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Beginning January 1, 2024, many small businesses formed or operating in the United States will be required to disclose information about the business and its owners to the Financial Crimes Enforcement Network (“FinCEN”), a bureau within the U.S. Department of the Treasury.  The Corporate Transparency Act (the “CTA”), passed in 2021, is intended to protect national security interests, combat money laundering, tax fraud, financing terrorism, and other criminal activities.  Businesses, their owners, and senior management should be aware of this law and its requirements.  As described below, there are monetary penalties imposed on both businesses and individuals required to report information who fail to make the required filings.

Who Must File

In general, two types of business entities are required to file reports with FinCEN.  A domestic business entity formed by filing a document with a secretary of state or similar office under the law of any state (or Indian tribe) is required to file.  Also, any business entity formed under the laws of a foreign country, that has filed a document with a secretary of state or similar office under the law of any state (or Indian tribe) in order to do business in that state must file with FinCEN.  The term “state” includes not only the 50 U.S. states, but also the District of Columbia, and U.S. territories and possessions such as the U.S. Virgin Islands and Puerto Rico.  Any company required to file a report with FinCEN is known as a “Reporting Company.”  Note that 23 exceptions to the definition of a Reporting Company exist, some of which are described below and are types of businesses that are already subject to governmental regulation.

The CTA also requires that each Beneficial Owner (as defined below) of a Reporting Company must be disclosed to FinCEN as well, either through a report filed by the Reporting Company, or a separate report filed by each Beneficial Owner.

Reporting Companies and Beneficial Owners:  What Information Must Be Disclosed

Each Reporting Company must disclose its name (including any trade names), principal place of business within the U.S., specific jurisdiction of formation (state, tribal, or foreign), and unique identification number, such as an employer identification number or taxpayer identification number.

Reporting Companies must also disclose the identities of its Beneficial Owners, as well as each Beneficial Owner’s date of birth, address, an identifying number from an unexpired passport, driver’s license, or other specified document, and an image of the document from which the identifying number was obtained.  A “Beneficial Owner” is generally any person that either (1) exercises substantial control over the Reporting Company, or (2) owns or controls at least 25% of the ownership interests of the company (by vote or value).

An individual exercises substantial control over a Reporting Company if he or she is (1) a senior officer of the company (e.g., president, chief executive officer, general counsel, etc.), (2) has authority over the appointment or removal of a senior officer or majority of the board of directors, (3) directs or has substantial influence over important decisions of the company, or (4) has any other form of substantial control.

The 25% ownership test is construed broadly.  It takes into account any equity, stock, or similar interest even if voting rights are not part of those interests.  Similarly, any interest in profits or capital, an instrument convertible into an ownership interest, or even an option to purchase or sell ownership interests are taken into account.  All options or similar interests are deemed exercised and ownership interests are aggregated for purposes of the test.

If a trust is deemed a Beneficial Owner, the following persons are also deemed Beneficial Owners:  (1) any trustee with authority to dispose of trust assets, (2) any beneficiary if the beneficial is the sole permissible recipient of trust income and principal or has a right to demand a distribution of substantially all the assets of the trust, and (3) a settlor of the trust if the trust is revocable or the settlor has a right to withdraw the assets of the trust.

The following persons are never a Beneficial Owner:

  • a minor child (provided, that information about the child’s parent or legal guardian is disclosed);
  • an individual acting as nominee, custodian, or agent on behalf of another (provided that information about the principal on whose behalf the person is acting is disclosed);
  • an employee acting solely as such whose control is derived solely from employment and such person is not a senior officer;
  • an individual whose interest in the company is only through a future right of inheritance, and
  • a creditor of a Reporting Company whose interest is limited to a specific sum or money, or whose only rights in the company are intended to secure repayment.

Company Applicants

Each Reporting Company has at least one “Company Applicant” that may need to be disclosed as well.  There are two types of Company Applicants.  A “Category 1 – Direct Filer” is the person who directly files the document that creates the entity, or registers the entity to do business in the U.S.  A “Category 2” filer is a person who is primarily responsible for directing or controlling the CTA filing.  A Company Applicant may be an attorney engaged to form a Reporting Company on behalf of a client.

Reporting Companies formed prior to January 1, 2024 need not provide information about Company Applicants.  Reporting Companies formed or registered to do business after this date have to provide information about Company Applicants, but need not subsequently update that information.

When To File

Reporting Companies formed or registered to do business before January 1, 2024 must submit the required information to FinCEN by January 1, 2025.  Reporting Companies formed or registered to do business after January 1, 2024 are required to report information within 30 days of formation or registration to do business.  However, FinCEN has extended the 30-day period to 90 days for entities formed or registering to do business during 2024.

If beneficial ownership changes, or if someone no longer qualifies for an exemption, an updated report must be filed within 30 days of the change.  Therefore, Reporting Companies must continuously monitor ownership.  At least one practitioner has pointed out that even a name change on account of marriage would result in an updated filing.  A change of residence would also necessitate an updated filing.

Note, that it is possible for Beneficial Owners to file their own reports directly with FinCEN.  If a Beneficial Owner chooses to do this, the burden to file updated information is on the Beneficial Owner rather than the Reporting Company.  If a Beneficial Owner files his or her own report a “FinCEN Identifier” (a unique identifying number) will be assigned to the Beneficial Owner.  The Reporting Company need only report this FinCEN Identifier with respect to that Beneficial Owner.

Confidentiality

Information reported to FinCEN is not publicly accessible.  It is available to a variety of governmental and law enforcement agencies in civil or criminal investigations, or even foreign law enforcement persons or agencies if a request is made under an applicable international treaty, agreement, or convention.  Financial institutions may also request information if in connection with customer due diligence requirements under applicable law.  Rules concerning access to this information have not been finalized by FinCEN.

Penalties

The failure to file any report required by the CTA results in a penalty of $500 per day (that a report remains unfiled) up to a maximum penalty of $10,000.  Additionally, failing to file or filing false or fraudulent information can also result in imprisonment for up to two years.

How To Report

All reporting will occur electronically through a secure website.  FinCEN is still developing this system, which will be available through FinCEN’s website.

Reporting Company Exemptions

The following business are exempt from the definition of a Reporting Company (for an exhaustive list of these entities please contact us):

  • Companies required to register securities under securities laws
  • Banks, credit unions
  • Securities brokers and dealers
  • Accounting firms registered under Sarbanes-Oxley
  • Tax-exempt organizations under 501(c) of the Internal Revenue Code
  • Political organizations as defined in Section 527(e)(1) of the Internal Revenue Code
  • Large Operating Company (perhaps the most significant exemption – an entity that employs more than 20 full time employees in the U.S, with a physical office in the U.S., and has filed a U.S. tax return disclosing more than $5 million in gross receipts or sales)
  • Inactive entities (in existence before January 1, 2020, not actively engaged in business, with no foreign owners, without a change of ownership over the prior 12 months, has not sent of received funds in excess of $1,000 over the prior 12 months, and does not hold any kind or type of assets).

Conclusion

Our clients and friends should be aware of the CTA, and insure that they, or their advisors (e.g., attorneys and accountants) are coordinating efforts for the filing of necessary reports.  Generally, FGMC is planning on filing reports on behalf of any new entities formed for our clients on or after January 1, 2024.  As for existing businesses (formed prior to 2024), we will be reaching out to clients that we believe have a filing requirement.  However, if you have concerns about any filing obligations please reach out to us, or your accountant or other trusted advisor.

This article is not intended to be an exhaustive analysis of the CTA.  If you have any questions or require more information please contact Steven Weiser.

Steven Weiser

Special Counsel