The Financial Crimes Enforcement Network (“FinCEN”) issued final regulations regarding the Corporate Transparency Act (“CTA”) on September 29, 2022, which will require most small businesses to begin reporting beneficial ownership of both existing and new legal entities starting in January of 2024. The purpose is to combat money laundering and other illicit activities and create a non-public database for law enforcement. Many exemptions exist, but companies will need to be thorough in their understanding of the requirements as significant penalties for non-compliance could arise.
History and Final Regulations
The National Defense Authorization Act (“NDAA”) is a series of federal laws passed annually to specify the budget and expenditures of the U.S. Department of Defense. The NDAA for Fiscal Year 2021, enacted into law by Congress via a presidential override, included expansions to the Anti-Money Laundering Act of 2020. Specifically, this included the new CTA.
Through the CTA, Congress moved to have the FinCEN establish and maintain a database of beneficial owners of certain reporting companies, with a goal of preventing and reducing illicit financial activities including money laundering, terrorism, human and drug trafficking, and securities fraud, with an emphasis on the use of shell companies.
Although the law was ratified on January 1, 2021, the effective date and details of the CTA reporting requirements remained open for a comment period into Fiscal Year 2022. On September 29, 2022, the FinCEN issued final regulations on the CTA, officially creating new reporting requirements for millions of small businesses.
The CTA requires “reporting companies,” unless exempt, to file reports with FinCEN which identify and disclose certain information related to their beneficial owners (discussed below).
Two types of reporting companies are described within the CTA: a domestic reporting company and a foreign reporting company.
- Domestic reporting company – Corporation, LLC, or other entity created by filing a document with the secretary of state or a similar office
- Foreign reporting company – Corporation, LLC, or other entity created in a foreign country that is registered to do business in the U.S. by filing a document with the secretary of state or a similar office
FinCEN also clarified that they expect these definitions include limited liability partnerships, limited liability limited partnerships, trusts, and limited partnerships.
The definition of “reporting companies” is quite broad, so understanding the exemptions is an integral piece of determining whether compliance is required for your business.
The CTA provides 23 categories of entities which are exempt from complying with their reporting requirements. Entities who operate in highly regulated industries are already subject to substantial federal and state requirements which include disclosing beneficial owners.
The entities exempt from CTA requirements are listed below, (CorporateTransparencyAct.org):
- Large operating companies (must meet all three)
- 20 or more full-time U.S. employees
- $5.0 million or more of U.S. revenue
- A physical presence in the U.S.
- Public utility
- Financial market utility
- Pooled investment vehicle
- Tax exempt entity
- Entity assisting tax exempt entity
- Subsidiaries of certain exempt entities
- Money transmitting business
- Securities broker-dealer
- Securities exchange or clearing agencies
- Other Securities Exchange Act of 1934 entity
- Registered investment company or adviser
- Securities issuer
- Domestic governmental authority
- Domestic credit union
- Depository institution holding company
- Venture capital fund adviser
- Insurance company
- State licensed insurance producer
- Commodity Exchange Act registered entity
- Accounting firm
- An inactive business
- Large operating companies (must meet all three)
In summary, unless specifically exempt, any U.S. corporation or LLC (new and existing) not meeting the thresholds described above is subject to the CTA reporting requirements.
The CTA defines beneficial owners 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 report company.”
Understanding the terms within the definition of “beneficial owners” is also important:
- Substantial control - An individual can exercise substantial control over a reporting company if they serve as a senior officer in the reporting company, have authority to appoint or remove senior officers or board members, have substantial influence over important decisions of the reporting company, or have any other form of substantial control over a reporting company
- Ownership interests – An individual who owns or controls 25% of the reporting company, via equity, profits interest, options, or other ownership interests
For complete rules on the beneficial owners please visit the Federal Register at the following link: Beneficial Ownership Information Reporting Requirements
What information is needed?
The reporting company is the party responsible for completing the annual filing, which will include the following information:
- Company name, including dba
- Business address
- Formation jurisdiction (or jurisdiction registered to do business if a foreign reporting company)
- Taxpayer ID number
FinCEN has set forth the following required information to be disclosed annually for every decision maker and beneficial owner (25%+ ownership) of the company:
- Dates of birth
- Current addresses
- Driver’s license or passport number
The CTA reporting requirements takes effect on January 1, 2024, but dates will vary based on when the company was established or when information has changed.
- Existing Company (registered before January 1, 2024) – Initial report is due by January 1, 2025
- New Company (created or registered after January 1, 2024) – Initial report is due within 30 calendar days of creation or registration
- Changes in ownership – Report must be filed within 30 days of the change
- Changes in status and correction of information – Entities changing status (to or from meeting reporting requirements) or updating any information has 30 days to file an updated report
How to file
FinCEN has not issued guidance or forms for which the reporting companies will disclose their beneficial owners. It’s expected that FinCEN will release draft forms in the Federal Register in advance of January 1, 2024, and hold a public comment period.
FinCEN will also develop compliance and guidance documents to assist reporting companies with these rules and provide notification to the secretaries of state to ensure effective implementation of the rules.
The final CTA regulations sets forth a significant compliance burden on reporting companies. Advanced planning to develop processes and identify beneficial owners will be necessary to meet the obligations and avoid potential penalties and the CTA adds a layer of complexity when company or beneficial ownership information changes.
Although many exemptions exist, the reporting for millions of companies will be a costly and time-consuming effort if not done proactively. Act now to avoid reporting headaches during 2024.
For more information, please visit the link to FinCEN’s Beneficial Ownership Information Reporting.
Contact us today if you have questions.