Key Details: Effective January 1, 2024, the Corporate Transparency Act (CTA) will implement reporting requirements relating to beneficial ownership for all existing, amended, or new corporations, Limited Liability Companies (LLCs), or other entities that were created in or are registered to conduct business in the United States. The CTA builds on the Anti-Money Laundering Act of 2020, designed to counteract illegal activity like corruption, money laundering, and tax fraud. As such, the CTA aims to increase owner information transparency by requiring certain information to be reported to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Businesses are encouraged to thoroughly review the CTA as significant penalties exist for noncompliance and to contact Ryan & Wetmore for further information and expertise.
Background on the CTA
In January 2021, the National Defense Authorization Act for Fiscal Year 2021 (NDAA) established the Anti-Money Laundering Act. The NDAA notes that the act is intended for “strengthening treasury financial intelligence, anti-money laundering, and countering the financing of terrorism programs.” This established the Corporate Transparency Act that will require beneficial ownership information (BOI) reporting for business entities to FinCEN.
Beneficial Owner Definition
Beneficial owners are defined as any individual who either owns or controls 25% or more of the “ownership interests” of the company or who either directly or indirectly exercises substantial control over the company.
The 25% “ownership interest” is not only traditional ownership equity, but also applies to any instrument that is convertible into equity. Therefore, ownership is not limited to stock, capital interests and profit interests. Instead, it includes options, warrants, and other rights to buy or sell equity.
The term “substantial control” applies if an individual is a senior officer or involved in the decision-making of the appointment or removal of senior officers or a majority of the board of directors. If they direct, determine, or have substantial influence over important decisions made by the company, then they are said to exercise “substantial control.”
Business owners are encouraged to review their company structure and ownership interest to determine which individuals will be required to submit their BOI to FinCEN.
Who is Required to Report?
Companies that must report include corporations, LLCs, and any other companies that are created by the filing of a document with a Secretary of State or similar office under the law of a state or Indian tribe. Foreign companies are also required to report if they meet the previous requirements and are registered to conduct business by filing a document with a Secretary of State or similar office under the law of any state or tribal jurisdiction.
There are 23 exemptions for reporting companies in the Act. The exemptions apply to companies subject to federal and state regulation, in which cases the company’s BOI is available to the government. Examples would be banks, credit unions, investment advisors, accounting firms, large operating companies, and any other entity who files reports with the SEC.
Your business may be exempt from reporting if it meets the requirements listed here within the frequently asked questions section of the FinCEN website.
Reporting Requirements
Starting January 1, 2024, each reporting company must report identifying information of their “beneficial owners” to FinCEN. Companies formed before the start date of January 1, 2024, will have until January 1, 2025, to report. While companies that are formed after January 1, 2024, must have their information reported within 30 days of notice. FinCEN will not begin accepting BOIs until January 1, 2024.
A company’s beneficial ownership information is required to be submitted electronically on the FinCEN website through the site’s secure filing system. The system is still in development and will be available when the reports must be submitted.
If a company is not exempt from reporting they must report the company’s legal name as well as any trade, “doing business as,” or “trading as” names. In addition, the company must report the current street address of its principal place of business, the jurisdiction of its formation, and its taxpayer identification number.
For each beneficial owner, the company must report the following:
- The individual’s legal name,
- Individual's birthdate,
- Individual's residential address,
- Individual’s unique identifying number from an identification document (e.g., passport number, driver’s license number),
- An accompanying image of the specified document.
If there are any changes in the identities of the beneficial owners or to any of their information, then an updated report must be made to FinCEN within 30 days of the change.
If the company is registered on or after January 1, 2024, they must also report information on its company applicants. Company applicants can be up to two individuals. A company applicant could be the individual that directly files the document creating or first registering the reporting company and/or the person responsible for directing or controlling the document's filing. In this case, the company must follow the same process with their company applicants as they did with their beneficial owners.
Penalties
If a company is found to be violating the Corporate Transparency Act, they could face civil penalties of $500 per day that a violation is not remedied, a criminal fine of up to $10,000, and/or up to two years of imprisonment. As such, businesses and beneficial owners are encouraged to fully review the CTA to understand if they are required to comply.
Conclusion and Next Steps
The CTA represents a significant change in the privacy of privately-owned companies. With the reporting and compliance effective January 1st of 2024, businesses should begin preparing for these new requirements by following the steps below:
- Review if your company is exempt or subject to the CTA.
- Determine who the beneficial owners of your company are.
- Establish a method of collecting beneficial ownership information.
- Create a procedure to monitor changes in beneficial ownership information.
- Develop a report to send your information to FinCEN.
- Stay up to date on if any changes are made to the Corporate Transparency Act.
Ryan & Wetmore is committed to aiding businesses in their compliance and growth journey. For further information and expertise, contact us today.
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