In an effort to combat financial terrorism and money laundering, beginning January 1, 2024, domestic and foreign entities registered in the United States will be required to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) under the Corporate Transparency Act (CTA). FinCEN will be collecting this ownership information and creating a domestic beneficial ownership database (which under current law will not be available to the general public).
“Reporting Companies” will be required to report the full legal name, birthdate, residential address, and a unique identifying number from a passport or driver’s license (along with a copy of the passport or driver’s license), for any owner who directly or indirectly (i) owns at least 25% of the ownership interests or (ii) directly or indirectly exercises “substantial control” over the entity. Reporting Companies are domestic entities created by filing with the Secretary of State or foreign entities registered to do business with the Secretary of State (e.g., corporations, LLCs, limited partnerships), subject to certain exemptions.
There are 23 exemptions to the CTA reporting requirement, which include exemptions for large operating companies, inactive entities, banks, tax-exempt entities, charitable trusts, pooled investment vehicles, and subsidiaries of certain exempt entities. Entities are responsible for keeping track of their own exemption status.
An entity is considered a “large operating company” if the entity (i) employs more than 20 full-time employees in the United States, (ii) has a physical operating presence in the United States, and (iii) filed a federal income tax or information return for the previous year demonstrating more than $5 million in gross receipts or sales.
An entity is considered to be “inactive” if it (i) was in existence on or before January 1, 2020, (ii) is not engaged in active business, (iii) is not owned directly or indirectly by a foreign person, (iv) has not experienced any change in ownership in the preceding 12-month period, (v) has not sent or received any funds in an amount greater than $1,000, and (vi) does not hold any kind or type of assets in the United States or abroad.
Under the CTA, an individual is considered to have “substantial control” over an entity if the individual (i) serves as a senior officer, (ii) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body), or (iii) directs, determines, or has substantial influence over important decision making. The CTA also provides a catch-all for individuals who have any other form of substantial control over an entity.
FinCEN currently has three different reporting deadlines depending on the entity formation date:
- Entities in existence by December 31, 2023 will have until December 31, 2024 to comply with the reporting requirement;
- Entities formed between January 1, 2024 and December 31, 2024 will have 90 days from formation to comply with the reporting requirement; and
- Entities formed on or after January 1, 2025 will have 30 days from formation to comply with the reporting requirements.
If there is a change in ownership, or there is a change in previously reported beneficial ownership information (e.g., if an owner’s residential address changes), the entity is required to report such changes to FinCEN within 30 days of such change. In other words, there are continuing reporting obligations. The reporting obligations are imposed on the Reporting Company itself, with substantial penalties for noncompliance. FinCEN has not yet issued a final form to comply with these requirements, but expects to on or before January 1, 2024, with the launch of its Beneficial Ownership Secure System on the FinCEN website.
Although legislation was introduced in the House of Representatives in August 2023 to delay the required filing dates for existing Reporting Companies, the legislation seems unlikely to pass.
Reporting companies may make their beneficial ownership reports through the FinCEN website or through third-party service providers. For more information, reach out to your Much attorney. Our firm has a dedicated team versed in the CTA that can advise you regarding your filing obligations.