The Corporate Transparency Act (the "CTA") was enacted on January 1, 2021, with the intended purpose of helping law enforcement combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activities. Before the CTA, there was no uniform beneficial ownership information reporting requirements in the United States, hindering the ability of law enforcement to investigate the owners of entities being used for illegal purposes. Certain provisions of the CTA will impose new duties and obligations on many of WHP's business clients.
Beginning January 1, 2024, the CTA will require most existing and new business entities in the United States to file reports with the federal government disclosing certain information regarding its beneficial owners (as further described below) and, for companies formed on or after January 1, 2024, the applicant(s) who directed the formation of the company. Reports must be filed with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). On September 29, 2022, FinCEN issued a final rule implementing the CTA's beneficial ownership information reporting requirements.
The due date for an initial report is determined based upon when the entity was created: new entities created on or after January 1, 2024, are required to file a report within 30 calendar days of the date the entity is created; while entities already in existence before January 1, 2024, are required to file a report no later than January 1, 2025.
FinCEN is currently building a new reporting system called the Beneficial Ownership Secure System to collect and store these beneficial ownership reports. Said system is not yet available and no reports will be accepted until January 1, 2024. Beneficial ownership reports will not be accessible by the public and will not be considered public records, subject to public records requests under the Freedom of Information Act.
Who Must Report:
The reporting requirements of the CTA apply to "reporting companies" as defined in the CTA. The CTA defines two types of reporting companies: domestic and foreign. A domestic reporting company is any entity created by a filing with a secretary of state or similar office under state law, including corporations, limited liability companies, limited liability partnerships, and most limited partnerships. A foreign reporting company is a corporation, limited liability company, or other entity formed under the law of a foreign country and registered to do business in any state by a filing with the secretary of state or similar office.
The scope of the reporting requirement is very broad, notwithstanding a list of 23 different types of businesses that are exempt, the vast majority of small business owners will be required to file beneficial ownership reports with FinCEN. FinCEN estimates that there will be approximately 32.6 million reporting companies in the first year of reporting, and 5 million additional reporting companies each in years 2–10. These affected entities include entities that own real estate assets, investment vehicles set up by family offices and individuals, and smaller private companies and joint ventures.
An important exemption exists for companies that are considered "large operating companies" under the CTA. This category exempts companies that meet all of the following criteria: (1) the company employs more than 20 employees on a full-time basis in the U.S.; (b) the company filed in the previous year federal income tax returns in the U.S. demonstrating more than $5,000,000 in gross receipts or sales in the aggregate; and (c) the company has an operating presence at a physical office in the U.S.
The practical result of this rule is that any company created or registered in the U.S. that is not already subject to federal or state regulation, otherwise required to disclose its beneficial ownership information to a government authority, otherwise considered a "large operating company" within the meaning of the CTA, or not otherwise exempt will be required to report certain personal information of its beneficial owners.
What Must be Reported:
The CTA requires reporting companies to identify the "beneficial owners" and the "company applicants" of the entity and to report the full legal name, date of birth, current address, and unique identifying number from a passport, driver’s license or other similar state issued document of said individuals, as well as a scanned copy of such identification document. Alternatively, individuals may apply for and obtain a unique FinCEN identifying number, and may provide this in lieu of the above information.
A "beneficial owner" is an individual who, directly or indirectly, exercises substantial control over a reporting company or owns at least 25% of the ownership interests of a reporting company.
An individual exercises "substantial control" if he: (1) serves as a senior officer; (2) has authority over the appointment or removal of any senior officer or a majority of the board of directors; or (3) has substantial influence over important decisions. Individuals may exercise control directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control.
A "company applicant" is the individual who directly files the document with the secretary of state or similar office that creates the company, and also includes the individual who is primarily responsible for directing or controlling the filing of such document. This means that more than one person can be considered the "company applicant", and in that case, both persons' identifying information must be reported.
Reporting companies are also required to report any change with respect to information previously reported within 30 calendar days after the date on which the change occurs. Furthermore, if the reporting company becomes aware of any mistakes or inaccuracies in a report that has been filed, it must file a corrected report within 30 calendar days after the date on which the reporting company becomes aware or has reason to know of said mistake or inaccuracy.
The reporting requirements of the CTA represent a substantial change to the regulatory scheme governing small businesses in the United States. Small business owners will need to be diligent in filing these initial beneficial ownership reports and identifying any and all changes that may require an updated or corrective filing.
As always, do not hesitate to contact your WHP counsel with any questions or concerns you may have.
This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.