Federal requirements enacted by the Corporate Transparency Act for small businesses to report information about themselves and their beneficial owners are just weeks away from taking effect. Starting January 1, 2024, many companies must report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury.
What is the Corporate Transparency Act?
The Corporate Transparency Act, an amendment to the Anti-Money Laundering Act of 2020, will require many companies to report beneficial owner information to FinCEN. The goal of the law is to identify and prevent the use of companies for criminal activities such as money laundering, tax fraud, and terrorism. Unlike most of our federal disclosure laws, this law targets smaller companies given that many larger companies already are subject to various federal disclosure requirements, such as public companies making SEC filings.
Who Must Report?
With certain limited exemptions, the law applies to all corporations, limited liability companies, limited partnerships, and other entities registered to do business in the United States. This includes foreign entities that register to do business in a particular state. The law has a broad reach, and reporting is not limited by industry.
The exemptions generally apply to entities already subject to federal reporting, such as banks, insurance companies, publicly traded companies, and certain tax-exempt entities. Other notable exemptions include inactive entities and large operating companies with more than 20 full-time employees in the U.S. and greater than $5 million in gross receipts.
What Must be Disclosed?
In addition to basic information about the company such as an address and any “doing business as” names, a company subject to the law must disclose any “beneficial owner.” A “beneficial owner” is defined as an individual who exercises substantial control over the company either directly or indirectly, including all senior officers, or an individual who owns or controls at least 25% of the ownership interests of the company. Ownership interests include various arrangements such as debt with convertible features, incentive equity grants such as options and warrants, and profits interests.
For any individual who is a “beneficial owner,” the company must provide the individual’s full legal name, date of birth, current residential address, a unique identifying number from an acceptable identification document such as a passport or driver’s license, and the image of the identification document. Alternatively, a “beneficial owner” may obtain a unique FinCEN identifier, which a company may report instead of these separate pieces of information about a beneficial owner. Using FinCEN identifiers will alleviate some of the administrative burdens for companies subject to these reporting rules.
What are the Deadlines for Reporting?
For companies formed or first-registered to do business beginning January 1, 2024 or later, initial reporting to FinCEN is due within 30 calendar days of formation or registration, although a proposed rule (if passed) would extend this deadline to 90 days for entities formed in 2024. Companies already in existence are not required to file their initial report until January 1, 2025. Reporting will be done electronically through FinCEN’s online system, which has yet to be released. Failure to report can result in significant penalties.
Anytime there is a change to the information reported, an updated report must be filed within 30 calendar days of the change. Various circumstances or transactions could trigger the requirement to file an updated report such as hiring a new senior officer, a residential address change for a beneficial owner, and gifting or selling equity, to name a few.
How Can We Help?
Our firm has a dedicated CTA Compliance Team available to assist with the following:
- Gathering the information that must be reported and assisting with filing
- Determining who the “beneficial owners” are
- Analyzing whether an arrangement such as debt with certain convertible features is treated as an ownership interest
- Determining whether a company is exempt from reporting
- Determining whether a corrected or updated report must be filed
- Updating operating agreements and shareholder agreements to ensure that the company is able to obtain the necessary information to comply with the reporting rules
- Advising on the use of FinCEN identifiers
- Advising on how the rules apply to trusts
- Performing due diligence with respect to corporate documents to confirm compliance with the rules
For assistance or questions about this alert, please contact the authors or the CTA Compliance Team via email at CTA_Compliance@Steptoe-Johnson.com.