By: Edmund G. Kauntz, Esq.
In early 2021, Congress passed the Corporate Transparency Act of 2020 (the “CTA”) after more than a decade of efforts to implement beneficial ownership reporting for business entities. The CTA establishes reporting requirements for most business entities organized or registered to conduct business in the United States. On September 29, 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued its final rule implementing the CTA (the “Final Rule”), which details the beneficial ownership reporting requirements.
The Final Rule describes which businesses are subject to disclosing beneficial ownership information, what information must be reported, what entities are exempted from reporting requirements, and when a company must submit the required report. Reporting companies must file a report that identifies individuals who are beneficial owners of the entity and individuals who are “company applicants” (i.e., organizers) of the entity.
The goal of the CTA is to reduce criminal activity within companies which are exploited for money laundering due to the fact that many of these companies are not currently regulated or required to disclose information about their ownership. Ultimately, the CTA’s primary purpose is to increase transparency within domestic and foreign businesses to further protect national security interests within the United States. Though there are many companies which are exempted from these reporting requirements (such as companies currently regulated by a governmental agency), the CTA ultimately imposes new standards with which many businesses must comply in order to avoid potential civil and criminal penalties. The broadest exemption is for “large operating companies” which are actively operating at a physical location in the United States with over $5,000,000 of annual gross revenues earned in the United States and more than 20 full-time employees in the United States.
Who Must Report
Under the CTA, a reporting company includes both domestic and foreign entities which are subject to the reporting requirements. A domestic reporting company is defined by the CTA as a corporation, limited liability company, or any other entity created by the filing of a document with a secretary of state or any similar office under the law of a State or tribal jurisdiction. A foreign reporting company is a corporation, limited liability company, or any other entity formed under the law of a foreign country that is registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.
What Information Must be Reported
The CTA will require reporting companies to disclose the following information to FinCEN:
- The full name of the reporting company;
- Any trade name or “doing business as” name of the reporting company;
- The business street address;
- The State or Tribal jurisdiction of formation (or, for foreign entities subject to the CTA reporting, the State or Tribal jurisdiction in which the foreign company first registered);
- The taxpayer identification number (TIN) under which the reporting company reports to the Internal Revenue Service;
- Certain information regarding its beneficial owners; and
- Certain information regarding its company applicants (but only for reporting companies formed after January 1, 2024).
Under the CTA, a beneficial owner is defined as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.” This broad definition includes owners as well as directors, executive officers, managers, general partners or other parties with substantial control, in order to achieve the underlying goals of the CTA in preventing money laundering and other financial crimes from occurring within the United States. A company applicant is the individual (including a lawyer) who is responsible for filing documents to form a domestic entity or register a foreign entity to do business.
The CTA requires a reporting company to submit the following information for each beneficial owner and company applicant: the individual’s full legal name, date of birth, current residential or business street address, and a unique identifying number from an acceptable photo identification document like a passport or driver’s license. In the alternative, an individual may apply for a FinCEN identifier and provide that identifier to the reporting company.
FinCEN will maintain a confidential database of reporting company information which is available only to (i) federal law enforcement authorities, (ii) certain other enforcement agencies with court approval, (iii) non-U.S. law enforcement authorities at the request of a U.S. federal law enforcement agency, or (iv) financial institutions and regulators with the consent of the reporting company.
When to Report
Effective January 1, 2024, reporting companies created or registered prior to that date will have one year to file their initial reports (i.e., by January 1, 2025), and reporting companies created or registered after January 1, 2024, will have 90 days after creation or registration to file their initial reports. If the information submitted by a reporting company changes, regardless of creation or registration date, the reporting company must submit these changes within 30 days from when the change occurred.
To obtain further information on the Corporate Transparency Act, please contact Edmund G. Kauntz at [email protected] or Nathaniel D. Tucker at [email protected] or via telephone at 216-292-5807.