Starting January 1, 2024, the Corporate Transparency Act of 2020 (the “CTA”) requires new and existing domestic and foreign entities created in or registered to do business in the United States to disclose information regarding their beneficial owners and company applicants to FinCEN (Financial Crimes Enforcement Network).
The intention of the CTA is to increase transparency and discourage the use of shell companies to hide illicit activities. This is an important step intended to help stop money laundering, financing of terrorism, tax fraud, human and drug trafficking, counterfeiting, piracy, securities and financial fraud, and acts of foreign corruption. Information reported under the CTA will not be available to the general public and will have stringent access requirements and safeguards on requestors.
Entities Subject to Reporting Requirements
Corporations, limited liability companies, limited partnerships, statutory trusts, or any other entity created by filing a document with a secretary of state or similar office under state of tribal laws, or formed under foreign law and registered to do business in the United States is a “reporting company” that must disclose information regarding its beneficial owners and its company applicants to FinCEN.
Certain entities are not “reporting companies” and do not have to report beneficial ownership and company applicant information to FinCEN. These are generally regulated entities that already report such information to other federal agencies, or companies with real business activities that are not perceived to be high risk. The final regulation lists 23 types of companies that are exempt including:
- large operating companies that employee more than 20 full time employees in the United States, reported more than $5 million in gross receipts on their previous year’s federal tax return, and have an operating presence at a physical office in the United States;
- public traded companies;
- banks and credit unions;
- money services businesses;
- insurance companies and insurance producers;
- investment companies, investment advisers, and venture capital fund advisers;
- accounting firms;
- securities brokers, dealers, exchanges, and clearing agencies;
- Commodity Exchange Act registered entities;
- certain pooled investment vehicles;
- tax-exempt organizations, nonexempt charitable trusts, nonexempt split interest trusts, and Section 527 political organizations, and certain entities that assist these entities;
- public utilities;
- financial market utilities;
- governmental authorities established under the laws of the United States, an Indian tribe, or a state or political subdivision, or under an interstate compact.
Information Reporting Requirements
A reporting company must disclose the identity of each beneficial owner of the company and each company applicant. Beneficial owners and company applicants must disclose their full legal name, date of birth, residential or business address, and a unique identifying number from an acceptable identifying document (such as state’s driver license or passport). Beneficial owners are those that:
- Exercise substantial control over the reporting entity;
- Owns 25% or more of the reporting entity.
In general, a beneficial owner is any individual who directly or indirectly exercises substantial control over the reporting company, or who directly or indirectly owns or controls 25 percent or more of the ownership interests of the reporting company. Whether an individual has substantial control over a reporting company depends on the power they may exercise over a reporting company. For example, an individual will have substantial control of a reporting company if they direct, determine, or exercise substantial influence over, important decisions the reporting company makes. In addition, any senior officer is deemed to have substantial control over a reporting company. Other rights or responsibilities may also constitute substantial control. Additional information about the definition of substantial control and who qualifies as exercising substantial control can be found in the Beneficial Ownership Information Reporting Regulations.
A company applicant is the individual(s) who files the document that created the company, as well as any individual primarily responsible for directing or controlling the filing incorporator, initial partners, etc. The company applicant only needs to be reported for reporting companies created or registered on or after January 1, 2024.
Reporting Due Dates
Domestic reporting companies created before January 1, 2024, and foreign reporting companies registered before January 1, 2024, must file their initial report with FinCEN no later than January 1, 2025.
A domestic reporting company created on or after January 1, 2024, must file its initial report within 30 calendar days of the earlier of the date when (1) it receives actual notice that its creation is effective or (2) a secretary of state or similar office first provides public notice that the company has been created. A foreign reporting company created on or after January 1, 2024, must file its initial report within 30 calendar days of the earlier of the date when (1) it receives actual notice that it is registered to do business or (2) a secretary of state or similar office first provides public notice that the company has been registered to do business.
A reporting company must file an updated report within 30 calendar days after any change occurs to previously submitted information concerning the company or its beneficial owners. A reporting company must also correct any inaccurate information in previously filed reports within 30 days after the company becomes aware or has reason to know of the inaccuracy.
Willful failure to report or update beneficial ownership information, or willful providing of false or fraudulent information, may result in a civil penalty of up to $500 per day, and a criminal penalty of up to $10,000 and/or imprisonment of up to two years. A safe harbor from these penalties may apply if the person who filed the report has reason to believe that the report contains inaccurate information and files a report with corrected information within 90 calendar days after filing the inaccurate report.
Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with start-up/emerging growth companies and affluent individuals. Building connections beyond the code.