US and foreign entities, including corporations, limited liability companies and statutory trusts, will need to report their individual beneficial ownership information to the Financial Crimes Enforcement Network of the US Department of Treasury (FinCEN) under the Corporate Transparency Act (CTA), effective January 1, 2024.
Currently existing companies must initially report by January 1, 2025. Companies formed in 2024 must report within 90 calendar days after formation. Companies formed after 2024 will currently be given 30 calendar days after formation to report. Reports must be updated as individual beneficial ownership changes.
Final versions of reporting forms and operational guidance have not been released and FinCEN has yet to publicly reveal the online filing system to be known as the Beneficial Ownership Secure System (BOSS). Given the uncertainty surrounding these features, it remains possible the implementation may be further delayed.
Nevertheless, businesses who qualify as "Reporting Companies" must take steps now to prepare for reporting because failure to comply with the CTA can result in civil and/or criminal penalties.
Overview of the CTA
Effective January 1, 2024, certain companies registered with any secretary of state or any similar office in the US (saved for the exemptions mentioned below) shall report their individual beneficial ownership information with FinCEN under the CTA. This new requirement aims to create a centralized federal database to assist enforcement authorities in preventing companies registered in the US from misuse by their anonymous owners for money laundering and other criminal activities. However, this new requirement imposes significant reporting burdens on companies with lawful purposes; and so, all who qualify as "Reporting Companies" should heed the applicability, details of the reportable information, and other main points about the CTA explained below.
Applicability of the CTA
The CTA applies to domestic or foreign corporations, limited liability companies, and any other legal entities created by the filing of a document with a secretary of state or any similar office in the US, unless it meets any CTA exemptions (“Reporting Companies”). Sole proprietorships, general partnerships, unincorporated associations, common law trusts and foreign entities not registered to do business in the US do not need to report under the CTA.
There are 23 types of legal entities that are exempt from the CTA reporting requirements; among them are: (i) large operating companies, which are entities with more than 20 full-time employees in the US that have their operations from physical office premises in the US and reported in their federal US income tax of the prior year more than $5 million in gross receipts or sales from US sources; (ii) nonprofit entities, political organizations, and certain tax-exempt trusts; (iii) insurance companies, banks, public companies, investment companies, investment advisers and certain other entities already subject to regulatory oversight; and (iv) subsidiaries of certain exempt companies.
Type of Reportable Information
The report will contain: (i) personal identifying information of beneficial owners of the Reporting Company (e.g., individual’s name, date of birth, residential address, and an acceptable identification number from a document such as a passport or US driver’s license); (ii) basic information of the Reporting Company (e.g., legal name, principal address, jurisdiction in which the entity was formed, and tax ID number); and (iii) for companies formed after January 1, 2024, personal identifying information of company applicant, who is an individual that actually does the filing to form the Reporting Company. If more than one person is involved in the filing, the other individual who is primarily responsible for directing or controlling the filing is also a company applicant.
For purposes of the personal information to be reported, the CTA defines a beneficial owner as an individual who either directly or indirectly: (i) exercises substantial control over the Reporting Company, or (ii) owns or controls at least 25% of the Reporting Company’s ownership interests (e.g., shares of equity, stock, voting rights). An individual can exercise substantial control over an entity (irrespective of whether the individual has an ownership interest in such company) if the individual (a) serves as a senior officer of the Reporting Company (e.g., CEO, CFO, COO); (b) has authority to appoint or remove certain officers or a majority of directors (or similar body) of the Reporting Company; (c) has important decision-making power, which includes decisions related to business, finances, and structure of the Reporting Company; or (d) has any other form of substantial control over the Reporting Company.
The information provided under the CTA will not be available to the public. It will be disclosed only to Federal, State, local, and Tribal officials, and for certain foreign officials who submit a request through a US Federal government agency. It may also be disclosed to financial institutions to assist in their anti-money laundering compliance activities.
Changes to information previously submitted under the CTA need to be updated to FinCEN within 30 days after the change occurs. These updates are not required for companies’ applicants. These changes include, but are not limited to, any new designation of senior offices, decision-makers, and/or modifications to their personal identifiable information, such as address, a new driver’s license, or other information previously submitted to FinCEN. Also, if the information contained in a report is inaccurate, the Reporting Company needs to correct it no later than 30 days after the date that the Reporting Company became aware of the inaccuracy or had reason to know of it.
New Identifying Number
To facilitate the report, FinCEN will issue to an individual or Reporting Company upon their request, a unique identifying number (“FinCEN identifier”). Then, Reporting Companies may report the FinCEN identifier of an individual instead of his/her required personal information. However, an individual or Reporting Company is not required to obtain a FinCEN identifier.
The CTA provides for civil and criminal penalties - fines up to $10,000, and imprisonment for up to two years - for wilfully providing false information, failing to provide complete information to the CTA, or failing to update information previously submitted to FinCEN.
Please note: This alert provides a summary of the CTA based on regulations and guidance published to date for general guidance and should not be construed as legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this alert. The FinCEN regulations are complex and evolving. Impacted persons should seek legal advice regarding their obligations and responsibilities under the CTA, based on their specific facts and circumstances.