By Tara Clemens
Beginning January 1, 2024, most business entities will be required to submit beneficial ownership information to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) under new Corporate Transparency Act (“CTA”) regulations. But identifying whether these requirements may apply to your business and what must be reported may surprise you. Here are five key points for the new federal reporting requirements:
- All “reporting companies” covered by this new reporting requirement must submit disclosures to FinCEN, unless exempt. A “Reporting Company” specifically includes corporations and limited liability companies. However, it also includes all other entities that are “created by the filing of a document” with the Secretary of State or a similar office under any state or tribal law. Consequently, under California law, a limited partnership is likely a “reporting company,” but a general partnership may be excluded.
- Some entities are exempt. An entity that might otherwise be considered a “reporting company,” may fall under one of the statutory exceptions and consequently not be required to report under the new regulations. There are too many exemptions to list here; however, a common factor among them is that many of the exempt entities are already subject to robust government reporting requirements, such as banks and insurance companies. Tax-exempt entities under IRC Sec. 501(c) are also exempt. Finally, inactive entities that meet certain very specific requirements are also exempt.
- Reporting Companies must disclose their “Beneficial Owners.” This does not just include partners, members, or shareholders. Anyone who has the ability to exercise “substantial control” over the entity OR is the holder of at least 25% ownership interest in the entity is considered a “beneficial owner” under the CTA regulations. Thus, many top-level officers, such as CEOs, COOs, and general managers, qualify as a “beneficial owner” and their information must be disclosed. Additionally, certain options and convertible instruments must be included in determining whether a holder meets the “25% ownership interest” threshold.
- For each beneficial owner, the disclosure must include the individual’s full legal name, date of birth, current residential or business street address, and a unique identifying number from acceptable identification such as a United States passport or a driver’s license. For entities formed after January 1, 2024, this information must also be disclosed for the entity applicant, that is, the individual who filed the documents with the Secretary of State to create or register the reporting company.
- Entities that were formed before January 1, 2024, will have one year to file the initial disclosure. Entities formed after that date will have 30 days from the date of its formation to file the initial disclosure with FinCEN. Additionally, any changes to the information reported, including correction of mistakes, must be disclosed within 30 days of discovery.
These are five key points of the new federal reporting requirements under the Corporate Transparency Act. The penalties for willful failure to report or willful false reporting include a running civil penalty of $500 per day and a criminal fine of up to $10,000 and/or up to two years’ imprisonment. If you have questions about whether your entity needs to report with FinCEN and what information should be included, contact your corporate governance attorney.