The Corporate Transparency Act (the “CTA”) will require certain businesses to report beneficial ownership information to the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury. The CTA will go into effect on January 1, 2024. Reporting requirements for new entities will begin on January 1, 2024, while reporting requirements for existing entities will go into effect on January 1, 2025.
Purpose of the Act: The purpose of the CTA is to “protect the U.S. financial system from illicit use and impeding malign actors from abusing legal entities, like shell companies, to conceal proceeds of corrupt and criminal acts.” In short, the CTA requires disclosure of entity ownership in an attempt to prevent money laundering activities.
Who is Impacted by the CTA: The CTA requires any domestic entity, or any foreign entity registered to do business in any state (each a “Reporting Company”), to disclose the following information to FinCEN: (i) Reporting Company’s legal name and/or trade name; (ii) principal place of business; (iii) jurisdiction of formation; (iv) taxpayer identification number; and (v) information regarding Beneficial Owners and Company Applicants.
For newly formed entities, the report of this information must be filed with FinCEN within 30 days of the date of formation (on September 27, 2023 FinCEN issued a proposal to extend this 30 day period to 90 days for entities formed in 2024, but as of November 9, 2023 this proposal has not yet been finalized). Further, the report must be updated or corrected within 30 days of a change or error in the previously reported information.
What is a Beneficial Owner: A “Beneficial Owner” is an individual who directly or indirectly (1) owns or controls not less than 25% of the ownership of the Reporting Company, or (2) exercises substantial control over the Reporting Company.
What is a Company Applicant: A “Company Applicant” is: (i) the person or persons who files the document establishing the Reporting Company (i.e., articles of organization or articles of incorporation) or (ii) the person or persons responsible for directing the filing to be made. Any Reporting Company formed PRIOR to January 1, 2024 is not required to provide Company Applicant information to FinCEN.
Exemptions: There are 23 types of entities which are exempt from having to report beneficial ownership to FinCEN, which include, but are not limited to, the following: (i) entities with more than 20 full time employees in the US and with more than $5M in gross receipts on such entity’s prior tax return; (ii) regulated entities, including publicly traded companies; (iii) banks, broker dealers, insurance companies, and regulated investment companies and investment advisors; (iv) subsidiaries of exempt entities; and (v) “inactive entities”, which will include an entity if (1) it was in existence on or before January 1, 2020; (2) it is not engaged in an active business; (3) it is not directly or indirectly owned by a foreign person; (4) it has not experienced an ownership change in the preceding 12 month period; (5) it has not sent or received any funds greater than $1,000 either directly or through any financial account in which the entity or an affiliate has an interest, in the preceding 12 month period; AND (6) it does not hold any assets in the US or abroad, including any ownership in other entities.
Penalties: Penalties issued by FinCEN for noncompliance of beneficial ownership reporting may include: (i) Civil and criminal penalties for willful violations, including fines of $500 a day and up to $10,000, and imprisonment for not more than two years, and (ii) Civil and criminal penalties for unauthorized disclosure and use of beneficial ownership information.
Next Steps: Many Meyers, Roman, Friedberg & Lewis clients will be impacted by the CTA. To prepare, we recommend that our clients: (i) review and familiarize themselves with the CTA and its reporting requirements; (ii) implement an internal policy for reporting, if applicable; (iii) update any corporate documents to include necessary language related to the CTA; and (iv) reach out to your Meyers, Roman, Friedberg & Lewis attorney to discuss any further questions.
Disclaimer: Please note that this legal update and the information contained herein do not, and are not intended to, constitute legal advice or legal representation or create (and is not a solicitation to create) an attorney-client relationship; instead, all of the information, content, and materials contained in this Legal Update are for general informational purposes only and may not reflect current legal developments. You should not act upon any such information, content or materials contained in this Legal Update without first seeking qualified legal counsel.