01.02.2024 News Doerner

ALERT: Effective January 1, 2024, the Corporate Transparency Act Requires Reporting the Beneficial Owners of Most Privately Held Companies

By H. Wayne Cooper

What is the Corporate Transparency Act?

On January 1, 2021, Congress enacted the Corporate Transparency Act (the “CTA”), and on September 30, 2022, the Financial Crimes Enforcement Network (“FinCEN”) of the Treasury Department finalized the implementing regulations.  The stated purpose of the CTA is “to help prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activity.”  Under the CTA and implementing regulations, non-exempt private companies, referred to in the CTA as “reporting companies,” will be required to file a report with FinCEN, and law enforcement agencies will then have access to beneficial ownership information of most privately held companies. As a result, for law enforcement purposes the CTA will end the anonymity of shell companies in the United States.

What is a Reporting Company?

The scope of the definition of what constitutes a “reporting company” is broad, and includes a corporation, limited liability company or other similar entity (i) created by the filing of a document with a secretary of state or similar office under the law of a U.S. state or Indian tribe, or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a U.S. state or Indian tribe.  

The CTA contains a list of 23 industries and types of businesses that are excluded from the definition of reporting company.  The entities exempt from the definition include banks, credit unions, brokers, dealers, insurance companies, public accounting firms, public utilities and tax- exempt entities.  Two exemptions that will be of interest to attorneys are “large operating companies” and “inactive entities.”

A “large operating company” is defined as a company that employs more than 20 people on a full-time basis in the United States, filed in the previous year a federal income tax return reporting more than $5 million in gross receipts or sales, and has an operating presence in the United States.   An “inactive entity” is defined as any entity that was in existence on or before January 1, 2020, is not engaged in active business, is not owned by a foreign person, has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds greater than $1,000, and does not otherwise hold any asset, including an ownership interest in any corporation, limited liability company, or other similar entity.  One caution:  Whether or not an entity is classified as “inactive” on the Secretary of State’s website is not determinative as to whether it meets the elements of  this exemption.

Who are the Persons Whose Data Must Be Reported?

Under the CTA, a reporting company must report information about itself, its current “beneficial owners,” and its “company applicants.”

Beneficial Owners.  A “beneficial owner” is any individual who, directly or indirectly, either (i) exercises substantial control over the reporting company, or (ii) owns or controls at least 25% of the ownership interests of the reporting company. 

There are three ways in which a person may exercise “substantial control” over a reporting company: (i) serving as a senior officer of the reporting company, (ii) having authority over the appointment or removal of any senior officer or a majority of the board of the reporting company, or (iii) having authority to direct, determine, or have substantial influence over important matters affecting the reporting company, including but not limited to a list provided in the rule.  In general, “substantial control” over an entity is deemed to exist for any person who holds the title of chief executive officer, chief operating officer, chief financial officer, or general counsel, or for any other person, regardless of official title, who performs or has the power to perform a similar function for the entity.

The definition of “ownership interest” includes (i) stock or other instruments of equity, whether or not the instrument is transferable or represents voting or non-voting shares, (ii) any capital or profits interest in a limited liability company, limited liability partnership, or limited partnership, (iii) any instrument convertible into any of the foregoing, regardless of whether characterized as debt, or (iv) any options to buy or sell any of the foregoing.  An individual may directly or indirectly own or control an ownership interest of a reporting company (i) through joint ownership with one or more other persons of an undivided interest in such ownership interest, (ii) through control of such ownership owned by another individual, or (iii) through a trust in which the individual is a trustee with authority to dispose of trust assets, or a beneficiary who is the sole permissible recipient of income and principal from the trust, or has the right to demand a distribution of or withdraw all assets from the trust, or a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets from the trust.

In determining whether an individual owns or controls 25% of the ownership interests of a reporting company, the ownership interests of the reporting company shall include all ownership interests of any class or type, and the percentage of such ownership interests that an individual owns or controls shall be determined by aggregating all of the individual’s ownership interests in comparison to the undiluted ownership interests of the company.  When calculating a person’s percentage ownership of an entity, be aware that FinCEN regulations currently contain an ambiguity regarding the treatment of any instrument that is convertible or exercisable into equity, stock, capital or profit interests, or voting rights in the entity, such as an option or note that is exercisable or convertible into ownership interests (such instruments are referred to herein as “contingent interests”).  To be safe, we recommend that a person’s percentage ownership of an entity be calculated under the assumption that all contingent interests owned by the person (and only such person) have been exercised or converted, even if such interests are not then exercisable or convertible by their terms, either legally or practicably (such as, for example, an option that is “out of the money”), and even if there are other persons who own contingent interests in the entity that are not being deemed to have been exercised or converted.

The exceptions to the definition of “beneficial owner” include (i) a minor child, (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual, (iii) an employee of a reporting company, acting solely as an employee and not as a senior officer, (iv) an individual whose only interest in a reporting company is a future interest through a right of inheritance, or (v) a creditor of the reporting company, as long as the debt interest does not give the creditor substantial control over or ownership of the reporting company.

Company Applicants.    For a domestic reporting company, a “company applicant” includes the individual who filed the formation document with the secretary of state or similar office under the law of a U.S. state or Indian tribe, and the individual who directed or controlled the filing of such document by another person.  For a foreign reporting company, a “company applicant” includes the individual who first registered the company to do business in any U.S. state or tribal jurisdiction by the filing of a document with the secretary of state or any similar officer under the law of the state or Indian tribe, and the individual who directed or controlled the filing of such document by another person.  For example, both the paralegal in a law firm that filed a reporting company’s formation document with the secretary of state and the lawyer in the firm that directed the filing would be the reporting company’s company applicants.

