As of now, beginning on January 1, 2024, a new United States regulatory requirement is scheduled to take effect, impacting millions of new and existing businesses. The Corporate Transparency Act (“CTA”) will require small businesses to file information about themselves and the individuals who formed, own, and control them with the United States Treasury Department. Failure to follow the CTA may result in civil and criminal liability for business owners, including civil fines of $500 a day and criminal fines up to $250,000 and up to five (5) years in prison.
Congress enacted the CTA as part of the Anti-Money Laundering Act of 2020. On December 7, 2021, the United States Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) proposed regulations seeking to implement the “beneficial ownership information” requirement of the CTA. A key provision of the CTA requires certain business entities to disclose to FinCEN their “beneficial owners” and other identifying information. The CTA is designed to prevent individuals from abusing legal entities to conceal proceeds of corrupt criminal acts, including money laundering. A driving factor behind the proposed regulations is for the United States to be aligned with international anti-money laundering standards.
What Types of Business Entities Have to File a Report?
Reporting companies include corporations, limited liability companies, other entities created by filing a document with a state or tribal authority, or foreign entities operating in the United States. Generally, the entities that are exempt from filing are entities that are already subject to federal or state regulation where the owner’s information is already disclosed, such as banks or nonprofit organizations. Larger operating companies are also exempt from filing a report with FinCEN. The CTA definition for a large operating company is, generally, a company with 20 or more employees with $5,000,000 in gross receipts with a physical office space in the United States.
What Must be Reported?
Reporting companies must report the following information: (1) the company’s full name; (2) any trade name or d/b/a’s; (3) the company’s street address; (4) the jurisdiction of formation; and (5) IRS taxpayer ID. Also, each reporting company must report each beneficial owner and the company applicant’s: (1) name; (2) birthdate; (3) address; and (4) unique identifying number from an acceptable identification document including a state issued ID, passport, or a FinCEN unique ID.
What Is a Beneficial Owner?
A “beneficial owner” is “any individual who directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise (1) exercises substantial control over the entity; or (2) owns or controls not less than 25 percent of the ownership interests of the company.” This is a broad definition intended to cover all individuals who influence a company.
Although substantial control is not defined in the CTA, FinCEN has set forth three indicators of substantial control: the individual (1) serves as an officer of the company; (2) has authority over the appointment or removal of any officer or dominant majority of the board of directors or similar reporting body of the company; or (3) has direction, determination or decision of, or influence over important matters of the company, for example, the sale of all of the company’s assets. Business owners should be aware that this test leaves FinCEN with substantial discretion to decide who qualifies as having “substantial control.”
An individual who owns or controls 25% or more of the company is deemed to be a beneficial owner under the CTA. For foreign entities, the individual who files the application or document that registers the company to do business in the United States would be a beneficial owner under the CTA.
So Now What?
Every business owner must evaluate whether their business qualifies as a reporting company under the CTA. If the business owner deems that they are a reporting company, then they have one (1) year to make the initial report to FinCEN once the regulations take effect. If a company makes a change that would result in a new beneficial owner, then the company has thirty (30) days to report the change to FinCEN. It is imperative that business owners have a system in place to address and monitor any such change.
Additionally, the CTA could increase the cost of forming new business entities. Companies formed after the regulations take effect have fourteen (14) days to prepare the FinCEN report or risk incurring the significant fines and penalties. The time and related costs necessary to file the FinCEN reports may increase the formation costs.
We understand this can be overwhelming, so if any business owner is unsure if their company is a reporting company or has any question about the CTA, please do not hesitate to contact Gutwein Law. The FinCEN regulations are new and there may be several unknowns, but we are tracking the regulations and are equipped to handle your questions.
