Pursuant to the Corporate Transparency Act (CTA), most small businesses must file information disclosing information and identities of owners of those small businesses with the Financial Crimes Enforcement Network (“FinCEN”) so that the data can be accessed by law enforcement, the IRS, certain other agencies, and select financial services companies in a new federal government database called Beneficial Ownership Secure System (BOSS). The CTA is part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.
FinCEN estimates Year 1 compliance with the rule will impact at least 32.6 million businesses. These mandated disclosure provisions come into effect on Jan. 1, 2024, and apply to both companies formed after Jan. 1 2024 and companies already existing prior to that date.
What businesses are covered by the CTA reporting mandate?
Mandated reporting applies to all manner of legal entities, including: corporations, limited liability companies (LLCs), partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), limited liability limited partnerships (LLLPs), and any other type of entity that is registrable with a Secretary of State’s office (or similar registrar).
There are certain specific exemptions from the definition of reporting company under the CTA, which are covered in further detail below.
Which business owners are required to comply?
The rule describes a “beneficial owner” as any individual who meets at least one of two criteria: (1) exercising substantial control over the reporting company; or (2) owning or controlling at least 25% of the ownership interest of the reporting company. If you meet either of these criteria, you are a beneficial owner under the CTA and your identity must be disclosed in the company’s report.
The CTA defines an individual who exercises “substantial control” over a reporting company as an individual that:
Serves as a senior officer of the reporting company (e.g., President, CEO, CFO, COO, GC);
Maintains authority over the appointment or removal of (i) any senior officer or (ii) a majority of the board of directors or similar body;
Directs, determines, or has substantial influence over important decisions made by the reporting company; or
Has any other form of substantial control over the reporting company, such as a board member or controlling the majority of voting power of the company.
The CTA defines “ownership interest” as:
Any equity, stock, or similar instrument;
Any capital or profit interest in an entity;
Any instrument convertible, with or without consideration, into any share or instrument;
Any put, call or other option; or
Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.
An individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship, or otherwise, including:
Joint ownership with one or more other persons of an undivided interest in such ownership interest;
Through another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual;
With regard to a trust or similar arrangement that holds such ownership interest:
as a trustee of the trust or other individual (if any) with the authority to dispose of trust assets;
as a beneficiary who (a) is the sole permissible recipient of income and principal from the trust; or (b) has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or
as a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust; or
When determining whether an individual owns or controls at least 25% of the ownership interests of a reporting company, the total ownership interests that an individual owns or controls, directly or indirectly, shall be calculated as a percentage of the total outstanding ownership interests of the reporting company.
The rule also describes five types of individuals who the CTA exempts from the definition of “beneficial owner,” including (i) minor children (provided the parent or guardian reports the required information for that child); (ii) an individual acting as nominee, intermediary, custodian, or agent for another individual; (iii) certain employees of a reporting company (provided they are not senior officers); (iv) individuals whose only interest in a reporting company is a future interest through a right of inheritance; or (v) certain creditors of a reporting company.
Are there any companies exempt from the reporting requirements?
There are 23 specific exemptions from the definition of reporting company under the CTA. The most common exemption applies to companies that have 20 or more full time employees with $5 million or more in gross annual sales in the year prior to the year in which the filing is due and that are physically located in the United States.
There are other exemptions covering larger, generally more seasoned or highly regulated types of entities, including: public companies; large private companies; public accounting firms; regulated insurance companies; registered investment companies and advisors; as well as certain tax-exempt entities.
When must reports be filed?
The time at which a required report is due depends on: (1) when the reporting company was created or registered; and (2) whether the report is an initial report, an updated report providing new information, or a report correcting erroneous information in a previous report.
Initial report timing
Domestic reporting companies created, or foreign reporting companies registered to do business in the U.S., before Jan. 1, 2024, have until Jan. 1, 2025 to file their initial report with FinCEN.
Domestic reporting companies created, or foreign reporting companies registered to do business in the U.S. for the first time, on or after Jan. 1, 2024, are required to file their initial report with FinCEN within 90 calendar days of the date on which they are created or registered, respectively.
What type of information must be disclosed?
The reporting company must submit information to FinCEN about: (1) the reporting company, and (2) each beneficial owner and company applicant. This includes:
the name, date of birth, and street address of each beneficial owner and company applicant; and
an image of an approved identifying document (e.g., a non-expired passport or driver’s license) proving the veracity of that information, among other things.
Who has access to this information?
This is not public information. The Act only allows access to the beneficial ownership information in the FINCEN database by law enforcement and taxing agencies (it is not a public database and not just for curious spectators for commercial purposes).
Are there penalties for failing to comply?
The CTA provides that it is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information to FinCEN, or to willfully fail to report complete or updated beneficial ownership information to FinCEN. Not complying, providing false or fraudulent reports, or willfully failing to comply may result in fines of $500 a day for as long as the report is inaccurate, and that is just the civil penalty. Failure to comply may also be subject to criminal penalties up to a $10,000 fine or two years in jail.
The Corporate Transparency Act places a very new and significant burden on small businesses. Rarely have they been required to report information about their owners. Many small business owners place a high value on their personal privacy. Some small businesses lose track of their owners. Some owners will refuse to comply, putting the company in jeopardy. It’s a minefield of new problems for small businesses.
The experienced team of business attorneys at Fiffik Law Group are here to help you understand how the Corporate Transparency Act impact your business. We will help you comply with the Act and establish policies so that your business can remain in compliance.