Feb. 7, 2024

This paid piece is sponsored by Woods, Fuller, Shultz & Smith PC.

Written collaboratively by Woods Fuller shareholders

To counter money laundering, the financing of terrorism and other illicit activity, Congress enacted the Corporate Transparency Act, which went into effect Jan. 1. The CTA creates significant reporting requirements for most privately held companies, including corporations, limited partnerships, limited liability partnerships, limited liability companies and certain statutory trusts.

Who is required to report?

Any “reporting company” that is created by the filing of a document with the secretary of state or similar office, or formed under the laws of a foreign country and registered to do business by filing a document with any secretary of state or similar office in the U.S.

Are there exemptions from reporting?

Yes, but only for certain entities such as publicly traded companies; “large operating companies,” meaning those that employ more than 20 employees on a full-time basis in the U.S., have an operating presence at a physical office in the U.S. and generate more than $5 million in annual gross receipts or sales as reported on the entity’s tax or informational return; or other highly regulated companies specifically enumerated by the CTA — 23 in total; for example, a wholly owned subsidiary of an exempt entity.

Companies initially exempt that later fall out of compliance with the exemption will have 30 days to become a reporting company by filing the necessary reports.

Where are reports required to be filed?

All reports are filed electronically with the Financial Crimes Enforcement Network, a division of the U.S. Department of Treasury, at fincen.gov/boi.

When are reports required to be filed?

For reporting companies created on or after Jan. 1, 2024, reports must be filed within 90 days of receipt of notice that the entity is effective or registered to do business; or when the secretary of state or similar office provides public notice that the reporting company was created or registered to do business, whichever is earlier.  After Jan. 1, 2025, reports must be filed within 30 days.

For reporting companies created before Jan. 1, 2024, reports must be filed by Jan. 1, 2025.

What information is required to be reported?

A reporting company must report its full legal name and trade name, current street address, jurisdiction of legal organization and IRS taxpayer identification number.

Reporting companies also must report the following information about their beneficial owners — and for any newly created reporting company after Jan. 1, 2024, their company applicants: their full legal name, date of birth, current residential address, a nonexpired U.S. identification document such as a driver’s license or passport and an image of the beneficial owner and applicant in the document used for identification. In lieu of this information, a reporting company can report a beneficial owner’s FinCEN Identifier, which is obtained by the beneficial owner through his or her separate filing with FinCEN.

A “beneficial owner” is any individual exercising substantial control of a reporting company or who has or controls at least 25 percent of the ownership interest in a reporting company. Substantial control will require a reporting company to include all senior executive officers, individuals who have the authority over the appointment or removal of senior officers and any individual who has substantial influence over major decisions such as merger, sale of assets, reorganization  major expenditures or amendments to governing documents as a beneficial owner.

In many cases, a reporting company will need to conduct a look-through of an entity — corporation, LLC, partnership, trust — that is a member or shareholder of the reporting company and potentially report these individuals as “beneficial owners” of the reporting company even though the ownership is indirect. There is also a specific rule for trusts in determining whether a trustee, beneficiary or grantor is a beneficial owner.

A “company applicant” is an individual who directly files the document that creates the reporting company or qualifies it to do business and, if there is more than one person involved in the filing, the individual who is responsible for directing or controlling the filing.

When will initial reports need to be updated?

Updates must be made within 30 days after there is a change to previously reported information or a reporting company becomes aware that previously reported information is inaccurate. For example, if a beneficial owner transfers ownership to another individual, the reporting company will have 30 days to submit an updated report.

What are the penalties for failing to report or inaccurate reporting?

A reporting company that fails to file timely may be assessed a $500 penalty for each day the report was delayed. The CTA also provides criminal penalties of a $10,000 fine or up to two years in prison when a reporting company willfully fails to report complete or updated information or willfully provides false or fraudulent information.

What to do now?

Existing or proposed companies should have a firm understanding of the requirements of the CTA, determine who will have the duty to monitor compliance and file reports, assess and establish procedures for determining the identity of beneficial owners and collection of the necessary information to report and ensure any existing or proposed governance documents such as operating agreements or shareholder agreements will adequately address the CTA.

Please contact Woods Fuller with any questions or for assistance.