The Corporate Transparency Act (the “CTA”) was enacted on January 1, 2021[1] in an effort by Congress to prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activities by imposing new disclosure requirements on certain companies formed or doing business in the U.S. On September 29, 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued final regulations to implement Section 6403 of the CTA (the “Final CTA Rules”)[1]. Under the Final CTA Rules, certain entities—referred to as “reporting companies”—will be required to submit specified information about the reporting company, its beneficial owners and company applicants to FinCEN.
Below is a high-level overview of the key provisions and implications of the Final CTA Rules. For further details and legal counsel, please do not hesitate to contact a DGS Partner.
What is a “reporting company”?
A “reporting company” includes (i) any corporation, limited liability company, and any other form of entity created by filing with a secretary of state or similar office under the laws of a state or Indian tribe (referred to as “domestic reporting companies”), and (ii) any corporation, limited liability company, and any other form of entity created under the laws of a foreign country and registered to conduct business in the U.S. or tribal jurisdiction (referred to as “foreign reporting companies”).
What entities are outside of the definition of “reporting company”?
To fall under the definition of a “reporting company,” the entity must have been created or qualified to do business by the filing of a document with a secretary of state or similar official. Accordingly, sole proprietorships, common law trusts, and general partnerships do not currently fall under the definition of “reporting company.” Trusts that are created by a filing, such as statutory or business trusts, however, will be subject to the CTA reporting requirements.
The Final CTA Rules provide 23 categories of exemptions from the “reporting company” definition, including public companies, large operating companies, subsidiaries of certain other exempt entities, inactive entities, pooled investment vehicles, and nonprofit organizations. See the Appendix attached hereto for a summary of each of the 23 exemptions.
Note that the applicability of an exemption will be an ongoing determination—if an entity no longer qualifies under an exemption, it will become a reporting company and be required to promptly file a report.
If my entity is a “reporting company,” what information is required to be submitted to FinCEN?
Each reporting company will be required to report the following for itself: (i) full legal name; (ii) trade name or DBA; (iii) street address of principal place of business or, for a foreign reporting company, its primary location in the U.S.; (iv) jurisdiction of formation and, for a foreign reporting company, the state or tribal jurisdiction in which it is registered; and (v) tax identification number or, for a foreign reporting company that doesn’t have a tax identification number, other unique tax ID number.
Reporting companies will be required to report the following for each individual that is a beneficial owner or company applicant with respect to such reporting company: (i) full legal name; (ii) date of birth; (iii) current residential or, for company applicants, business street address; (iv) unique identifying number from an acceptable identification document (e.g., a non-expired passport or driver’s license) or FinCEN identifier; and (v) an image of the document from which the identifying number was obtained.
Who qualifies as a “beneficial owner”?
A beneficial owner is any individual that, directly or indirectly, either:
- owns or controls at least 25% of the total ownership interests of the reporting company, calculated as they stand at the time of the calculation and on a fully diluted basis, or
- exercises substantial control over the reporting company.
An individual is deemed to have “substantial control” if such individual (i) serves as a senior officer of the reporting company; (ii) has authority over the appointment or removal of any senior officer or a majority of the board of directors; (iii) directs, determines or has substantial influence over, important decisions made by the reporting company; or (iv) exerts similar control.
The Final CTA Rules also describe five types of individuals that are exempt from the definition of “beneficial owner.” Note that there is no limit on the number of beneficial owners a reporting entity might have.
Who is a “company applicant”?
A company applicant is the individual directly responsible for creating or registering the reporting company, and, if different, the individual who is primarily responsible for directing or controlling the filing. Each reporting company formed after January 1, 2024 will have at least one, but not more than two, company applicants.
What are the deadlines for submitting reports?
- Existing Companies – Reporting companies created before January 1, 2024 must file their initial reports by January 1, 2025. Note that reporting companies formed prior to January 1, 2024 do not need to report information about company applicants.
- Companies formed after January 1, 2024 – Reporting companies created after January 1, 2024 must file their initial reports by the earlier of: (i) 30 calendar days[2] of the date the reporting company receives actual notice of its creation or registration, and (ii) the date on which the secretary of state or similar office provides public notice of the reporting company’s existence or registration.
- Entities that no longer qualify for an exemption – Entities that were once exempt but that no longer qualify for any exemptions must file their initial reports within 30 calendar days after the date that they no longer meet the criteria for any exemptions.
- Updates and Corrections – If there are changes or inaccuracies in previously reported information, the reporting company must file an updated report to FinCEN no later than 30 days after it becomes aware of the change or of the inaccuracy.
What are the penalties for non-compliance?
The Final CTA Rules impose penalties for willful violations by individuals and entities. Such violations include willfully reporting or attempting to report false or fraudulent information to FinCEN or willfully failing to complete or update reports to FinCEN. Each violation is subject to penalties of $500 per day up to $10,000 per violation, and possible jail time (up to two years).
How do reporting companies file reports and who will have access to the submitted reports?
Reporting companies will need to file their reports through a secure filing system on FinCEN’s website, which will be available on January 1, 2024.
FinCEN is mandated to maintain reported information confidentially, accessible only to select federal, state, or foreign agencies for investigative and enforcement purposes, as well as financial institutions requesting this information to facilitate compliance with customer due diligence regulations, with the consent of the reporting company.
[1] FinCEN Issues Final Rule for Beneficial Ownership Reporting to Support Law Enforcement Efforts, Counter Illicit Finance, and Increase Transparency (Adopting Release)
[2] On September 28, 2023, FinCEN issued a Notice of Proposed Rulemaking that would extend this filing deadline for reporting companies created or registered on or after January 1, 2024 but prior to January 1, 2025. Those entities would have 90 days following notice of the reporting company’s creation or registration to submit its initial report. The 30-day timeline would continue to apply to reporting companies formed on or after January 1, 2025.