What Data Must Be Reported?

Reporting Companies.  The information that must be included about the reporting company itself includes (i) the company’s name, (ii) its trade name(s), (iii) its business street address, (iv) its state, Tribal or foreign jurisdiction of formation, (v) for a foreign reporting company, the state or Tribal jurisdiction where the company first registers, and (vi) its TIN (including an EIN), or for a foreign reporting company that has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.

Beneficial Owners.  The information that must be included about each beneficial owner includes (i) full legal name, (ii) date of birth, (iii) current residential address that the individual uses for tax residency purposes, and (iv) a “unique identifying number” from (a) a non-expired U.S. passport issued to the individual, (b) a non-expired  identification document issued to the individual by a state, local government, or Indian tribe, (c) a non-expired driver’s license issued by a state, or (d) if none of the foregoing are available, a non-expired foreign passport.  The report must include an image of the document from which the unique identifying number was obtained, including both the number and a photograph in sufficient quality to be recognizable.  If an entity that is exempt from the definition of reporting company (“exempt entity”) has or will have a direct or indirect ownership interest in a reporting company and an individual is a beneficial owner of the reporting company by virtue of such ownership, the report may include the name of the exempt entity in lieu of the information required of a reporting company.

Company Applicants.  A reporting company must provide the same information about its company applicants as it does for its beneficial owners, except that (i) in the case of a company applicant who files the document that creates a domestic reporting company or registers a foreign reporting company “in the course of such company applicant’s business,” only the business address of such company applicant need be reported, and (ii) if a reporting company was formed prior to January 1, 2024, the reporting company is not required to report information with respect to any company applicant.

FinCEN Identifier.  Any beneficial owner or company applicant may obtain a FinCEN identifier by submitting to FinCEN an application containing the information about themselves described above.  Likewise, any reporting company may obtain a FinCEN identifier by submitting to FinCEN an application at or after the time the entity submits an initial report.  Each FinCEN identifier shall be specific to each such individual or reporting company.  If an individual obtains a FinCEN identifier and provides the same to a reporting company, the reporting company may include such FinCEN identifier in its report in lieu of the personal information required above.

Retention of Data.  The CTA requires that beneficial ownership information relating to each reporting company shall be maintained by FinCEN for a minimum of five years after the date on which the reporting company terminates.  However, there is nothing in the CTA or the implementing regulations that would prevent FinCEN from retaining beneficial ownership information for a longer period.

When are Reports Required to be Filed?

Initial Reports.  During 2024, any domestic reporting company formed on or after January 1, 2024, shall file its initial report within 90 calendar days after formation.  Beginning with 2025, the deadline for filing moves up to 30 days.  Likewise, any entity that becomes a foreign reporting company on or after January 1, 2024, shall file a report within 90 calendar days after it has been registered to do business in a state (30 days beginning in 2025).  Any domestic reporting company created before January 1, 2024, and any entity that became a foreign reporting company before such date shall file a report not later than January 1, 2025.    After January 1, 2024, any entity that no longer meets the criteria for an exemption from the definition of reporting company will have 30 calendar days to file its initial report.

Updated Reports. If there is a change with respect to any required information in an initial report, an updated report shall be required to be filed within 30 calendar days after the date on which there is such a change, including any changes in the beneficial owners and their reportable data. If after the filing of an initial report, a reporting company meets the criteria for any exemption to the definition of reporting company, its updated report shall include notification that the entity is no longer a reporting company.

Corrected Reports.  A reporting company shall file a corrected report within 30 calendar days after the date on which such reporting company becomes aware or has reason to know that any required information contained in any report filed by the reporting company was inaccurate when filed and remains inaccurate.  The corrected report shall include all information necessary to make the report accurate and complete at the time it is filed with FinCEN.

What are the Penalties for Violations?  

Reporting Violations.  The CTA makes it unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, or to willfully fail to report complete or updated beneficial ownership to FinCEN.  A reporting violation is punishable by a civil penalty of up to $500 per day for each day that the violation continues, plus possible criminal penalties of a fine of up to $10,000 and imprisonment for up to two years.   The CTA defines “willfully” as “the voluntary, intentional violation of a known legal duty.”  The term “person” includes “any individual, reporting company, or other entity.”  When a reporting company fails to report complete or updated beneficial ownership information to FinCEN, not only can the reporting company be held liable, each person who caused the failure or who was serving as a senior officer of the reporting company at the time of the failure can also be fined and imprisoned.

Disclosure Violations.  The CTA also makes it unlawful for any person to knowingly disclose or knowingly use the beneficial ownership information obtained by the person through a report submitted to FinCEN, or through a disclosure made by FinCEN to persons entitled to receive such information.  The persons to whom FinCEN may disclose beneficial ownership information include (i) a federal agency engaged in national security, intelligence, or law enforcement activity, pursuant to a request, (ii) a state, local or tribal law enforcement agency but only pursuant to a court order, (iii) a law enforcement agency, prosecutor, or judge of a foreign country, pursuant to a request meeting certain conditions, and (iv) a financial institution, but only with the consent of the reporting company, in order to facilitate the compliance of the financial institution with customer due diligence requirements under applicable law.  A person who makes an unauthorized disclosure or use of beneficial ownership information can be punished with a civil penalty of up to $500 per day for each day that the violation continues, plus possible criminal penalties of a fine up to $250,000 and imprisonment up to five years.

For more information about the FinCEN filing requirements under the CTA, contact one of our corporate practice group attorneys.

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