Federal law will soon require for the first time that certain companies disclose personally identifiable information about themselves and their beneficial owners and company applicants to U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). This disclosure obligation, mandated by the Corporate Transparency Act (CTA), will require these companies to identify their beneficial owners and company applicants based on definitions developed by federal regulators. Because these reporting obligations begin on January 1, 2024, companies should begin taking steps now to prepare themselves for this new regulatory regime.
Reporting Companies
The CTA requires a “reporting company” to disclose beneficial ownership information to FinCEN. A reporting company can be either a “domestic reporting company” or a “foreign reporting company.” A domestic reporting company includes a domestic corporation, limited liability company, or “other similar entity” created by a filing with a state department or similar office. A foreign entity registered to conduct business in the United States is considered to be a foreign reporting company. The CTA exempts 23 categories of entities, which are mainly entities already subject to federal regulation, such as public companies and financial institutions.
Beneficial Owner Information
A reporting company will have to disclose information regarding its beneficial owners and, depending on when the reporting company was created, its company applicants. A beneficial owner is an individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of the reporting company. Generally, an individual exercises substantial control over a reporting company if, among other requirements specified in the CTA, that individual is a senior executive officer, has authority to appoint or remove a senior officer or a majority of the board of directors, or is able to make or direct important decisions for the reporting company. That individual does not have to own or control any ownership interests of the reporting company.
Unlike reporting companies, there are only five exemptions detailing who does not qualify as a beneficial owner. These exemptions include individuals who are minors or creditors of the reporting company.
A company applicant is (i) an individual who directly files the document that either registers or creates the reporting company and (ii) if more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing. A reporting company, however, will not be required to file information for a company applicant if the company was registered or created before January 1, 2024.
Required Disclosures
A reporting company will have to make disclosures about itself, its beneficial owners, and, if applicable, its company applicants. Regarding its beneficial owners and company applicants, the reporting company will have to disclose each individual’s (i) full legal name, (ii) date of birth, (iii) address, and (iv) a unique identifying number or FinCEN identifier (an identification number that FinCEN will issue upon application). If an exempt reporting company, as described by CTA, is a beneficial owner, then the reporting company need only identify the name of the exempt entity.
The reporting company will also have to disclose (i) its full legal name, including any trade name, (ii) its current address located in the United States, (iii) the jurisdiction where it was formed, (iv) the jurisdiction where the company first registered (for foreign reporting companies only), and (v) a tax identification number.
If any of the above information about the reporting company or beneficial owners changes, the reporting company is required to update that information with FinCEN not more than 30 days after a change occurs.
Applicable Deadlines
The CTA provides the following deadlines for filing an initial report:
- For a domestic or foreign reporting company created on or after January 1, 2024, the domestic reporting company must file a report within 30 calendar days after the entity was formed or, in the case of a foreign reporting company, registered to do business in the United States.
- Reporting companies in existence before January 1, 2024 must file a report no later than January 1, 2025. These companies will thus have a one-year period within which to file their initial report.
- For any entity that was exempted under the CTA and no longer qualifies for an exemption, it must file a report within 30 calendar days after the date that it no longer meets the criteria for any exemption.
Failure to Make Required Disclosures
The CTA provides penalties for a reporting company that willfully fails to make the required reports listed above. If a reporting company willfully fails to report the beneficial ownership information, or willfully provides false or fraudulent beneficial ownership information, it could face civil and criminal penalties, including a fine of up to $250,000 or imprisonment not exceeding five years. More severe penalties apply for the unauthorized disclosure or use of beneficial ownership information.
Access to Beneficial Ownership Information
FinCEN will create a non-public, secure registry housing the reporting company’s information and information on the reporting company’s beneficial owners and company applicants. Subject to certain safeguards and controls, FinCEN will disclose certain information in the new database to authorized government authorities and financial institutions.
Next Steps
The CTA and its implementing regulations raise a number of fact-specific questions that will entail an analysis of the regulatory definitions and require various judgment calls. Because the CTA’s effective date looms on the horizon, owners of small businesses and complex structures should begin preparations now to determine how best to comply with the CTA and its implementing regulations. Please feel free to reach out to Venable to discuss a compliance strategy for your reporting company and its beneficial owners and company applicants.