Background: Congress enacted the Corporate Transparency Act (the “CTA”) on January 1, 2021, to help prevent and combat money laundering, terrorist financing, organized crime, and other illicit activity. Effective January 1, 2024, the CTA will require most existing and newly formed corporate entities in the U.S. to file reports with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) regarding their beneficial owners.
The impact of the new reporting requirements is expansive. With certain exceptions, the CTA will affect existing and to-be-formed domestic and foreign corporate entities, especially private companies or family office structures with numerous reporting entities. Business entities and their beneficial owners face the risk of civil and/or criminal penalties for failure to file any required information. Effective January 1, 2024, newly formed entities which do not fall under one of the approved exceptions will have thirty (30) days to file an initial report with FinCEN disclosing its beneficial ownership information. Existing entities, formed prior to January 1, 2024, will have until January 1, 2025 to file their reports.
Overview: The CTA was enacted to increase transparency for corporations, limited liability companies, certain partnerships, business trusts, and similar entities – referred to as “Reporting Companies.” Reporting Companies include domestic and foreign companies that are registered to do business in the U.S., and will typically be smaller or private businesses not otherwise overseen by a regulatory authority. Reporting Companies will be required to report information regarding beneficial owners, company applicants, and information regarding the Reporting Company itself. In addition, all Reporting Companies will be required to provide updated reports to FinCEN when the company detects any inaccuracy in its initial report or any change in the reported information.
Beneficial Owners: Under the CTA, privately-owned companies that are not exempt will have to report to FinCEN regarding certain beneficial ownership information about each person who either owns 25% or more of the company’s ownership interests, or who exercises “substantial control” over the company (known as a “Beneficial Owner”). Exceptions to who qualifies as a Beneficial Owner include employees, creditors, and future beneficiaries of ownership through inheritance. Depending on the particular facts and circumstances, a trustee and/or beneficiary of a trust may be considered a Beneficial Owner, especially if the trust is used as a mechanism for the exercise of substantial control over the Reporting Company. The beneficial ownership information will be kept in a private national database. The database will be managed by FinCEN, with limited access through “appropriate protocols” to state, federal and international law enforcement agencies, and certain financial institutions to further the purposes of the CTA. Beneficial Owners will be required to report their full legal name, date of birth, residential address, an identifying number such as passport or driver’s license number and an image of such document.
Determining whether a company is a Reporting Company and whether an individual is considered a Beneficial Owner is highly fact-specific. The attorneys at DUGGAN BERTSCH, LLC can help identify whether your company is a Reporting Company and all the Beneficial Owners required to report.
Company Applicants: Additionally, with regard to newly formed entities, the CTA requires that any person who files the formation or registration documents for a Reporting Company (a “Company Applicant”) must also file a report regarding beneficial ownership information with FinCEN. This includes both the person who actually filed the documents and the person who directed the filing, such as an attorney or paralegal who helped form the Reporting Company.
FinCEN Identifiers: Given the foregoing definitions, it is likely that an individual will be required to be identified as a Beneficial Owner and/or Company Applicant in numerous filings. For example, an attorney or paralegal who regularly assists clients in creating legal entities will be a frequent Company Applicant. To ease the administrative burden, an individual will be granted a “FinCEN Identifier,” which is a unique identifying number issued by FinCEN. A Reporting Company can then submit a Beneficial Owner’s or Company Applicant’s FinCEN Identifier in lieu of the individual’s personal identifying information. A FinCEN Identifier is also an effective data security tool that can lessen the risks associated with privacy and data breach concerns.
Reporting Company Information: A Reporting Company must also report certain information about itself, such as its legal name, state of formation, all trade names, taxpayer identification number, and the address of its principal place of business.
Exemptions from Filing: The CTA exempts twenty-three (23) types of companies from the reporting requirements, including, but not limited to, publicly-traded companies, churches, charities, nonprofit entities, and any other entity that qualifies for tax-exempt status under relevant sections of the Internal Revenue Code. There is also an exemption for “Large Operating Companies,” which are entities with a physical office in the U.S. with more than 20 employees and reflect more than $5,000,000 in gross receipts or sales in the aggregate. If a Reporting Company does not fall within any exemptions, a client may consider whether a restructuring would result in an exemption. For example, by consolidating ownership, an entity might qualify for a Large Operating Company exemption.
Violations & Penalties: Providing false or fraudulent information or failing to comply with the CTA’s reporting requirements can lead to civil and criminal penalties, including a maximum civil penalty of $500 per day (up to $10,000) and/or imprisonment for up to two years. There is a safe harbor for any voluntary corrections of reports, and such corrections must be made within ninety (90) days of filing.
The CTA reporting requirements will affect many clients that hold interests in a legal entity, including those who have formed business entities for estate planning and asset protection purposes. The recommended course of action is to begin compiling a list of every entity you are involved with and to have an attorney review the reporting implications for each entity.
Members of the DUGGAN BERTSCH team are available to advise you as to the impact of the CTA on your business and investments, and to help you respond to any further developments in this area.
Beware of Scams: The impact of the CTA has unfortunately led to an increase in fraudulent activity attempting to access your personal information. The Better Business Bureau recently alerted the public to watch out for communications in which scammers are sending out official looking letters claiming to come from a non-existent agency such as the United States Business Regulations Department, Corporate Transparency Act Division, Process and Filing Center. The letter informs you that you have “reporting obligations under the Corporate Transparency Act” and instructs you to visit a website or scan a QR code to report your information. To date, FinCEN has given no indication that it intends to send letters to businesses or individuals requesting information. We urge you to stay alert to potential scams and unsolicited communications pertaining to the CTA and your personal information.