The Corporate Transparency Act

In an era marked by increasing economic interconnectivity, transparency in corporate practices has become a critical aspect of ensuring fair and ethical business conduct. Signed into law on January 1, 2021 as part of the National Defense Authorization Act, the Corporate Transparency Act (CTA) seeks to enhance corporate transparency by addressing issues related to anonymous ownership and potential misuse of corporate structures. The CTA, which will be overseen by the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), is aimed at combating money laundering, terrorist financing, and other illicit activities facilitated by anonymous corporate entities. By mandating increased disclosure, the legislation aims to create a more accountable and transparent business environment.

Preliminary estimates by FinCEN estimate roughly 32 million companies will initially be required to comply and a further 5 million newly created companies each year thereafter.  Given the widespread applicability of the CTA, it is crucial that businesses become familiar with the various terms and reporting requirements to ensure timely compliance. We have outlined the key concepts under the CTA below, but strongly encourage all businesses who may be impacted by the CTA to consult legal counsel to discuss their potential filing requirements in more detail.

Reporting Company

Reporting companies are those companies that are required to disclose ownership and other information under the CTA, as discussed later in this article.  A reporting company is broadly defined as a corporation, limited liability company (LLC), or other similar entity that was created through the filing of a document with a State, Local, or Tribal office. For Foreign entities, a reporting company is defined as any entity that filed a registration document to conduct business in the US with a secretary of state or similar office.

There is a list of 23 types of companies that are exempt from the CTA and therefore not considered reporting entities.  These include, among others, banks, governmental agencies, Tax-exempt entities, Public utility companies, Accounting Firms, and Large Operating Companies.

The large operating company exemption is predicated on a company having at least 5 million in gross receipts from US sources on its prior year federal income tax return, at least 20 full-time equivalent employees, and a physical operating presence in the U.S.

Beneficial Owner

Among other items, reporting companies must report information regarding their beneficial owners. A beneficial owner is an individual who, directly or indirectly, owns or controls 25% or more of the ownership interests in a reporting company. In addition, a beneficial owner may be any individual with significant control over a reporting entity, regardless of ownership.

The CTA casts a wide net when defining beneficial ownership to recognize that even individuals with substantial influence over a reporting company should be disclosed. Therefore, beneficial owners include not only those with direct ownership, but also those who exercise control through other means, such as having voting rights or having the authority to appoint or remove directors (e.g. C-Suite executives, General Counsel), and potentially those who have indirect influence through convertible debt rights, contracts, and other arrangements. Due to the broad nature of the definition of beneficial owners, reporting entities should carefully consider all relationships that may give an individual any level of control over the entity.

Company Applicant

A company applicant is an individual or entity that files an application to create a reporting company. This person or entity is responsible for providing accurate and complete beneficial ownership information at the time of formation. This could be a company President, external/internal attorney, secretary, or any other person involved in an entity’s formation.

The CTA places the burden of disclosure on the company applicant, emphasizing the importance of transparency from the very inception of a reporting company. It is crucial for company applicants to conduct due diligence and gather the necessary information about the beneficial owners who will be disclosed to FinCEN. A company applicant must be disclosed in the reporting to FinCEN for companies that are created on or after January 1, 2024.

Information to be Provided

Once a reporting entity has established that they must report under CTA and has identified the beneficial owners, they will need to gather the following information for submission:

Reporting Company:

1. Full legal name and any DBA name
2. Address of principal place of business
3. Jurisdiction of formation
4. IRS TIN (e.g. EIN)
   1. If Foreign company then IRS TIN or Foreign tax ID number and jurisdiction

Beneficial Owner/Company Applicant:

1. Full legal name
2. Date of birth
3. Residential address – must be your current home
   1. Company Applicant may use business address if performing service in ordinary course of business
4. Identification number from non-expired US government document (e.g. passport, driver’s license)
   1. If Foreign, then non-expired foreign government document
5. Image of the document from which the reported ID number was obtained

Key Timelines and Compliance Requirements

The CTA establishes clear timelines for compliance, ensuring that reporting companies adhere to the disclosure requirements in a timely manner. The key timelines associated with the CTA include:

1. Initial Reporting: For reporting companies in existence prior to January 1, 2024, the initial report must be submitted to FinCEN no later than January 1, 2025.
2. New Reporting Companies: For entities formed on or after January 1, 2024, the disclosure of beneficial ownership information must be made within 90 days of formation. Effective January 1, 2025 that time period is reduced to 30 days.
3. Updates for Changes: Reporting companies must update their beneficial ownership information within 30 days of any change in the reported information. This includes changes in beneficial ownership percentages, the addition or departure of a beneficial owner, or any other relevant modifications or corrections of errors.

Methodology for Submission

Reporting entities must submit the required information as outlined above via a secure filing system on the FinCEN website (https://www.fincen.gov/boi).  We anticipate that the portal will become available on January 1, 2024 but at this time we have limited information regarding the details of the system.

Access to Information

FinCEN will establish a secure, non-public database that will house the disclosed beneficial ownership information. FinCEN will be  allowed, upon written request, to share the reported information for official purposes with any Federal government agency as well as state and local law enforcement agencies, financial institutions, and other authorized entities.  Foreign law enforcement agencies (when requested through a US Federal agency) may also have indirect access to this information.

The IRS is allowed to access this information without a written request for “tax administration purposes.” This term is deemed by the Internal Revenue Code section 6103(b)(4) to include assessment, collection, enforcement, litigation, or publication and statistical gathering.

FinCEN Unique Identifier

In order to streamline the process FinCEN has the ability to provide Beneficial Owners and Company Applicants a unique identifying number. The beneficial owner and/or company applicant must apply to FinCEN for this number by providing all of the required “Information to be Provided” as outlined above.  The beneficial owner or company applicant may then provide their FinCEN unique identifier to any reporting entity that must include them in their report rather than providing the detailed information outlined above.  It is the responsibility of the beneficial owner or company applicant to update their information with FinCEN within 30 days should anything change (i.e. change of address, updated driver’s license, etc). This number may be useful to those who may have to report their information to numerous reporting entities.

Penalties

Penalties may be assessed for willful failure to comply with the CTA or for the provision of false or misleading information. These penalties may be up to $500 per day until the violation has been remedied and/or a fine up to $10,000 and up to 2 years imprisonment.

Conclusion

The impact of the CTA will be far-reaching and may require significant changes and increased diligence when it comes to the record keeping of U.S. businesses.  Please consult your attorney and CPA to ensure you are well informed and equipped to prepare, file, and update your required reports in an accurate and timely manner.

For more information you may visit the FinCEN website for Beneficial Ownership Information Reporting at https://www.fincen.gov/boi-faqs