November 28, 2023
This article is for informational purposes only and does not constitute legal advice or the formation of an attorney-client relationship. If you would like advice for your specific situation, please click here to schedule a consultation with one of our attorneys.
Background Information
Congress recently passed the Corporate Transparency Act ("CTA"), which is scheduled to become effective on January 1, 2024. The CTA's primary purpose is to "better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity" by creating a national database of beneficial ownership information for most types of companies. The CTA expands the regulatory power of the Financial Crimes Enforcement Network ("FinCEN"), which is a bureau of the U.S. Department of the Treasury.
Most business entities formed by a filing with a Secretary of State's office in the United States (e.g., limited liability companies and corporations) will be required to disclose to FinCEN personal identifying information about the individual creating the entity, the beneficial owners of such entity, and the directors, managers, officers and employees with substantial control over such entity. In addition, previously created entities will have to file similar information with FinCEN by January 1, 2025, and within thirty (30) days of any change in the reported information.
Who is Required to File Reports with FinCEN?
Only domestic and foreign "reporting companies" must file with FinCEN. A domestic reporting company is any entity that is a corporation, a limited liability company or another entity that is created by the filing of a document with a Secretary of State or similar office (e.g., in most jurisdictions, a registered limited partnership, but not most types of trusts). A foreign reporting company is any entity formed under the laws of a foreign country that registers to do business in the U.S. by filing a document with a Secretary of State or similar office (e.g., a foreign registration in order to conduct business operations within Virginia).
However, there are twenty-three (23) exemptions even for reporting companies, most of which apply to entities that are already subject to substantial federal reporting requirements. For example, there are exemptions for:
- accounting firms;
- large operating companies that meet the following general criteria: (i) employ more than twenty (20) full-time employees in the U.S.; (ii) maintain an operating presence at a physical office in the U.S.; and (iii) have filed a federal income tax return showing greater than five million dollars ($5,000,000.00) in annual revenues (all three (3) elements are required);
- inactive entities (but please note that "inactive" has a precise definition); and
- tax-exempt entities (but only after their tax exemption has been approved by the Internal Revenue Service).
What Information Must be Reported?
Each non-exempt reporting company must provide the following information to FinCEN: (i) such reporting company's legal name and any and all trade names (i.e., a d/b/a or fictitious name); (ii) such reporting company's principal office address; (iii) the jurisdiction in which such reporting company was formed or is currently domiciled; and (iv) such reporting company's tax identification number (i.e., EIN).
For Company Applicants (as defined below) who form a non-exempt reporting company and for Beneficial Owners (as defined below) of such non-exempt reporting company, such non-exempt reporting company must provide each such party's: (i) full legal name; (ii) date of birth; (iii) residential address; and (iv) a unique identification number (e.g., a SSN or ITIN) and image of such unique identification number, such as (a) a non-expired U.S. passport, (b) a state/local identification document, (c) a state-issued driver's license, or (d) a non-expired foreign passport.
Who Qualifies as a Company Applicant and a Beneficial Owner?
A "Company Applicant" is an individual who files or directs the filing of the document that (i) creates the domestic reporting company or (ii) first registers the foreign reporting company in the U.S. There can be a maximum of two (2) Company Applicants for each reporting company, meaning the person who directly files the relevant document and the person who is primarily responsible for directing or controlling the filing of such document. Please note that only reporting companies formed on or after January 1, 2024 must report Company Applicants, so reporting companies formed prior to such date are exempt from this requirement.
A "Beneficial Owner" is an individual who either (i) exercises substantial control over the reporting company (please note that the phrase "substantial control" is interpreted very broadly); or (ii) owns or controls at least twenty-five percent (25%) of the direct or indirect (i.e., though multiple layers of ownership) ownership interests of the reporting company. Please note that each non-exempt reporting company, regardless of when it was formed, must report all Beneficial Owners of such company.
What are the Key Deadlines?
Reporting companies formed prior to January 1, 2024 will have one (1) year from such date (i.e., until December 31, 2024) to file their initial beneficial ownership information report.
New reporting companies formed on or after January 1, 2024 must file their initial report within thirty (30) days after their creation. However, please note that FinCEN recently proposed extending this deadline to ninety (90) days for reporting companies created during 2024, but as of the date of this article this has yet to be approved.
After filing the initial report, there is no periodic filing requirement for the reporting company. However, a reporting company must file an amendment with FinCEN within thirty (30) days after any change occurs with respect to any information reported to FinCEN. Therefore, reporting companies will need to establish internal policies for tracking changes and reporting them to FinCEN in a timely manner.
Is there a Penalty for Non-Compliance?
Yes, the CTA provides for both civil and criminal penalties (up to a fine of ten thousand dollars ($10,000.00) and imprisonment of up to two (2) years) for (i) willfully providing false information to FinCEN, (ii) failing to provide complete information to FinCEN or (iii) failing to update information that was previously reported to FinCEN. In addition, an individual may be held liable under the CTA if such individual caused the failure or was a senior officer of the reporting company at the time of such failure.
Conclusion
The CTA has rapidly approaching deadlines and was intentionally broadly written in order to cover most business entities. However, much of the general public is unaware that the CTA exists or that it applies to them and requires them to take timely action. Therefore, we highly recommend that all business owners and senior level officers and employees educate themselves regarding the CTA's requirements in order to avoid non-compliance and potential civil or even criminal penalties. For additional information regarding the CTA, please see: https://www.fincen.gov/boi-faqs
The facts and circumstances of each business are unique, so we highly recommend that you get the advice of an attorney in order to determine the precise reporting requirements for your business. Click here to schedule a consultation with an attorney at Arlington Law Group regarding the CTA and the requirements that it imposes on your business.
