In Depth Review of The Corporate Transparency Act

Effective January 1, 2024, U.S. companies including corporations, partnerships, and limited liability companies (LLCs) will be required to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a branch of the U.S. Department of the Treasury.

The Corporate Transparency Act (CTA) was enacted by Congress in 2021 as an expansion of the anti-money laundering laws. The CTA introduces uniform beneficial ownership reporting requirements for new and existing companies that fall within the CTA’s definition of “reporting company.”

The CTA requires a reporting company to file reports identifying the company’s owners. The CTA authorizes FinCEN to collect that information and disclose it to authorized government authorities and financial institutions to help prevent money laundering, terrorist financing, corruption, tax fraud, and other illicit activity. 

Despite some exceptions to the CTA that are discussed below, FinCEN estimates as many as 32 million entities will be required to report at the onset of the law, creating significant compliance requirements.

Compliance with the CTA is the responsibility of reporting companies, and engagement of Godfrey & Kahn does not include legal advice relating to any potential CTA reporting obligations, beneficial ownership or company applicant analysis, or other assistance relating to reporting requirements under the CTA unless we expressly agree to provide that advice.

A. Definitions

In discussing the CTA, the following definitions are important:

• Reporting Company
  A corporation, partnership, LLC, or any other similar entity organized under the law of a state, or a foreign entity formed under the laws of a foreign country and registered to do business in the United States.
• Beneficial Owner
  Any individual who (1) directly or indirectly exercises substantial control over a reporting company, or (2) directly or indirectly owns or controls 25 percent or more of the ownership interests of a reporting company.
• Company Applicant
  An individual who either directly files the document that creates or first registers the reporting company, and/or who is primarily responsible for directing or controlling the filing of the relevant document. There can be up to two company applicants per reporting company. If only one person was involved in filing the relevant document, then only that person should be reported as a company applicant.

B. Types of Exempt Entities

The CTA does not apply to all entities. Exemptions apply for 23 categories of entities, such as companies that are already subject to reporting regulations, like investment companies, insurance companies, tax-exempt entities, federal and state credit unions, and certain banks. 

Additionally, “large operating companies,” defined as a company with at least 20 full-time employees, more than $5 million in gross U.S. sales, and an operating presence at a physical office within the U.S., are also exempt.  Further, wholly owned subsidiaries of exempt entities are also exempt, but this exemption does not extend to subsidiaries of pooled investment vehicles (i.e., private equity funds). 

C. Required Actions

When to File

The due date for the initial report depends on when the company was created.

• If the company is created on or after January 1, 2024, the initial report is due within 30 calendar days of the date the company is created. This 30-day deadline runs from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.

Effective November 29, 2023: FinCEN has amended the deadline for the reporting of beneficial ownership information of newly created reporting companies (those created or registered on or after January 1, 2024) to allow reporting companies ninety (90) calendar days to file their initial reports, instead of the original 30-day deadline.

• If the company was created before January 1, 2024, the initial report is due no later than January 1, 2025.

Once a reporting company files its initial report, it has an ongoing commitment to update its beneficial ownership information within 30 calendar days of a change in beneficial ownership. 

How to File

If a company is required to report its beneficial ownership information to FinCEN, it will do so electronically through a secure filing system available via FinCEN’s website. This system is currently being developed and is expected to be available before any reports are required to be filed.

Reporting Requirements

The CTA requires reporting companies to file specific information about their company, their beneficial owner(s) and their company applicant(s). The reporting requirements for each are listed below.

Reporting Company

• Full legal business name
• Any trade name or “doing business as” (d/b/a) name
• Complete current street address of principal place of business
• Jurisdiction of formation or initial registration (state or tribal)
• Taxpayer Identification Number or Employer Identification Number

Beneficial Owner and Company Applicant

• Full legal name
• Date of birth
• Complete current residential street address
• Unique Identifying Number from an acceptable non-expired identification document such as a passport or driver’s license
• An image of the identification document (that also includes a photograph of the individual)

Note: Only reporting companies formed or registered on or after January 1, 2024, will have to report information about their company applicants. Companies created or registered before January 1, 2024, do not need to report information about their company applicants.

D. Penalties for Non-Compliance

Both individuals and reporting companies are subject to civil and criminal penalties for failure to comply with their obligations under the CTA, which may include a fine of up to $500 for each day the violation continues, imprisonment for up to two years, or both.

E. Confidentiality of Reported Beneficial Owner Information (BOI)

FinCEN will store and maintain all reported BOI in the Beneficial Ownership Secure System (BOSS), which is still under development. The CTA imposes strict confidentiality, security, and access restrictions on the data FinCEN collects. The information reported to FinCEN will not be accessible to the public and is not subject to the Freedom of Information Act Requests. FinCEN is required to maintain the information until five years after the reporting company terminates or is otherwise dissolved.

F. Conclusion

Companies should begin preparing for compliance with the CTA by familiarizing themselves with the applicability of the reporting requirements and establishing protocols for identifying and collecting beneficial ownership information on an ongoing basis. 

For companies involved in mergers and acquisitions, this is a new subject area for due diligence, and it will be important to consider a target’s compliance with its CTA reporting obligations.

We are closely following the development of the online reporting process and will update our clients as more information becomes available. If you have any questions in the meantime, please reach out to your Godfrey & Kahn attorney.