December 18, 2023
On January 1, 2021, Congress passed the Corporate Transparency Act (“CTA”) as part of the Fiscal Year 2021 National Defense Authorization Act, for the stated purpose of combatting anonymous shell companies and/or opaque ownership structures used to facilitate money laundering, terrorist financing, sanctions evasion, the sheltering of illicit funds in the U.S., and other crimes. Through the CTA, certain domestic and foreign companies, referred to as “reporting companies,” will be required to disclose certain information about, and establish and maintain a national registry of, beneficial owners of reporting companies and certain individuals who file corporate paperwork on behalf of such reporting companies. The U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) is responsible for managing and enforcing the CTA. If an entity is deemed a reporting company, then an initial beneficial ownership report containing information about the reporting company, its beneficial owners, and its company applicants must be submitted to FinCEN via an online secured portal.
- What is a reporting company?
The regulations describe two distinct types of reporting companies that must file beneficial ownership reports with FinCEN: (i) domestic reporting companies and (ii) foreign reporting companies. Domestic reporting companies are defined as any entity created by the filing of a document with a secretary of state or similar office of a jurisdiction within the United States (including any U.S. state, territory, or Indian Tribe). This would include, among others, corporations, limited partnerships, limited liability companies or similar entities. Foreign reporting companies are defined as any entity formed under the law of a foreign jurisdiction that is registered to do business within the United States. Excluded from the definition of reporting company are 23 types of entities that are already subject to extensive regulation or are otherwise required to report their beneficial ownership information. Those exemptions include, among others, (i) public companies, insurance companies, banks, registered investment companies, registered investment advisers and certain other entities already subject to regulatory oversight, (ii) government authorities, (iii) tax-exempt entities, including nonprofit entities, political organizations and certain tax-exempt trusts, (iv) inactive entities, (v) large operating companies, which are entities that (1) have more than 20 full-time U.S. employees (not counting employees of affiliated entities), (2) reported more than $5 million of revenue from U.S. sources on a consolidated basis to the IRS for the previous year and (3) have an operating presence at a physical location in the United States, and (vi) subsidiaries that are wholly owned, directly or indirectly, by the foregoing exempt entities.
- What is a beneficial owner?
A beneficial owner is defined as any individual who meets at least one of two criteria: (i) exercising substantial control over the reporting company; or (ii) owning or controlling at least 25% of the ownership interest of the reporting company. Substantial control refers to control over important decisions of the reporting company. This includes senior officers or anyone who has authority to appoint or remove officers or directors, among others.
- What is a company applicant?
Company applicants are those who directly file the document to create or register the reporting company and the individual who is primarily responsible for directing and controlling the filing. There can only be two such individuals. For a foreign reporting company, any individual who files the document that first registers the foreign reporting company, including any individual who directs or controls the filing of such document by another person. Company applicant information must be reported for reporting companies formed after January 1, 2024, but not for reporting companies formed prior to January 1, 2024.
- What information is required to be reported?
For reporting companies, the following information must be included in the beneficial ownership report filed by the reporting company to the FinCEN database: (i) the full legal name of the reporting company; (ii) any trade name or “doing business as” name; (iii) the principal place of business; (iv) the state, tribal, or foreign jurisdiction of formation (for a foreign reporting company, the state or tribal jurisdiction where such company first registers); and (v) IRS issued taxpayer identification number (including the reporting company’s employer identification number).
For beneficial owners and company applicants, the following information must be included in the beneficial ownership report filed by the reporting company to the FinCEN database: (i) the full legal name of the individual; (ii) the date of birth of the individual; (iii) the individual’s complete current address consisting of: (1) in the case of a company applicant who forms or registers an entity in the ordinary course of such company applicant’s business, the company applicant’s business street address; or (2) in the case of a beneficial owner, the individual’s residential street address; (iv) a unique identifying number from one of the following documents: (1) a passport; (2) a driver’s license; or (3) other identification document issued by a state, local government, or Indian tribe; and (v) an image of the document containing the unique identifying number.
The beneficial ownership information will be made available to the following groups: (a) federal, state, local, and tribal officials and foreign officials who request access for activities related to national security, intelligence, and law enforcement; (b) financial institutions in certain circumstances with the consent of the reporting company; and (c) regulators, when they supervise those financial institutions.
- When are reporting companies required to submit their beneficial ownership reports?
For entities formed between January 1, 2024 and January 1, 2025, the initial beneficial ownership report is due within ninety (90) calendar days of the formation date. For entities formed before January 1, 2024, the initial beneficial ownership report is due one (1) year after January 1, 2024. For entities formed after January 1, 2025, the initial beneficial ownership report is due within thirty (30) calendar days of the formation date.
- Is there an obligation to update beneficial ownership reports?
Yes. An updated and/or corrected report must be filed within 30 days of any change. This includes reporting companies that become exempt after filing beneficial ownership reports. If a reporting company is currently exempt, beneficial ownership reports claiming an exemption are not required to be filed. However, a reporting company should consider preserving records relevant to any claimed exemption(s). Additionally, if a reporting company becomes aware that a report is inaccurate or has reason to know about the inaccuracy, the reporting company must correct the report within 30 days.
- What penalties are there for non-compliance with the CTA’s reporting requirements?
The CTA applies civil penalties to the United States of not more than $500 for each day that a violation continues or has not been remedied and fines of up to $10,000 and possible imprisonment of up to two (2) years for any person who willfully (i) provides, or attempts to provide, false or fraudulent beneficial ownership information (including identifying photographs or documents) or (ii) fails to report complete or update beneficial ownership information to FinCEN. The CTA also requires reporting companies to update any change with respect to any information changed related to beneficial ownership within thirty (30) days after the date on which there is any change with respect to any information previously submitted to FinCEN, including any change with respect to who is a beneficial owner of a reporting company and any change with respect to information reported for any particular beneficial owner or company applicant.
- What steps can I take to prepare?
In preparation of the regulations taking effect, reporting companies, beneficial owners, and company applicants will want to take a variety of steps to ensure they are in compliance. For reporting companies formed before the January 1, 2024, taking the steps to begin gathering information regarding each reporting company’s information, beneficial ownership information, and company applicant information will be necessary to come into compliance before the deadline. For reporting companies formed after January 1, 2024 the reporting companies, beneficial owners, and company applicants will want to ensure they have processes in place to gather the required beneficial ownership information, ensure the beneficial owners and company applicants submit their ownership information to the FinCEN database (or obtain their consent to disclose the information). Other preparatory steps may include reviewing the governing documents of the identified reporting companies, beneficial owners, and company applicants to ensure the disclosure of the required information is not in conflict with the governing documents and consider revisions to the governing documents (e.g., operating agreements, partnership agreements, bylaws, shareholder agreements, etc.) to require all beneficial owners report the required information.
If you have any questions about this FAQ or the CTA, please contact Evan D. Chambers (echambers@hartzoglaw.com) and Jacob L. Fanning (jfanning@hartzoglaw.com). Due to the number of questions expected regarding the CTA, please pose questions via e-mail.
CTA FAQ Updated December 18, 2023