The U.S. Financial Crimes Enforcement Network (FinCEN) recently issued rules implementing the reporting requirements of the federal Corporate Transparency Act (CTA). The CTA was enacted as part of broader national security legislation to deter money-laundering, corruption, tax evasion and other illegal activities.The CTA requires certain companies to report identifying information about any person who is a “beneficial owner” or “company applicant” of the company.
What companies must report?
The CTA requires “reporting companies” to report certain identifying information to FinCEN.Reporting companies are domestic or foreign entities that file a document with any state’s secretary of state or similar office to create themselves or do business in the state.In general, corporations (both S-Corporations and C-Corporations) and LLCs are considered reporting companies.There are 23 exceptions to the reporting requirement, exempting mostly large operating companies with over $5 million in gross receipts and companies that already have certain reporting requirements like investment companies and others regulated by the SEC, banks, and 501(c) tax-exempt entities. Subsidiaries of exempt companies are also exempt.
Who are beneficial owners and company applicants?
Reporting companies are required to report the personal information of both “beneficial owners” and “company applicants” to FinCEN.Beneficial owners are those who (i) directly or indirectly own or control 25% or more of the ownership interest of a reporting company or (ii) directly or indirectly exercise substantial control over the company.Those who have substantial control over a company include, without limitation, those who are authorized to make major expenditures, merge or dissolve the company, or approve the operating budget. Generally, this will include senior officers, board members, and certain managers of the company. For trusts that meet the 25% test, the rules for determining the beneficial owners and substantial control are complex.In general, certain beneficiaries and all individuals who make decisions, like trustees and trust protectors, are likely required to disclose their personal information. Company applicants are those who directly filed or were primarily responsible for the filing of the document that created the company.
What information must be reported to FinCEN and what will be done with it?
Reporting companies are required to report the name, date of birth, address, and driver’s license or passport of any beneficial owner and company applicant.Information reported to FinCEN will be available to the IRS, federal agencies engaged in national security, intelligence, and law enforcement.Each reporting company is required to report its full legal and trade names, the company’s address, the state where the company is registered and the IRS Taxpayer Identification Number.Further, reporting companies will have the responsibility of updating their report within a set number of days if there are any changes concerning beneficial owners or company applicants.
What are the deadlines to comply and what are the penalties for noncompliance?
With some exceptions, new entities formed on or after January 1, 2024, will be required to comply with the CTA.Information must be reported within 30 days of entity formation or any change in reported information.This 30-day window may be extended as the IRS has proposed a 90-day reporting period.By January 1, 2025, every entity formed prior to January 1, 2024 (no matter how long ago) will be required to bring itself into compliance if that entity is still in existence. In addition, any changes to the beneficial ownership of a reporting entity will need to be reported on an on-going basis. Failure to comply with the CTA’s requirements may lead to penalties of $500 per day up to $10,000, and/or imprisonment up to 2 years.
What are my next steps?
The CTA is a significant change in federal law.If you or a family member has an ownership interest in an entity, then you will need to determine whether you (and/or such entity) must comply with the CTA.For details on the CTA, and to determine if your entity may be exempt, you may use the interactive Compliance Guide provided by FinCEN. Katz Teller is prepared to assist its clients in determining if an entity is exempt or must report, and we will assist with reporting for entities that must comply.Given the number of entities that will be required to report, it is important for clients to notify us that our assistance is needed. Please email us at cta@katzteller.com or contact your Katz Teller attorney if you want help navigating these reporting requirements.