By Danny Little, Noland, Hamerly, Etienne & Hoss
As published in Coastal Grower magazine, Spring 2024
In 2021, Congress passed a new law called the Corporate Transparency Act (“CTA”) as part of the Anti-Money Laundering Act of 2020, aimed at increasing the transparency of small companies throughout the country.
The CTA requires most small business entities (called “reporting companies”) to report certain information about key individuals related to the reporting company (called “beneficial owners”) and for new reporting companies, their creators (called “company applicants”), to the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury. This beneficial ownership and company applicant information will be stored in a FinCEN database and utilized to combat the use of shell companies for money laundering, terroristic activities, and other unlawful and fraudulent purposes.
Reporting obligations under the CTA begin January 1, 2024. Reporting companies formed on or after January 1, 2024 must report all required information within 90 calendar days after formation of the entity (beginning January 1, 2025, new entities will only have 30 calendar days after formation). Reporting companies formed prior to January 1, 2024 must report their information by January 1, 2025.
As noted above, reporting companies must disclose certain information regarding “beneficial owners” and “company applicants,” including, but not limited to, their names, birthdates, residential addresses, and a government-issued identification number (e.g., a driver’s license or passport number) with a scan or photo of the identification.
So what do these terms – “reporting company”, “beneficial owner”, and “company applicant” mean?
A “reporting company” includes any domestic entity created by filing a document with the secretary of state (or similar office) in any US state or any foreign entity that is formed under the laws of a foreign jurisdiction and has registered to do business within the United States. This includes corporations, limited liability companies, limited partnerships and limited liability partnerships. Certain entities that are already subject to regulations requiring disclosure of beneficial ownership information are exempt from the “reporting company” definition, including, but not limited to, publically traded companies, public utilities, tax exempt entities, banks and insurance companies. In addition, certain “large operating companies” are exempt if they have more than 20 full time employees, have a physical presence in the United States, and filed a federal tax return or informational return for the prior year reporting more than $5 million in gross receipts or sales.
A “beneficial owner” is any individual who directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise: (i) exercises substantial control over the entity; or (ii) owns or controls at least 25% of the ownership interests of the entity. This can include a large number of persons, including shareholders and directors for corporations, members and managers for limited liability companies, and officers and other key decision-making employees for all types of entities. A settlor, trustee or beneficiary of a trust can be considered a beneficial owner if the trust holds an interest in a reporting company. Because so many individuals may be required to report, you may want to update your governing documents to reflect that all beneficial owners will provide their required information.
A “company applicant” is an individual who files a document to form a domestic entity or registers a foreign entity to do business in the United States. Often, this will be the attorney, paralegal, or accountant that filed the articles of incorporation, articles of organization, or other formational document for the entity. If you form a new entity, be sure to ask the company applicant for their information (or their FinCEN identifier) so that you can include it in the reporting company’s beneficial ownership report.
In addition to the initial reporting, all reporting companies must also update their beneficial ownership information within 30 days after any change in beneficial ownership or the information relating to a beneficial owner or the reporting company. Further, a reporting company is also obligated to correct inaccuracies in the information previously reported within 30 days after the reporting company becomes aware of the inaccuracy.
It is critical that all reporting companies complete and keep current their beneficial ownership reports: The CTA implementing regulations make it “unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information . . . or to willfully fail to report complete or updated beneficial ownership information to FinCEN.” Failure to timely, accurately, or fully complete a report or provide an updated report may subject the company and its beneficial owners to penalties, including daily civil penalties of up to $500 per day, a criminal fine of up to $10,000, and imprisonment up to two years.
For more information about the beneficial ownership report, you can visit FinCEN’s website at https://www.fincen.gov/boi. The website has thorough FAQs, tutorials for completing the report, and both an online portal for completing the report and a PDF version of the report if you prefer to review or complete it offline.
This article is intended to address topics of general interest and should not be construed as legal advice. © 2024 Noland, Hamerly, Etienne & Hoss