Recently, Congress enacted the Corporate Transparency Act (“CTA”) aimed at preventing money laundering, financing of terrorism, and other illegal financial activity through anonymous shell entities. As a result, starting January 1, 2024, certain existing and new domestic companies must disclose and report to the U.S. Treasury Department's Financial Crimes Enforcement Network (“FinCEN") detailed information about the individuals that beneficially own or substantially control them. [1]

The CTA’s FinCEN disclosure requirements generally apply to limited liability companies, small corporations, and similar entities (likely including LLPs) created by the filing of a document with the secretary of state or similar office.[2] Generally, such “Reporting Companies”[3] must provide, as an “Initial Report,” the following information regarding each “Beneficial Owner”: (i) full legal name, (ii) date of birth, (iii) current residential or business address, and (iv) an identifying number from an acceptable identification document (such as a valid passport, driver’s license, or state ID).[4]

With some exceptions, generally, a “Beneficial Owner” is an individual who owns or controls at least twenty-five (25%) percent of the ownership interests in, or who “exercises substantial control” over, the company.[5] Ownership interest includes any equity, stock, voting trust certificate, certificate of interest, capital or profit interest, and any option to buy or sell such interests.[6] Ownership interests are calculated as a percentage of the total outstanding ownership interests of the company.[7] An individual “exercises substantial control” over the company if the individual: serves as a senior officer of the company, has authority over appointment or removal of any senior officer, or has substantial influence over important decisions made by the company.[8] “Important decisions” include, for example, the management of principal assets, issuances of equity, incurrence of significant debt, approval of the operating budget, geographic focus, and compensation schemes of the company.[9]        

The CTA provides for phased in reporting timelines. Companies created before January 1, 2024 have until January 1, 2025 to submit their Initial Report.[10] Companies created on or after January 1, 2024 must file their Initial Report within 30 days of receipt of notice that the company’s creation is effective.[11] Starting January 1, 2024, if there is any change to the required information previously submitted, then the company is required to file an Updated Report within 30 days after the date on which the change occurs.[12]  

For companies created and registered on or after January 1, 2024, the reporting must also identify “company applicant(s)”, who are the individuals who filed the documents creating the company and those directing or controlling such filing if more than one individual is involved in the filing of the formation document(s).[13] As such, new companies may also have to report information identifying their lawyer and/or the lawyer’s paralegal or other staff involved in filing entity formation documents.[14]

Several exceptions to the reporting requirements apply. For example, the disclosure requirements do not apply to entities within the “large operating companies” exception, which are those with (1) more than twenty full-time employees in the United States, (2) more than $5,000,000 in gross receipts or sales, as shown on the previous year’s federal income tax return, and (3) a U.S. based “physical office.”[15] Also, dormant companies are considered exempt if the “inactive entity” (1) has been in existence since at least January 1, 2020, (2) is not engaged in active business, (3) does not have any direct or indirect foreign ownership, (4) has not experienced any changes in ownership in the preceding 12 months, (5) has not sent or received any funds aggregating more than $1,000 in the preceding 12 months, and (6) does not hold any kind of tangible or intangible assets.[16] Finally, publicly traded companies, banks, brokers, investment companies, insurance companies, public utility companies, and similar heavily regulated companies are generally exempt from the reporting requirements.[17] There are other exceptions.

Small businesses and single-owner LLCs, however, that do not qualify for exemption face serious reporting burdens and increased expenses of compliance going forward. Failure to comply will subject those responsible to civil and criminal penalties for CTA reporting violations. For example, willfully failing to report, willfully providing false or fraudulent information, or failing to file complete and accurate reports (or updated reports), the CTA provides for civil penalties of up to $10,000 (i.e., $500 per day for each day the violation continues) and/or imprisonment for up to 2 years.[18]

This comment was prepared by Robert S. Stassi and Kyle J. E. Koch. It is for informational purposes only and does not constitute legal advice. See disclaimer. Mr. Stassi is managing partner of the firm and regularly advises business clients on corporate matters.

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Robert S. Stassi and Kyle J. E. Koch

FOOTNOTES:
[1]  31 USC 5336.  
[2] 31 USC 5336(a)(11).
[3] 31 USC 5336(a)(11).
[4] 31 USC 5336(b)(2). An image of the identification document must be submitted along with the identifying number. 31 C.F.R. § 1010.380(b)(1).
[5]  31 USC 5336(a)(3).
[6] 31 C.F.R. § 1010.380(d)(2). Options and similar interests are treated as exercised.  
[7] 31 C.F.R. § 1010.380(d)(2).
[8] 31 C.F.R. § 1010.380(d)(1).
[9] 31 C.F.R. § 1010.380(d)(1).
[10] 31 C.F.R. § 1010.380(a)(1).
[11] 31 C.F.R. § 1010.380(a)(1).
[12] 31 C.F.R. § 1010.380(a)(2).
[13] 31 C.F.R. § 1010.380(b)(1)(ii); accord, 31 C.F.R. § 1010.380(b)(2)(iv) and 31 C.F.R. § 1010.380(e).
[14] 87 FR 59498-01 at *59536.
[15] 31 USC 5336(a)(11)(B)(xxi).
[16] 31 C.F.R. 1010.380(c)(2)(xxiii).
[17] 31 USC 5336(a)(11)(B).
[18] 31 USC 5336(h)(3).