On January 1, 2024, the Corporate Transparency Act (“CTA” or the “Act”) went into effect, requiring most private companies to file informational reports with the Financial Crimes Enforcement Network, or “FinCen”, a bureau of the U.S. Department of the Treasury. The Act is designed to combat money laundering, terrorism funding and other illicit activities by collecting the beneficial ownership information of most smaller, closely held domestic or foreign companies operating in the United States. Almost every small family business will need to report to FinCen, with more than 32 million entities estimated to be affected. The Act has significant penalties for non-compliance, so it is important for businesses to understand what the CTA is and what is required to be reported.
Who Needs to File
The CTA requires that all “Reporting Companies” file information identifying their beneficial owners to FinCen and to update the information if it changes. A “Reporting Company” is an entity created by filing a document with a secretary of state or any similar office under state law. This broad definition affects corporations, limited liability companies, limited partnerships, professional corporations and similar entities, including certain foreign entities and real estate holding companies. There are exemptions, mostly for entities already required under law to submit similar information, such as publicly traded companies, banks, tax-exempt §501(c) corporations, and entities that (1) employ 20 or more full-time employees, (2) reported $5,000,000 in receipts or sales on the entity’s tax return for the previous year and (3) have a physical office in the United States.
Reported Information
A “Beneficial Owner” is an individual who, directly or indirectly, (1) owns or controls at least 25% of the ownership interests of the entity, or (2) exercises substantial control of the entity. This includes senior officers (President, CEO, CFO, or any other officer, regardless of title, who performs a similar function) or those who otherwise have substantial influence over the entity’s important decisions. In addition to information identifying Beneficial Owners, entities formed after January 1, 2024 must report the same information on each “Company Applicant”, who is the person that files the formation documents to create the Reporting Company and the person responsible for directing or controlling the filing of the formation documents.
A Reporting Company must report the following information to FinCEN for each Beneficial Owner (and Company Applicant):
a) Full legal name;
b) Date of birth;
c) Current residential or business street address; and
d) A unique identifying number from a passport, driver’s license, or other government issued identification document along with a copy of the document, or a FinCEN ID, which can be obtained from FinCen through the following website: https://fincenid.fincen.gov/landing.
In addition, Reporting Companies must file updated reports within 30 days of any changes in the above information.
When Do You Have to File
All Reporting Companies created prior to January 1, 2024 must file their Beneficial Ownership information by January 1, 2025. Reporting Companies created on or after January 1, 2024 must file their Beneficial Ownership and Company Applicant information within 90 days of formation. For Reporting Companies created in 2025 and after, there is a 30 day deadline to file.
Any Reporting Company willfully failing to provide Beneficial Ownership information or failing to provide complete or updated information to FinCen, could be liable for civil penalties up to $500 for each day the violation continues and criminal penalties of up to two years in prison and fines of up to $10,000.
Most of the estimated 32 million businesses covered by the CTA are small businesses without their own in-house counsel. If you have any questions or concerns about how to comply with the Act, we are happy to assist you.