Corporate Transparency Act: Beneficial Ownership Reporting Requirements for Small, Medium Businesses Effective Jan. 1

The Financial Crimes Enforcement Network’s final rule implementing the Corporate Transparency Act’s beneficial ownership information reporting requirements will become effective on January 1, 2024. Small and medium businesses should prepare for compliance with the requirements.

On January 21, 2021, the Corporate Transparency Act (CTA) was enacted into federal law in the United States. The CTA directs the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury and the US financial intelligence unit, to establish a national registry of beneficial ownership information (BOI) for the beneficial owners of most entities created or registered to do business in the United States (Reporting Companies). The CTA is primarily an anti-money laundering law to fight against bad actors that seek to use anonymous shell companies to facilitate money laundering, financing of terrorism, tax fraud, and other illegal acts.

On September 30, 2022, FinCEN published a final rule that implements the CTA’s BOI reporting requirements (Final Rule). The Final Rule requires Reporting Companies to disclose certain personal information of each “beneficial owner” and “company applicant” to FinCEN. The effective date of the Final Rule is January 1, 2024.  

We prepared a comprehensive overview of the CTA’s implementing regulations available in a previous report. Key takeaways of the CTA and the Final Rule are detailed below.

WHAT’S A REPORTING COMPANY?

• Reporting Companies are bifurcated between domestic Reporting Companies and foreign Reporting Companies.
• A domestic Reporting Company is any entity that is (1) a corporation, (2) a limited liability company (LLC), or (3) created by the filing of a document with a secretary of state of any similar office under the law of a state or American Indian tribe.
• A foreign Reporting Company is any entity that is (1) a corporation, LLC, or other entity, (2) formed under the law of a foreign country, and (3) registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a state or American Indian tribe.

KEY DATES

• Existing Companies: Reporting Companies created on or registered before January 1, 2024 must file their initial BOI reports by January 1, 2025.
• New Companies: Reporting Companies created or registered on or after January 1, 2024 must file their initial reports (1) if created or registered in calendar year 2024, within 90 calendar days, or (2) if created or registered thereafter, within 30 calendar days,[1] in each case, of the earlier of the date on which it receives actual notice that its creation has become effective (in the case of domestic Reporting Companies) or it has been registered to do business (in the case of foreign Reporting Companies), or the date on which a secretary of state or similar office first provides public notice.

WHOSE INFORMATION MUST BE REPORTED?

• Reporting Companies must disclose certain personal information of each “beneficial owner” and “company applicant” to FinCEN.
• A “beneficial owner” is any individual who exercises “substantial control” over the Reporting Company or who owns or controls a 25% “ownership interest” in the Reporting Company. Both terms are further defined in the Final Rule.
• A “company applicant” is any individual who directly files the document that creates the domestic Reporting Company or registers the foreign Reporting Company, and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.

WHAT INFORMATION IS REPORTED?

• Reporting Company Information: Required disclosures include: (1) legal name, (2) trade name, (3) business address, (4) jurisdiction information, and (5) US Internal Revenue Service taxpayer identification number.
• Beneficial Owners and Company Applicant Information: Required disclosures include: (1) legal name, (2) date of birth, (3) current address, and (4) an identification document with a unique identifying number (e.g., passport).

ARE THERE ANY EXEMPTIONS TO REPORTING?

• The CTA and the Final Rule contain 23 exemptions for certain types of entities. The types of entities exempted generally include a range of entities regulated in the United States, certain participants in the investment funds industry, tax exempt entities, large operating companies, and subsidiaries of certain exempt entities, among others.

LARGE OPERATING COMPANY EXEMPTION

• The large operating company exemption may exempt certain small and medium businesses or operating companies if certain thresholds are met.
• To qualify as a large operating company, any entity is exempt from the reporting requirements that (1) employs more than 20 fulltime employees in the United States; (2) has an operating presence at a physical office within the United States; and (3) filed a federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales,[2] excluding gross receipts or sales from sources outside of the United States.

SUBSIDIARY EXEMPTION

• The subsidiary exemption exempts certain subsidiaries of entities otherwise exempt from the reporting requirements if structured correctly.
• Any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more exempt entities, except for subsidiaries of certain entities, is exempt from the reporting requirements.

WHAT HAPPENS IF REPORTS ARE NOT FILED?

• Reporting violations (e.g., false reporting or failure to report) can lead to civil or criminal penalties for a Reporting Company and certain individuals associated with it.

WHAT’S NEXT?

The foregoing highlights are not an exhaustive discussion of the details surrounding the application of the CTA and the Final Rule and their accompanying compliance obligations. Further, FinCEN still needs to finalize additional rulemakings (as discussed in a January 11 and January 31 LawFlash) regarding (1) the form that will be used to submit information; (2) who may receive access to the BOI information and for what purposes; and (3) safeguards required to protect BOI in accordance with the CTA’s strict security and confidentiality requirements.

In addition, FinCEN must amend the customer due diligence requirements of financial institutions to conform them with the requirement of the CTA and the Final Rule and develop the infrastructure to administer the Final Rule’s reporting requirements.

CTA IMPLICATIONS ON SMALL AND MEDIUM BUSINESSES AND OPERATING COMPANIES

Unless subject to an exemption, every new LLC, limited partnership, limited liability partnership, corporation, or other business entity will have a filing obligation with FinCEN. This will capture the vast majority of small and medium businesses in the United States, and it will be incumbent on persons to track their various business organizations and ensure that reports are filed with FinCEN in a timely manner.

In addition, as small and medium companies grow, and expand their business lines, they will need to be mindful to update FinCEN with any changes, including new owners over threshold, new investors, and any new business lines operating under a different trade or DBA name. Notably, in the Final Rule, FinCEN made clear that responsibility for the accuracy of the information rests with the Reporting Company, itself.

NEW ENTITY COMPLIANCE CONSIDERATIONS

Small or medium businesses that do not anticipate that an exemption will apply to their business may consider forming new entities before the January 1, 2024 effective date. In doing so, the newly formed entity will have until January 1, 2025 before compliance with the CTA is required. A small or medium business may also elect to restructure to qualify for the large operating company or subsidiary exemptions. 

FUTURE STATE DEVELOPMENTS?

Similar to the CTA, certain states have begun to pass or propose statutes that in certain ways mirror the federal provisions in order to create state-level databases of BOI. For example, the New York state legislature recently passed the LLC Transparency Act, which is awaiting Governor Kathy Hochul’s signature. Under the New York LLC Transparency Act, both current and newly established LLC’s will be required to disclose BOI information of its owners with the Department of State. However, unlike the CTA, which limits public access to the BOI information stored in its database, the New York bill will make the information largely available to the general public.

California has followed suit and proposed its own version of the CTA particularly aimed at corporations not formed in California or LLCs registered to do business in California to report BOI information with the secretary of state. The proposed bill would require these companies to disclose BOI information to do business in California or risk being guilty of a misdemeanor for noncompliance.

Morgan Lewis will continue to monitor these state developments as they arise.