Overview and Background.
On January 1, 2024 the Corporate Transparency Act (“CTA”) will go into effect, requiring federal reporting of ownership information for nearly all entities doing business in the United States, irrespective of their domicile.
The CTA was implemented in conjunction with the Anti-Money Laundering Act of 2020 and ultimately passed on January 1, 2021, as a means to mitigate tax fraud, money laundering, and terrorist financing. To achieve such efforts, Congress tasked the Financial Crimes Enforcement Network (“FinCEN”) to establish a reporting framework and registry to collect and aggregate all information subject to the CTA. In doing so, FinCEN developed criteria detailing which companies would be required to report information (“Reporting Companies”), which individuals information will be collected from (“Beneficial Owners” and the “Company Applicant”), and what exact information will be collected (“Beneficial Owner Information”).
Given the expansive impact of the CTA and FinCEN’s regulations, we’ve included a summary of the primary obligations and dates business owners and management should be aware of below.
What Entities Qualify as Reporting Companies?
Unless an exemption applies, the following entities are considered Reporting Companies required to submit Beneficial Owner Information:
a corporation, limited liability company, or other entity created by filing of a document with any Secretary of State or similar office under state or tribal law; or
a foreign company registered to do business in any U.S. state or Indian tribe.
Who Qualifies as a Beneficial Owner of a Reporting Company?
FinCEN defines a Beneficial Owner as an individual who either directly or indirectly:
exercises “Substantial Control” over the reporting company; or
owns or controls at least 25% of the reporting company’s ownership interests.
An individual is considered to maintain Substantial Control over a Reporting Company if they have significant influence over the entity’s operational or management decisions. This influence can be direct or indirect and may be exercised through ownership interests, voting rights, contracts, arrangements, understandings, or otherwise. While this broad terminology is designed to serve as a catch-all, FinCEN also provides the following scenarios which are each individually considered to amount to Substantial Control of a Reporting Company:
the individual is a senior officer (President, CEO, COO, CFO, and GC);
the individual has authority to appoint or remove any senior officer or a majority of directors of the reporting company;
the individual directs, determines or has substantial influence over important decisions made by the reporting company, including decisions regarding:
i. the nature, scope and attributes of the business, including the sale, lease, mortgage or other transfer of any principal assets;
ii. reorganization, dissolution or merger;
iii. major expenditures or investments, including issuances of equity, incurrence of significant debt, or approval of the operating budget;
iv. selection or termination of business ventures or geographic operations;
v. compensation and incentive programs for senior officers;
vi. entry, termination, or fulfilment of significant contracts; or
vii. amendments of any substantial governance documents.
the individual has any other form of substantial control over the reporting company.
While FinCEN explicitly provides that the term “senior officer” includes any individual holding the position of president, chief executive officer, chief operating officer, chief financial officer, and general counsel, it is important to note that any other individual, regardless of official title, who exercises similar authority to such enumerated positions will be considered a senior officer subject to reporting requirements.
Contents, Deadlines, and Submission of Beneficial Owner Information.
Reporting Companies are required to electronically submit a “Beneficial Owner Information Report” to FinCEN including the following Beneficial Owner Information for each Beneficial Owner:
full legal name;
date of birth;
residential street address;
an identifying number, such as passport number or driver’s license number, from an acceptable identification document and the name of the issuing state or jurisdiction of the identification document; and
a copy of the document from which the unique identifying number originated from.
The initial Beneficial Owner Information Report will be due:
by January 1, 2025 for Reporting Companies formed prior to January 1, 2024;
within 90 calendar days following the formation of all Reporting Companies formed on or after January 1, 2024 but before January 1, 2025; and
within 30 calendar days following the formation of all Reporting Companies formed on or after January 1, 2025.
Following the initial Beneficial Owner Information Report, a new Beneficial Owner Information Report will be required to be filed within 30 calendar days of any changes to the Reporting Company’s previously reported information, including information changes with respect to a Beneficial Owner.
Who Qualifies as a Company Applicant of a Reporting Company Subject to Reporting?
In addition to disclosing Beneficial Owner Information, Reporting Companies formed or registered on or after January 1, 2024, will be required to report “Company Applicant” information in the initial Beneficial Owner Information Report. Specifically, the same information required to be disclosed for Beneficial Owners (name, DOB, address, identifying number, copy of identifying document) will required to be disclosed for the Company Applicant.
The following individuals may qualify as a Company Applicant subject to reporting requirements:
The individual who directly files the document that creates or registers the company; and
If more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing
Companies formed or registered prior to January 1, 2024 will not be required to report Company Applicant information.
Exemptions From the Beneficial Owner Information Report.
FinCEN exempts twenty-three (23) specific categories of entities from the reporting requirements of the CTA, including accounting firms, tax-exempt entities, “large operating companies,” and certain “inactive” entities. Additionally, subsidiaries of certain entities exempt from the reporting requirements of the CTA may be exempt as well.
Penalties for Failure to Submit the Beneficial Owner Information Report.
Failure to timely submit a complete or updated Beneficial Ownership Information Report to FinCEN, or the willful provision of or attempt to provide false or fraudulent Beneficial Ownership Information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of a Reporting Company that fails to file a required Beneficial Owner Information Report may also be held accountable for noncompliance.
Ensuring Compliance with the CTA and Beneficial Ownership Information Report.
We recognize that it may be particularly burdensome to navigate the complexities of the CTA and the Beneficial Ownership Information Report to determine whether your business qualifies as a Reporting Company and if so, who is considered a Beneficial Owner. To ensure compliance with the CTA and accurately determine whether your business may qualify for an exemption to the reporting requirements established by FinCEN, please reach out to John Bennett at jrb@fellplaw.com at (858) 746-6488 or any member of the FELLP Law team at (858) 746-6480 to schedule a consultation.