CORPORATE TRANSPARENCY ACT: REPORTING REQUIREMENTS TAKE EFFECT JANUARY 1, 2024
December 15, 2023
CORPORATE TRANSPARENCY ACT:
REPORTING REQUIREMENTS TAKE EFFECT JANUARY 1, 2024
Reporting required by the Corporate Transparency Act will take effect on January 1, 2024. Most small companies will have new reporting requirements with respect to certain owners and management. This article provides a quick overview of the new reporting requirements.
WHAT IS THE CORPORATE TRANSPARENCY ACT?
In 2021 Congress enacted the Corporate Transparency Act, 31 USC § 5336 (the “Act”), as part of legislation targeting money laundering in the U.S. The Act was passed to enhance transparency of the ownership and control of shell companies used in financial crimes. Unless an exemption applies, both existing and newly formed “reporting companies” will be required to submit certain management and ownership information to the Financial Crimes Enforcement Network (“FinCEN”) arm of the U.S. Treasury.
WHO IS REQUIRED TO REPORT?
All “reporting companies” are required to report. The Act defines reporting company as a corporation, limited liability company or other similar entity that is created by filing of a document with a secretary of state or similar office under the laws of a State or Indian Tribe (this also includes entities formed under the law of a foreign country and registered to do business in the U.S. with any of the foregoing offices).
The Act exempts from the definition of “reporting company” 23 specific entities that are already heavily regulated, including for example, banks, credit unions, public utilities, publicly-traded companies, insurance companies, and subsidiaries of certain exempt entities. Two significant exemptions to the reporting company definition include: (1) tax-exempt entities with active 501(c) status, and (2) large operating companies that (i) employ more than 20 employees on a full-time basis; (ii) report more than $5,000,000 in gross receipts on a consolidated basis in the prior year; and (iii) have physical operations located in the U.S.
Most small companies will not fall into an exemption and will be subject to the Act’s reporting requirements.
WHAT NEEDS TO BE REPORTED?
The report includes: (i) the reporting company’s full legal name, trade name(s), full street address of its principal place of business, its state of formation/ incorporation, and its taxpayer identification number; and (ii) each beneficial owner’s full legal name, date of birth, current residential street address, and an identifying number (such as passport, driver’s license or state issued ID number, including a photocopy of such document). “Beneficial owner” is defined as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, exercises substantial control over the entity (i.e., management, senior officers or anyone with authority to direct the reporting company’s affairs), or owns 25% or more of the ownership interests in the entity.
Beneficial owners who will be making numerous filings can obtain a FinCEN identifier that can be used in lieu of submitting personal information in each filing.
For reporting companies formed, registered or incorporated on January 1, 2024 and after, in addition to the personal information of each beneficial owner, the personal information for the “company applicant” will also need to be submitted – with the exception that instead of a residential street address, the company applicant must submit its business street address. “Company applicant” is defined as the individual who directly files the document that creates the reporting company, or has authority in directing someone to file such document.
WHEN IS REPORTING DUE?
FinCEN will not accept any reporting until January 1, 2024.
If your entity qualifies as a reporting company, it will need to file an initial report as follows: (i) for entities formed, registered or incorporated on or prior to December 31, 2023, the initial report must be filed on or before December 31, 2024; and (ii) for entities formed, registered or incorporated on or after January 1, 2024, the initial report must be filed 30 days after confirmation notice of formation, registration or incorporation is received or made public.
Additionally, an updated report must be filed within 30 days of any change in the information that was previously submitted in the initial report (i.e., after a sale, redemption, cross-purchase, death, change in management, etc.).
ARE THERE PENALTIES FOR NON-REPORTING?
Yes. The willful failure to report or update changes in information previously provided could result in civil fines of up to $500 per day for each day that a violation continues, and could result in criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.
CONCLUSION
Owners should determine whether an exemption applies for entities formed before December 31, 2023. If not, owners should begin gathering the necessary beneficial ownership information and report to FinCEN prior to December 31, 2024. After January 1, 2024, if you intend to form an entity, you should gather beneficial ownership information prior to filing formation documents to ensure timely reporting. Please reach out to us if there is a question about how the Act might impact you or your company, a company you anticipate forming, or need assistance filing a required report under the Act.