraud, and other illicit activities by increasing transparency in corporate ownership. Under this law, certain corporations and limited liability companies (LLCs) are now obligated to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). Beneficial ownership includes any individual who directly or indirectly controls an entity or who owns or controls 25% or more of equity of the entity.
All non-exempt US companies are subject to new disclosure requirements beginning January 1, 2024.
Personally identifying information about the beneficial ownership of non-exempt companies must be disclosed to the Financial Crimes Enforcement Network (FinCEN). Compliance with the CTA is essential, as non-compliance can result in substantial penalties and even prison time.
Who is subject to these new disclosure requirements?
All corporations, limited liability companies (LLCs) and other companies that are formed by a filing with a State or Indian tribe and certain foreign companies that are qualified to do business in the US. Companies that do not exist by virtue of a filing with a State are not covered. For instance, a common law partnership or sole proprietorship is not subject to disclosure requirements.
The following companies are Exempt from filings:
“Large Operating Companies” defined to be a company that:
- Employs more than 20 full-time employees in the US,
- Filed Federal income tax returns in the previous year showing more than $5 million in gross receipts or sales from the US, and
- Has an operating presence or physical office in the US
21 other types of companies that are highly regulated and meet the specific requirements of the regulations including:
- Publicly traded companies subject to SEC reporting (filing periodic 34 Act reports or having securities registered under Section 12 of the 33 Act),
- Investment companies and investment advisors registered with the SEC under the 40 Act,
- Banks, insurance companies, broker dealers, credit unions, utilities, public accounting firms and other companies that are already heavily regulated, and
- Tax exempt entities under 501(c) of the Internal Revenue Code
Inactive entities meeting all of these requirements:
- In existence on or before January 1, 2020,
- Not engaged in an active business,
- Not owned, directly or indirectly, by a foreign person,
- Has not within the past year received or sent more than $1,000 or experienced a change in ownership, and
- Does not hold any assets
What is the deadline for filing?
- Companies in existence prior to January 1, 2024 must file by January 1, 2025. More than 30 million companies are expected to file during 2024 to meet this deadline.
- New companies formed after January 1, 2024 must comply within 90 days of formation during 2024 and within 30 days in subsequent years.
- There is a 90-day safe harbor (no penalties) to voluntarily correct inaccurate information in a report.
What information needs to be submitted?
For each Beneficial Owner and Company Applicant the following must be submitted:
- Full legal name,
- Date of birth,
- Address (for individuals, this must be the residential address),
- Unique identifying number from government-issued identification (e.g., unexpired state i.d. card number, unexpired driver’s license number or an unexpired passport number), and
- A scanned copy of the identifying document
A FinCEN identifier may be obtained in advance which will eliminate the need to provide the information about the individual with the FinCEN identifier. The holder of a FinCEN identifier must report any change in the information submitted to obtain the identifier within 30 days of the change.
Filings will be done electronically. The electronic filing system is not yet available.
Once I file, is there anything else I need to do?
Yes, there is an ongoing duty to monitor.
- A company that ceases to be Exempt must file a report within 30 days of ceasing to be Exempt and newly Exempt companies must file a report that it has become Exempt.
- A reporting company must report changes to its report, including ownership changes by sale or death of a holder, within 30 days of the change.
Companies will need to put monitoring systems in place to confirm that all information remains the same. Monthly questionnaires to beneficial owners may be required.
Definition of Key Terms
Company Applicant
This is the individual who files or directs the filing with the State to form or qualify the company to do business.
For companies formed prior to January 1, 2024, no information about a company applicant is required.
Beneficial Owner is defined as:
any individual who, directly or indirectly, either
- Exercises substantial control over such reporting company or
- Owns or controls at least 25 percent of the ownership interests of such reporting company
Notes:
- Companies are not required to report how an individual has beneficial ownership, i.e. whether it is through control or ownership.
- There may be multiple beneficial owners of a company.
- Beneficial owners are individuals, not entities, so intermediate entities that are not otherwise reporting companies do not, themselves, report.
Substantial Control
An individual exercises substantial control over a reporting company if the individual:
- Serves as a senior officer of the reporting company;
- Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); or
- Directs, determines, or has substantial influence over the listed important decisions made by the reporting company.
An individual may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through:
- Board representation,
- Ownership of voting power,
- Contractually, or
- Through formal or informal arrangements or relationships.
Ownership Interests include:
- Any equity, stock, or similar instrument, subscription, voting trust certificate etc. an equity security, interest in a joint venture, certificate of interest in a business trust
- Whether any such instrument is transferable or confers voting power is irrelevant;
- Any capital or profit interest in an entity;
- Any instrument convertible, with or without consideration, into any of the foregoing, even if characterized as debt;
- Any put, call, straddle, or other option or privilege of buying or selling any of the foregoing
- There is an exception for any of these created and held by a third party without the knowledge or involvement of the reporting company; or
- Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.
Ownership or control of ownership interest can be found directly or indirectly through any contract, arrangement, understanding, relationship, or otherwise, including:
- For a trust or similar arrangement that holds such ownership interest:
- As a trustee of the trust or other individual (if any) with the authority to dispose of trust assets;
- As a beneficiary who:
- Is the sole permissible recipient of income and principal from the trust; or
- Has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or
- As a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.
- Through ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the reporting company.
Exceptions from Beneficial Owner definition:
- A minor child (but the legal guardian of the child must report);
- An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
- An employee of a reporting company, acting solely as an employee, whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee, provided that such person is not a senior officer;
- An individual whose only interest in a reporting company is a future interest through a right of inheritance; or
- A creditor of a reporting company. “Creditor” is an individual whose beneficial ownership is solely in payment of a predetermined sum or a covenant or right intended only to secure the right to receive payment or enhance the likelihood of repayment.
Confidentiality
- Information disclosed under the CTA to FinCEN will not be made public but it may be shared with Federal and State governmental entities under specified circumstances.
- Some States are adopting their own Corporate Transparency laws and in at least one case, New York, the proposal is that some of the disclosed information be made available to the public.
Penalties
The penalties for providing inaccurate information or not filing are significant: a civil penalty of $500/day that a failure or inaccuracy exists and criminal penalties of up to $10,000 or 2 years in prison, or both.
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This is a summary of the laws and regulations in connection with the Corporate Transparency Act. This is a summary only and there are important details that may apply to an individual situation. Reference is made to the Act at 31 USC 53 Subch II Section 5336 and the regulations at 31 CFR Part 1010.380. You are strongly advised to read the law and regulations and consult with an attorney or other professional before filing or deciding not to file.
In addition, FinCEN has published a Small Entity Compliance Guide, FAQs and other information here.
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CONTACT
Aaron Ghais
Marilyn Sonnie
MORE INFORMATION
The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or a member of the Shulman Rogers CTA Task Force.
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