The federal Corporate Transparency Act ("CTA") will become effective January 1, 2024. Any entity created by a filing with a Secretary of State or similar office under the laws of a state or Native American tribe (as well as foreign entities registering to do business by a state or tribal filing) may be subject to the reporting requirements of the CTA, unless it is included in one of 23 exempt categories (a "reporting entity"). While business entity formation historically has been mainly a matter of state law, the CTA constitutes a major new federal regulation.
Put simply, the CTA has far-reaching implications, and all existing (and to-be-formed) limited partnerships, corporations, limited liability companies, trusts and other associations will want to evaluate whether they may be subject to its reporting requirements.
Congress adopted the CTA to confront the use of entities with concealed ownership for illegal purposes, such as money laundering and tax fraud. It is designed to require entities that are not already subject to federal regulatory oversight in some manner, or not sufficiently large (with certain employee, income and operational thresholds), to report the identities of their "beneficial owners" to the Financial Crimes Enforcement Network, a bureau of the U.S. Department of the Treasury ("FinCEN"). As a result, the new CTA reporting rules will predominantly impact small businesses and their beneficial owners. FinCEN estimated there will be approximately 32 million reporting entities in the first year of the CTA's effectiveness and an additional 5 million reporting entities each year thereafter.
Reporting entities in existence before January 1, 2024, will have until January 1, 2025, to file their required initial report. Reporting entities formed on or after January 1, 2024, will have only 90 days from formation to file the required initial reports (shortened to 30 days beginning January 1, 2025). Updated reports regarding reporting entities and beneficial owners are required within 30 calendar days of any change in the reported information. The CTA includes civil and criminal penalties for failure to file or update required reports.
Under the CTA, there are multiple filing requirements. All reporting entities (regardless of when formed) will need to file a report with FinCEN about their beneficial owners. (Beneficial owners are individuals who directly or indirectly (1) own or control at least 25 percent of the ownership interests of the reporting entity, or (2) exercise substantial control over the reporting entity. For entities created on or after January 1, 2024, the reporting entity will also need to file a report with FinCEN for up to two "company applicants." (Company applicants are individuals who file, or direct or control the filing of, an application to form a U.S. entity or to register a non-U.S. entity to do business in the U.S.) For beneficial owners and company applicants, the reported information includes each individual's name, date of birth, address, and passport, driver's license or other ID number (including the issuing jurisdiction and an image of the ID). In addition, the reporting entity itself must report its full legal name, any DBAs, its current U.S. address, its jurisdiction of formation and its tax ID number.
As noted above, beneficial owners for purposes of the CTA include not just people with significant ownership interests but also people who exercise "substantial control" over the entity. The rules for determining beneficial owners are complicated and expansive and will require thoughtful review of regulatory guidance and detailed factual analyses. Specific CTA compliance issues will likely evolve as reporting entities file reports and FinCEN supplements its existing advice. All potential reporting entities will want to establish procedures for ensuring compliance with the CTA. Select considerations include, but are not limited to, putting in place processes to (1) determine the availability of exemptions from the CTA as of January 1, 2024, and thereafter, (2) identify triggering events for becoming newly subject to the CTA, (3) assess the identities of beneficial owners, any changes in beneficial owners over time and gather information about beneficial owners to be reported, (4) ensure that reports are filed with FinCEN in a timely manner, and (5) monitor changes in previously reported information about both the reporting entity and all of its beneficial owners and submit required updates to FinCEN in a timely manner. Some of this reporting can be mitigated if a beneficial owner registers with FinCEN and takes responsibility for updating that person's information, so that each entity does not need to monitor changes in each owner's personal information.
While beneficial ownership reported to FinCEN will be stored in a non-public database, FinCEN will permit federal, state, local, and tribal officials, as well as certain foreign officials who submit a request through a U.S. federal government agency, to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will also have access to beneficial ownership information in certain circumstances, with the consent of the reporting entity.
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