Corporate Transparency Act Means New Reporting Requirements for Certain Businesses
The Corporate Transparency Act (CTA) is a Federal Law intended to improve business ownership transparency and combat criminal behavior such as money laundering and tax fraud in the United States.
Effective on January 1, 2024, the CTA requires closely-held domestic and foreign entities operating in the United States to report certain beneficial ownership information and, in some situations, information about Company Applicants.
Reports required by the CTA must be filed electronically with the Financial Crimes Enforcement Network (“FinCEN”), which promulgates rules surrounding the CTA.
Which entities are considered “Reporting Companies”?
A Reporting Company is defined as a corporation, limited liability company (LLC), or similar entity that is:
- created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or
- formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.
This broad definition will encompass most closely-held business entities that conduct business in the United States, which FinCEN refers to as “small entities.” Businesses include many family-owned businesses, real estate LLCs such as vacation homes with joint ownership, and businesses operated out of a home – among many others.
Which entities are exempt from CTA Requirements?
Carved out from the Reporting Company definition and its reporting requirements are 23 separate types of exemptions, such as banks, “large operating companies,” and securities issuers. These entities meet one or more of the CTA’s stated exemptions and are therefore not subject to the CTA’s reporting requirements. More details about each of the exemptions are contained in the CTA. [31 CFR § 1010.380(c)].
What are “Beneficial Owners” of an entity and “Ownership Interests” under the CTA?
Under FinCEN’s reporting rules, Reporting Companies must identify and disclose certain information concerning their “Beneficial Owners.” Beneficial Owners are individuals who, with respect to a Reporting Company, directly or indirectly:
- exercise substantial control over the Reporting Company; or
- control 25% or more of the ownership interests in the Reporting Company.
FinCEN provides additional guidance regarding the definition of “substantial control” and individuals who exercise such control over a Reporting Company. Neither FinCEN nor the CTA indicate a minimum or maximum number of Beneficial Owners that must be reported.
According to FinCEN, the term “Ownership Interest” is broad, encompassing:
- equity, stock or voting rights;
- a capital or profit interest in the Reporting Company;
- convertible instruments;
- options or other non-binding privileges to buy or sell any of such interests; and
- any other “instrument, contract, or other mechanism used to establish ownership.”
Some entities may have multiple types of Ownership Interests within their corporate structure. For example, an individual can directly control an Ownership Interest by owning an undivided interest in a Reporting Company. An individual also can indirectly control an Ownership Interest by owning or controlling an entity that owns or controls an Ownership Interest in a Reporting Company. In this scenario, although the individual does not directly own or control the ownership in the Reporting Company, the CTA still may require disclosure of the individual.
Who are “Company Applicants” for a Reporting Company?
A Company Applicant is the individual:
- who directly files the document that created a domestic reporting company; or
- who directly filed the document that first registered a foreign reporting company; and
- who is primarily responsible for directing or controlling such filing.
Certain Reporting Companies are required to disclose the Company Applicant. If multiple individuals are involved with the filing, then two Company Applicants must be reported.
Entities formed prior to January 1, 2024, are not required to collect and report information concerning Company Applicant(s).
However, entities formed on or after January 1, 2024, are required to collect and report information concerning Company Applicant(s).
When do business owners need to file an initial report?
Any domestic Reporting Company created on or before December 31, 2023, and any entity that became a foreign Reporting Company on or before December 31, 2023, must file its initial report not later than January 1, 2025.
Any domestic Reporting Company created between January 1 and December 31, 2024, must file its initial report within 90 calendar days of the earlier of:
- the date on which it receives actual notice that its creation has become effective; or
- the date on which a secretary of state or similar office first provides public notice that the domestic Reporting Company has been created.
Any entity that becomes a foreign Reporting Company between January 1 and December 31, 2024, must file its initial report within 90 calendar days of the earlier of:
- the date on which it receives actual notice that it has been registered to do business; or
- the date on which a secretary of state or similar office first provides public notice (such as through a publicly accessible registry) that the foreign reporting company has been registered to do business.
Are there penalties for failure to comply?
The CTA applies civil and criminal penalties for certain willful conduct. Willful failure to report or update a Reporting Company’s beneficial ownership or willfully providing false or fraudulent beneficial ownership information will subject the Reporting Company to civil penalties, which include a daily $500 fine for a continuing violation (up to a maximum of $10,000). Criminal penalties include up to two years’ imprisonment.
The CTA also prohibits the unauthorized use or disclosure of beneficial ownership information filed with FinCEN by a Reporting Company. If an error is discovered, corrected reports are due within 30 calendar days after the Reporting Company becomes aware of -- or has reason to know of -- the error or inaccuracy in the previously submitted report.
How should a Reporting Company begin the reporting process?
Most closely-held entities operating in the United States, including corporations, LLCs, and similar entities, are likely considered Reporting Companies under the CTA.
Owners of existing business entities should contact their attorney and accountant to determine whether they are affected by CTA and to discuss any reporting requirements with which they must comply.
Beginning in 2024, individuals who create new business entities also need to ensure that they obtain and compile the necessary information for Beneficial Owners and Company Applicants. Initial reports must be filed with FinCEN as soon as possible after creating the entity, as there is only a 90-day window to do so.
The business lawyers at Murphy Desmond S.C. have been closely following the CTA. We can assist with questions, concerns, and filings.
Contact your Murphy Desmond business attorney, email the firm at firstname.lastname@example.org or call us at 608.257.7181. We are happy to help you navigate these new and important reporting requirements.
The information contained in this article is not, nor is it intended to be, legal advice, and does not create any relationship or engagement between Murphy Desmond S.C. and you or your business entity. You should consult an attorney for advice regarding your individual situation, and potential reporting obligations affecting your business entity. We invite you to contact us with any questions and welcome your calls, letters, and electronic mail. Contacting us does not create an attorney-client relationship.
Published December 29, 2023