Corporate Transparency Act

Below is a memorandum regarding the Federal Corporate Transparency Act. Effective January 1, 2024, this Act will require most small companies to file and update reports with the federal government, which, among other things, will need to disclose identifying information concerning individuals who, directly or indirectly, are beneficial owners of the company. This memorandum does not constitute legal advice and merely is intended to assist individuals in evaluating whether companies in which they have an interest must comply with the Act and the basic requirements for complying with the Act. Please contact Joe Selinger or Kristin Wainright for further information or questions regarding the Act.

I. Introduction

The federal Corporate Transparency Act (“CTA” or the “Act”) was vetoed by the President in 2019, but Congress overrode that veto, and the Act officially passed in January 2021. Upon and after the effective date, every existing or new corporation or limited liability company (“LLC”) (and other entities formed by filing documents with a secretary of state) that is not excepted from compliance with the CTA must file a report with the federal government identifying its beneficial owners and “applicants” who formed the company (for companies formed after the effective date). The CTA specifically targets small private companies.

The reporting requirements under the CTA go into effect January 1, 2024. The Treasury Department plans to make report forms available online at some point prior to the effective date and also plans to provide a compliance guide to aid small companies in determining their filing responsibilities.

The CTA empowers the Financial Crimes Enforcement Network of the U.S. Treasury Department (“FinCEN”) to propose implementing regulations. In September 2022, FinCEN issued their final rules for the CTA. These final rules are Part 1 of an anticipated three parts. Part 2 will discuss the security of the database housing beneficial ownership information (the “BOSS” database), including which agencies can access it and under what circumstances, and Part 3 will update the FinCEN customer due diligence rules in light of the CTA.

II. Purpose

The purpose of the CTA is to ensure that “beneficial owners” of small companies are reported to the federal government in an effort to combat terrorism, money laundering, human trafficking and other crimes.

The CTA requires that the reported information be kept confidential and available only to law enforcement and our international allies. The final rule regarding access to and security of the database that will store reported information has not yet been approved.

III. Which companies must report?

To determine your company’s reporting responsibility, you must first determine whether the company falls under the CTA definition of corporation or LLC, and, if so, whether your company falls under an exception from compliance with the CTA.

The terms “corporation” and “limited liability company” have the same meanings as the definitions given by the state in which they are registered, and include any non-US entity which is eligible for registration or registered to do business as a corporation or LLC under the laws of the applicable state.

While the statutory language expressly applies to LLCs and corporations, it also includes any “other similar entity.” Comments to the final rule make it clear that FinCEN considers any entity organized formally by written document submitted to a secretary of state (“SOS Entities”) to be a “similar entity” (and therefore obligated to report). Thus, similar entities would include limited partnerships and limited liability partnerships. On the other hand, the comments to the CTA indicate that sole proprietorships, certain types of trusts and general partnerships will not be subject to reporting.

The exceptions generally apply to: publicly held companies that report to the U.S. Securities and Exchange Commission; companies overseen by government regulators, such as banks and insurance companies; non-profits; and private companies with more than $5M in revenue and more than 20 employees. Thus, most small private corporations and LLCs and other SOS Entities will need to file reports under the CTA. Note that foreign, non-US corporations or LLCs are required to file as well.

IV. Who is a beneficial owner?

A beneficial owner is a natural person who (i) directly or indirectly, exercises substantial control over an SOS Entity, e.g. senior officers or controlling directors, those individuals who can appoint and remove senior officers, and anyone who directs, determines or has substantial influence over important decisions made by the company, (ii) owns more than 25% of the equity or ownership interest of an SOS Entity, or (iii) receives substantial economic benefits from the assets of an SOS Entity. One entity may have a number of beneficial owners. Unless they meet one of the foregoing tests, employees generally are not beneficial owners, even if they are highly paid or have managerial authority.

V. What must be reported?

After the effective date, any SOS Entity that is not excepted from the CTA will have to file a report that contains the following information:

  • A list of all beneficial owners and related identifying information;
  • Identification of any applicant, i.e. any person filing the application paperwork to create a new company, even if they are not a beneficial owner, must be (However, only companies created after the Act’s effective date will have to file the information about their applicant and companies are not required to keep the information regarding their applicant updated); and
  • The reporting company’s own name and related identifying

An excepted company (new or existing) must file a written certification which: identifies which exception the company falls under; states that the company meets those requirements; and provides identification information for the applicant, prospective or existing officer, director or agent making the certification.

VI. When must I file?

For companies formed after January 1, 2024, a reporting company has 30 calendar days from the time of its formation to file its report. A new foreign reporting company also has 30 days.

An existing reporting company shall have one year after the Act’s effective date to file a report. The Act will become effective on January 1, 2024, so the report must be filed by January 1, 2025.

There is no annual filing requirement. However, companies must update their filings any time there is a change in beneficial ownership information or exception status. When updates are needed, the company will have 30 days after it discovers the change to file the update.

VII. Penalties for Non-Compliance

Willful failure to file, provide correct information or to update information can result in penalties up to and including a $10,000 fine and three years in prison.

VIII. Conclusion

We hope this memo will help you to determine your responsibilities under the Corporate Transparency Act and prepare for reports you may need to file. If you have any questions along the way, please do not hesitate to call us at (860) 447-0335.