Did You Know About the Corporate Transparency Act and that you may be Required to File a Report?
In January 2021, the United States Congress passed the Corporate Transparency Act (“CTA”) as part of the Anti-Money Laundering Act of 2020. This law, while intended to prevent criminal actors from hiding and laundering money through shell companies, has significant implications for many corporations and small businesses.
Under the CTA, many corporations will be required to identify to the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) information about the company, including its beneficial owners (which includes senior officers, important decision makers, and anyone who owns or controls 25% or more of the company), and company applicants. While most financial institutions generally already required these types of disclosures, companies did not have to provide all of this information to the federal government in the past.
The reporting requirement of the beneficial ownership information (“BOI”) to FinCEN through an online filing, begins on January 1, 2024. With this date quickly approaching, now is the time to prepare for this filing to avoid penalties.
Companies required to report are called reporting companies. There are two types of reporting companies. Domestic Reporting Companies are entities that are formed by the filing of a document with a secretary of state or similar state office. They include Corporations; Limited Liability Companies; Limited Liability Partnerships; Limited Liability Limited Partnerships; Business Trusts; and Most Limited Partnerships. Then there are Foreign Reporting Companies, and they are entities that are formed under the laws of a foreign jurisdiction and then registered to do business in any U.S. state by the filing of a document with a secretary of state or similar office (including corporations, limited liability companies, or other entity formed under the law of a foreign country).
There are a few exemptions to include other types of legal entities, including certain trusts, are excluded from the definitions to the extent that they are not created by the filing of a document with a secretary of state or similar office. This includes any entities that do not fall into one of these two categories (e.g., general partnerships, sole proprietorships, and common law trusts) are exempt from the CTA reporting requirements. Additionally, there are also twenty-three types of entities that are exempt from the definition of “reporting company.”
Reporting companies must report their information along with the beneficial owner(s) information along with the information of the company applicant(s).
A beneficial owner is any individual who, directly or indirectly, either: (a) Exercises substantial control over the reporting company; or (b) Owns or controls at least 25% of the reporting company’s ownership interests.
Company applicants are the individuals who file the documents forming the corporation or LLC with the appropriate government agency and this may be an owner of the company or an outside consultant such as a lawyer or accountant. A reporting company may have a maximum of two applicants. All company applicants must be individuals, not companies or legal entities.
Reporting companies that are in existence on the effective date of January 1, 2024, must file their initial reports within one year by January 1, 2025. If a reporting company is created after January 1, 2024, they will have 30 days after the formation or registration to file their report with FinCEN.
If there are corrections or changes, the reports must be updated within 30 days of a change to the beneficial ownership, or 30 days upon becoming aware of or having reason to know of inaccurate information previously filed.
There are civil and criminal penalties with the potential for imprisonment. Non-compliance or falsification of report information can result in fines that range from $500 to $10,000 per violation and the possibility of jail time of up to two years.
You can and should prepare for the upcoming implementation of the Corporate Transparency Act. All companies should review the requirements of the Act and assess whether they are exempt from reporting. If reporting is required, reporting companies should establish internal protocols regarding reporting and begin to collect the information needed to make the filings starting on January 1, 2024.
Staying compliant will also require frequent monitoring for changes and updates to the Corporate Transparency Act and ensuring any changes to beneficial owner information is promptly reports to FinCEN.
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This article is for information purposes only. It is not intended to be and should not be relied on as legal advice for any particular matter.