Corporate Transparency – A New ERA

Corporate Transparency – A New ERA

Authored by Attorney Kent L. Schlienger

The Corporate Transparency Act and the federal regulations related to it (the “CTA”) go into effect on January 1, 2024. Under the CTA, most small businesses entities operating in the US, such as corporations and limited liability companies, and most other entities formed by filing documents in a state office, will be required to file with the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury, online reports about the individuals that own and control them. The reports that these entities – called “reporting companies” – are required to file include basic information about the reporting companies themselves and about the individuals – called beneficial owners – who directly or indirectly own 25% or more of a reporting company’s interests or who directly or indirectly have substantial control of a reporting company. In addition, reporting companies that are US domestic entities formed on or after January 1, 2024, or that are foreign entities first registered to do business in the United States on or after January 1, 2024, will need to identify and report information about the one or two individuals –called “company applicants” – primarily involved in the filing of the reporting company’s formation documents or first registration to do business in the United States. The information must be reported to FinCEN by reporting companies within 30 days of any of the following events: (1) the formation of a reporting company or its first registration to do business in the United States (except that for entities formed or first registered in 2024, in which case the reporting deadline is 90 days from formation or first registration), (2) a change in beneficial owners, and (3) a change in the reporting company’s or a beneficial owner’s information previously reported to FinCEN. For entities that were already in existence before January 1, 2024, and for foreign entities that were first registered to do business in the United States before January 1, 2024, the initial reporting required under the CTA is due on or before January 1, 2025, and no information about any of its company applicants is required.

Not all entities are required to file reports under the CTA.  There are 23 categories that exempt an entity from reporting under the CTA because of the entity’s type of business or characteristics.  Included among the exempt entities are public companies, banks and financial institutions, government entities, public utilities, insurance companies CPA firms, certain entities engaged in the securities industry, and certain types of non-profit businesses.  One category of exemption from the CTA that may be applicable to a wide range of closely held business entities is the “large operating company” exemption.  This category exempts business entities that can satisfy all of the following criteria: (1) 20 full time employees in the US (without aggregating part-time time employees as full-time equivalents), (2) a physical place of business in the US, and (3) at least $5 million of US sourced annual gross proceeds or revenue.  The requirements for an entity to qualify for the “large operating company” exemption are very technical and should be confirmed annually by a tax or legal professional.

It should also be noted that the beneficial owners are individuals and not entities, even if ownership interests in a reporting company are owned by other entities.  Reporting companies must look through ownership interests held by other entities to determine the individuals that directly or indirectly own 25% or more of the reporting company or directly or indirectly can exercise substantial control over the reporting company.  Beneficial owners also include the senior officers of the reporting company holding positions of president, CEO, CFO, COO, general counsel and similar positions by whatever name they are referred to.

The reporting obligations of the CTA require that the reporting companies ascertain from their beneficial owners and company applicants those individuals’ personal information to be reported.  That information includes their full name, physical address and birthdate, plus a copy of their driver’s license, passport, or other government ID.  Company applicants and beneficial owners can, in lieu of providing their personal information to the reporting companies with whom they are associated, report and update with FinCEN the same personal information required to be reported and obtain a unique identifying code – called a FinCEN identifier –that can be provided by the beneficial owners and company applicants to the reporting companies for reporting in lieu of the individuals’ personal information.  Reporting companies will be well advised to implement provisions in their shareholder agreements, operating agreements or other governance documents that obligate beneficial owners to provide the information needed by the company to meet its reporting obligations.

Compliance with the CTA is a serious matter.  There are civil penalties – fines of up to $500 per day for continuing violations – and criminal penalties – up to a $10,000 fine or imprisonment up to two years –for violations by reporting companies and their senior officers.  The CTA’s rules regarding beneficial owners’ ownership and control are complex and often quite subjective.  Many entities will need the advice of an attorney familiar with sophisticated entity ownership and governance structures to assist in determining their reporting obligations under the CTA.

This article is written for informational purposes only and does not create any engagement of Neider & Boucher, S.C. to represent you or your entity regarding any specific reporting obligations under the Act. Readers are encouraged to reach out to legal counsel to determine the applicability of these issues to their own personal needs.  If you have questions,  Neider & Boucher has attorneys experienced in these areas to provide that advice and guidance. Please call us at (608) 661-4500.