Effective January 1, 2024, most new and existing corporate entities in the United States will be required to file reports on their beneficial owners with the federal government. These sweeping requirements are part of the Corporate Transparency Act and are expected to impact millions of business entities. Below are some frequently asked questions regarding these new filing requirements.
What is the Corporate Transparency Act?
The Corporate Transparency Act, or CTA, was enacted on January 1, 2021. It is an expansion of anti-money laundering laws and is intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity. Broadly speaking, it requires most existing and new corporate entities in the United States to file reports with the federal government regarding their beneficial owners. Reports will be filed with the Department of the Treasury’s Financial Crimes Enforcement Network, or FinCEN.
Congress believes illicit actors frequently use corporate structures such as shell and front companies to hide their identities and move money through the U.S. financial system. Prior to the CTA, there were no uniform beneficial ownership information reporting requirements in the United States, which hindered law enforcement’s ability to investigate entities being used for illegal purposes.
Who is required to file reports?
Reports must be filed by domestic and foreign “reporting companies,” which are defined as follows:
Domestic reporting company – any entity that is a corporation, a limited liability company, or otherwise created by the filing of a document with a secretary of state or similar office.
Foreign reporting company – any entity formed under the law of a foreign country and registered to do business in any U.S. state by the filing of a document with a secretary of state or similar office.
The definition of “reporting company” is incredibly broad. Are there any exemptions?
Yes, there are many exemptions from the definition of “reporting company.” Below is a list of some of the more notable exemptions:
- SEC-reporting companies
- Regulated financial services companies, including banks, credit unions, depository institution holding companies, registered securities broker-dealers, registered investment companies and investment advisers, venture capital fund advisers, and pooled investment vehicles that are operated or advised by the foregoing
- Insurance companies
- PCAOB-registered accounting firms
- Tax-exempt entities
- Inactive entities that existed before January 1, 2020, are not engaged in active business, are not owned by a foreign person, have not had a change in ownership in the last 12 months, have not sent or received funds greater than $1,000 in the last 12 months, and do not hold any assets
- Subsidiaries of certain exempt entities
There is also an exemption for entities that employ more than 20 full-time employees in the U.S., have an operating presence at a physical office in the U.S., and demonstrate more than $5 million in gross receipts or sales on their federal income tax return (excluding receipt/sales from sources outside the U.S.) If a company falls below these thresholds in the future, a report must be filed within 30 days. An updated report is required if a reporting company later becomes eligible for the exemption.
I’ve determined that my company is a “reporting company” or will be a “reporting company” when it is created. Now what?
The reporting regime goes into effect on January 1, 2024. The due date for the initial report depends on when the entity was created:
- If the company is created on or after January 1, 2024, then the initial report is due within 30 calendar days of the date the entity is created.
- If the company was formed before January 1, 2024, then the initial report is due no later than January 1, 2025.
In other words, effective January 1, 2024, new entities will have to file a report within 30 days of their creation. Entities already in existence on January 1, 2024 have until January 1, 2025 to file a report.
What’s in the report?
Reports include information about (1) the reporting company, (2) the reporting company’s beneficial owners, and (3) “company applicants” who made the filings to create the entity.
Information about the reporting company includes:
- Full legal name
- Any trade name or “doing business as” (d/b/a) name
- Current address
- Jurisdiction of formation
- Federal taxpayer ID number
Information about individual beneficial owners and company applicants includes:
- Full legal name
- Date of birth
- Current address
- Unique identifying number and issuing jurisdiction (e.g., U.S. passport or driver license)
- Image of document with identifying number
Alternatively, individuals and entities may apply for and obtain a FinCEN identifier, which can be included on subsequent filings in lieu of this information. This could make the filing process more efficient for frequent filers.
Once an initial report is filed, is it required to be updated?
Yes. If there is any change with respect to information previously reported, the reporting company is required to file an updated report within 30 calendar days after the date on which the change occurs. Examples of changes that would require an updated report include the following:
- Changes in who is a beneficial owner, e.g. due to transfers of ownership or sales of additional ownership interests
- A reporting company becoming exempt from the reporting requirements
- Transfers of ownership interests due to an owner’s death
- Transfers of ownership when a minor child reaches the age of majority
- Any changes to an identifying document previously submitted, e.g. changes in name, address, or identifying number
In addition, if the reporting company becomes aware of mistakes or inaccuracies in a report that has already been filed, it must file a corrected report within 30 calendar days after the date on which the reporting company becomes aware or has reason to know of the inaccuracy.
Who is considered a “beneficial owner” of a reporting company?
A beneficial owner is any individual who, directly or indirectly, either exercises “substantial control” over the company or owns or controls at least 25% of the company’s ownership interests.
An individual exercises “substantial control” over a company if the individual (A) serves as a senior officer of the company; (B) has authority over the appointment or removal of any senior officer or a majority of the board; or (C) directs, determines, or has substantial influence over important decisions made by the reporting company. Thus, senior officers and other individuals with control over the company are “beneficial owners” under the CTA, even if they have no equity interest in the company.
Individuals may exercise control directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control. Indirect ownership or control of a company or its ownership interests may include the following:
- Joint ownership with one or more other persons
- Through another individual acting as a nominee, intermediary, custodian, or agent
- As trustee, grantor/settlor, or beneficiary of a trust
- Through ownership or control of one or more intermediary entities that separately or collectively own or control ownership interests of the reporting company
Are there any exceptions to the definition of “beneficial owner?”
Yes. The following are not considered beneficial owners of a reporting company:
- Minor children (however, the reporting company must report information regarding the minor child’s parent or legal guardian)
- An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual (in which case that individual would be the beneficial owner)
- An employee of the reporting company, acting solely as an employee, whose substantial control over or economic benefits from the entity are derived solely from the employment status (provided that the person is not a senior officer of the entity)
- An individual whose only interest in a reporting company is a future interest through a right of inheritance
- A creditor of the reporting company
Who is considered a “company applicant?”
The “company applicant” is the individual who directly files the document that creates the reporting company. It also includes the individual who is primarily responsible for directing or controlling the filing if more than one individual is involved in the filing of the document.
In many cases, the company applicant will also be a beneficial owner of the company. Third parties such as attorneys and paralegals may also be considered company applicants if they file corporate formation documents on behalf of clients.
Entities created prior to January 1, 2024 do not need to include information on company applicants.
Who has access to this information once it’s on file with FinCEN?
Reports filed with FinCEN will not be accessible to the public and are not subject to requests under the Freedom of Information Act. The following government agencies will have access to the information:
- Federal agencies engaged in national security, intelligence, and civil and criminal law enforcement
- The Department of the Treasury in connection with its official duties, including tax administration
- State and local law enforcement agencies in connection with criminal or civil investigations
If the reporting company consents, FinCEN may also disclose information to financial institutions to assist in their anti-money laundering compliance activities.
How do you file?
FinCEN is currently designing and building a new IT system called the Beneficial Ownership Secure System to collect and store CTA reports. This system is not yet available, and reports will not be accepted prior to January 1, 2024.
Jonathan A. Greene is co-leader of the Banking & Financial Institutions practice group of Wyrick Robbins, which represents banks and their affiliates in regulatory and corporate matters. Cassandra J. Creekman is a member of the Emerging Companies, Investment Funds, and Mergers & Acquisitions practice groups of Wyrick Robbins. Her practice focuses on regulatory and compliance matters, including antitrust, export controls and sanctions, anti-corruption, and foreign investment issues. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.