Update - Corporate Transparency Act: Preparing for a New Regulatory World

Key Takeaway: Certain entities will be required to report various information concerning their businesses and beneficial owners to the Financial Crimes Enforcement Network ("FinCEN") or face penalties.

Background

The Corporate Transparency Act ("CTA") was enacted by Congress on January 1, 2021. FinCEN adopted the Final Rule implementing the CTA on September 30, 2022, and it becomes effective January 1, 2024. The CTA aims to prevent current abuses of the U.S. financial system by stopping malicious actors from setting up shell companies to launder money while concealing corporate ownership and evading legal action. Accordingly, the CTA's main goal is the disclosure of corporate ownership.

Businesses Subject to CTA

The CTA applies to domestic corporations, limited liability companies, limited partnerships, other entities created by a filing with a Secretary of State or equivalent official, and foreign companies registered to do business in the U.S. ("Reporting Companies"), unless the entity falls under one of the CTA's 23 exemptions. Most notably, the CTA exempts "Large Operating Companies," defined as entities that (i) employ more than 20 full-time employees in the U.S., (ii) have an operating presence at a physical office in the U.S., and (iii) filed a federal income tax return for the previous year demonstrating more than $5 million in gross sales or receipts from U.S. sources. Other exemptions include tax-exempt 501(c) entities and highly-regulated entities such as banks and credit unions, insurance companies, public utilities, and SEC-regulated entities such as securities brokers, exchanges and advisors.[1] Entities falling under these exemptions are not considered Reporting Companies under the CTA and are exempt from its reporting requirements.

Reporting Requirements

Beneficial Owners

The CTA requires any Reporting Company to file a report with FinCEN concerning: (i) the entity itself; (ii) each company applicant; and (iii) certain beneficial ownership information ("BOI") regarding its "Beneficial Owners."

Beneficial Owners are persons who, directly or indirectly, either (i) exercise substantial control over the entity; (ii) own 25% or more of the entity via stock, membership interests, equity, or other similar mechanism. FinCEN defines "substantial control" as serving as a senior officer of a Reporting Company, having authority over the appointment or removal of any senior officer or a majority of the board of directors, and having substantial influence over important decision-making.[2]

A Reporting Company must report the following BOI for each Beneficial Owner: (i) full legal name; (ii) date of birth; (iii) current residential address; and (iv) unique identifying number from an identification document (e.g., passport, driver's license), including a copy of the identification document.

Company Applicants

Reporting Companies created or registered on or after January 1, 2024, must report the same information listed above for each "Company Applicant." A Company Applicant is the person who files the document that creates the Reporting Company and any person who is primarily responsible for directing the filing of such document. However, a business address must be used for a Company Applicant that engages in the business of corporate formation and files the formation document in connection with that business, e.g., a paralegal at a law firm would use the law firm's address.

Reporting Company Itself

Reporting Companies must also report the following information regarding the Reporting Company itself: (i) legal name; (ii) trade or d/b/a names; (iii) state of formation; (iv) address of principal place of business; and (v) taxpayer identification number.

Effective Dates; Penalties

Reporting Companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports about themselves and their Beneficial Owners.

Reporting Companies created or registered on or after January 1, 2024, will have 30 days after creation or registration to file their initial reports concerning themselves, their Beneficial Owners, and their Company Applicants.

Reporting Companies will have 30 days to report any changes to reported information, such as whether the Beneficial Owners have changed or have made changes to their BOI.  Reporting Companies must update their reports within 30 days of any change and any updates to inaccurate information must be reported within 30 days of when the Reporting Company becomes aware, or has reason to know, of an inaccuracy in a prior report.

The CTA authorizes FinCEN to (i) assess penalties for $500 per day (up to a maximum of $10,000) for failing to timely report or update information and (ii) impose criminal penalties, including up to 2 years imprisonment, against Company Applicants or other persons that willfully fail to report or knowingly report inaccurate information. FinCEN has stated that senior officers of a Reporting Company may be held accountable for failing to file a report.

Disclosure

FinCEN's BOI database will not be publicly available, and reports will not be obtainable through FOIA requests. The CTA permits FinCEN to disclose reported information under certain circumstances to six types of requesters: (1) U.S. federal agencies engaged in national security and law enforcement activities; (2) state, local, and tribal law enforcement agencies with court authorization; (3) foreign law enforcement agencies, judges, prosecutors, and competent authorities; (4) financial institutions using BOI to facilitate compliance with customer due diligence requirements; (5) federal functional regulators and other regulatory agencies acting in a supervisory capacity assessing financial institutions for compliance with customer due diligence requirements; and (6) the U.S. Department of Treasury. The CTA imposes stringent access requirements upon each category of requesters to ensure reported information is safeguarded. The CTA also allows harsher criminal penalties for wrongful disclosure or use of reported information. FinCEN will perform annual audits to ensure that recipients are requesting and using reported information appropriately.

Preparation

Reporting Companies will submit their reports electronically on a secure system via FinCEN's website. FinCEN will start accepting reports on January 1, 2024. Until then, Entities should determine whether any CTA exemptions apply to them and start compiling BOI and other required information. Entities created or registered on or after January 1, 2024, should prepare the necessary reporting information in connection with the entity's creation or registration given the CTA's 30-day reporting window.

UPDATE (December 6, 2024):

Further Developments

On December 3, 2024, the U.S. District Court for the Eastern District of Texas granted a nationwide preliminary injunction temporarily blocking the government from enforcing the CTA and staying the current compliance deadlines. We believe it is likely the government will file an expedited appeal to the U.S. Court of Appeals for the Fifth Circuit and request that the Fifth Circuit vacate the district court's order or otherwise limit its application. Given the uncertainty regarding the ultimate outcome of this case, Reporting Companies should continue gathering information required for filing their initial reports and be prepared to timely file in the event the Fifth Circuit vacates he district court's order or otherwise limits the nationwide preliminary injunction. If that happens, Reporting Companies would still be required to file their initial reports within the time frames described above (all subject to any extensions by FinCEN); a potential extension by FinCEN should not be expected or relied on.  Pedersen & Houpt will continue monitoring developments on this matter.

If you have any questions about the CTA and how it applies to your business, or if you would like assistance in preparing your business’ report, please contact your Pedersen & Houpt attorney, or contact P&H attorneys Stan Sneeringer (ssneeringer@pedersenhoupt.com or 312-261-2238) or Robert "Dean" Oldham (roldham@pedersenhoupt.com or 312-261-2293).

[1] A complete list of the exemptions can be found at 31 CFR 1010.380(c)(2). If you are unsure whether your business falls within an exemption, call a Pedersen & Houpt attorney to discuss.

[2] See 31 CFR 1010.380(d)(1) for a complete discussion of “substantial control.” You and your attorneys should review the various factors provided in the Final Rule to determine who has substantial control over your business.

This communication is provided as a general informational service to clients and friends of Pedersen & Houpt. It should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. This material may be considered Attorney Advertising in some states.