06/01/2023
RE: Corporate Transparancy Act
To: Clients, friends and those who need to know:
You did not ask me, but you may need to know this. From time to time, I endeavor to share some information of which I believe my clients or potential clients should be aware. This is one of those times.
Effective January 1, 2024, corporations and limited liability companies in the United States will be required to file reports with the federal government, not previously required.
If you manage any corporation or limited liability company, you should know this: you will need to report your “beneficial owners.” A beneficial owner is any individual who, directly or indirectly, either exercises “substantial control” over the company or owns or controls at least 25% of the company’s ownership interests. This requirement is a part of the federal Corporate Transparency Act. This will impact millions of business entities.
An individual exercises “substantial control” over a company if the individual (a) serves as a senior officer of the company; (b) has authority over the appointment or removal of any senior officer or a majority of the board; or (c) directs, determines, or has substantial influence over important decisions made by the reporting company. Thus, senior officers and other individuals with control over the company are “beneficial owners” under the CTA, even if they have no equity interest in the company.
Individuals may exercise control directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control. Indirect ownership or control of a company or its ownership interests may include the following: joint ownership with one or more other persons; through another individual acting as a nominee, intermediary, custodian, or agent; as trustee, grantor/settlor, or beneficiary of a trust; through ownership or control of one or more intermediary entities that separately or collectively own or control ownership interests of the reporting company
The Corporate Transparency Act, or CTA, was enacted on January 1, 2021. It is an expansion of anti-money laundering laws and is intended to help prevent money laundering, terrorist financing, corruption, tax fraud, and other illicit activity. The CTA requires most existing and new corporate entities in the United States to file reports with the Department of the Treasury’s Financial Crimes Enforcement Network, or FinCEN. Prior to the CTA, there were no uniform beneficial ownership information reporting requirements in the United States, which hindered law enforcement’s ability to investigate entities being used for illegal purposes.
Any domestic or foreign “reporting company” must file. A “reporting company is very broadly defined as any entity that is a corporation, a limited liability company, or otherwise created by the filing of a document with a secretary of state or similar office. All corporations and LLC’s are created this way, so if you are a corporation or an LLC, this applies to you, unless exempted.
Exempted companies include:
(1) SEC-reporting companies, regulated financial services companies, including banks, credit unions, depository institution holding companies, registered securities broker-dealers, registered investment companies and investment advisers, venture capital fund advisers, and pooled investment vehicles that are operated or advised by the foregoing.
(2) Insurance companies
(3) PCAOB-registered accounting firms
(4) Tax-exempt entities
(5) Inactive entities that existed before January 1, 2020, are not engaged in active business, are not owned by a foreign person, have not had a change in ownership in the last 12 months, have not sent or received funds greater than $1,000 in the last 12 months, and do not hold any assets;
(6) Subsidiaries of certain exempt entities;
(7) Entities that employ more than 20 full-time employees in the U.S., have an operating presence at a physical office in the U.S., and demonstrate more than $5 million in gross receipts or sales on their federal income tax return (excluding receipt/sales from sources outside the U.S.) If a company falls below these thresholds in the future, a report must be filed within 30 days. An updated report is required if a reporting company later becomes eligible for the exemption.
The due date for the initial report depends on when the entity was created:
• If the company is created on or after January 1, 2024, then the initial report is due within 30 calendar days of the date the entity is created.
• If the company was formed before January 1, 2024, then the initial report is due no later than January 1, 2025.
• In other words, effective January 1, 2024, new entities will have to file a report within 30 days of their creation. Entities already in existence on January 1, 2024 have until January 1, 2025 to file a report.
Reports include information about (1) the reporting company, (2) the reporting company’s beneficial owners, and (3) “company applicants” who made the filings to create the entity. Information about the reporting company includes: the full legal name; any trade name or “doing business as” (d/b/a) name; current address; and the state where formed; federal taxpayer ID number.
Information about individual beneficial owners and company applicants includes full legal name; date of birth; current address; unique identifying number and issuing jurisdiction (e.g., U.S. passport or driver license and an image of the document with identifying number. Alternatively, individuals and entities may apply for and obtain a FinCEN identifier, which can be included on subsequent filings in lieu of this information. This could make the filing process more efficient for frequent filers.
Once an initial report is filed, it must be updated within 30 days if there is any change with respect to information previously reported. Examples of changes that would require an updated report include changes in who is a beneficial owner due to transfers of ownership or sales of additional ownership interests, a reporting company becoming exempt from the reporting requirements, transfers of ownership interests due to an owner’s death, transfers of ownership when a minor child reaches the age of majority, any changes to an identifying document previously submitted, for changes in name, address, or identifying number.
If the reporting company becomes aware of inaccuracies in a report that has already been filed, it must file a corrected report within 30 calendar days after the date on which the reporting company becomes aware or has reason to know of the inaccuracy.
Interestingly, reports filed with FinCEN will not be accessible to the public and are not subject to requests under the Freedom of Information Act. The following will have access to the information: federal agencies engaged in national security, intelligence, and civil and criminal law enforcement; The Department of the Treasury in connection with its official duties, including tax administration; state and local law enforcement agencies in connection with criminal or civil investigations. If the reporting company consents, FinCEN may also disclose information to financial institutions to assist in their anti-money laundering compliance activities.
FinCEN is currently designing and building a new IT system called the Beneficial Ownership Secure System to collect and store CTA reports. This system is not yet available, and reports will not be accepted prior to January 1, 2024.
If you have any questions now, or closer to January 2024, please call me to discuss this further. If you are a client, I do urge you to seek my assistance at least for this first filing. If you are not a client and/or choose not to seek my assistance, please be sure to consider this information and take whatever action you deem necessary.
