Businesses Should Review and Prepare for New Corporate Transparency Act Requirements
Key Takeaways
Beginning next year, many entities will be required to (i) identify each beneficial owner of the entity; (ii) report certain personal information of such beneficial owners; and (iii) report any subsequent changes to the beneficial ownership of the entity. Failure to meet these requirements will result in substantial penalties, so businesses should prepare now for these requirements.
Overview
Beginning January 1, 2024, approximately 32 million business entities in the United States will be required to disclose to the Financial Crimes Enforcement Network (“FinCEN”) certain information related to each entity’s ownership. This will include certain personal information of every individual who has at least a 25 percent ownership interest in such entity and each individual who maintains substantial control over such entity. This new requirement will also impose reporting obligations on an additional estimated five million new entities each year when such entities are formed or registered to do business in the U.S. These new reporting requirements are the result of the Corporate Transparency Act (the “Act”) enacted by Congress on January 1, 2021, which goes into effect at the beginning of 2024.
Which Entities are Subject to the Reporting Requirements?
The Act is purposefully broad and contains limited exemptions. Accordingly, the majority of non-publicly traded corporations, LLCs, certain trusts, and similar entities with less than $5 million in annual revenue and 20 or fewer employees will be subject to the Act’s reporting requirements. The Act requires disclosure from “reporting companies” which are defined as corporations, LLCs, or similar entities (such as a partnerships and business trusts), that are created by filing a document with the secretary of state or similar office of a state or tribe. This includes both domestic and foreign companies that are registered to do business in the U.S.
The Act exempts a number of entities (more than 23 types) from the reporting requirements. Notable exempted entities include: highly regulated entities such as financial institutions; companies already subject to SEC regulation (such as publicly traded companies); entities that employ more than 20 full-time employees in the United Sates and that reported more than $5 million in gross receipts or sales on the previous year federal tax return; tax-exempt entities; public utilities; and certain inactive businesses.
What Will Entities Need to Report?
Each reporting company subject to the Act will be required to submit certain information related to the entity and such entity’s “beneficial owners,” including each beneficial owner’s name, birth date, address, and a government-issued photo ID. A beneficial owner is an individual who, directly or indirectly, (i) has an ownership interest of 25 percent or more in the entity; or (ii) exercises substantial control over the entity. Certain trusts may also be beneficial owners. When a trust is a beneficial owner, personal information of the trustee, beneficiaries, grantor, and other individuals may be required to be disclosed. Individuals are considered to exercise “substantial control” over a reporting company if they serve as a senior officer or otherwise have control or decision making power over material matters affecting the business or operation of the reporting company. Determining whether an individual exercises substantial control over the company is not purely objective and will need to be analyzed on a case-by-case basis. Each reporting company will be required to identify at least one beneficial owner (e.g. an entity with no individuals owning an interest of at least 25 percent will still be required to identify at least one individual who exercises “substantial control” over the entity).
Additionally, “company applicants” of reporting companies will be required to disclose certain personal information. A company applicant is both the individual who directs the filing of, and the individual who actually files either (i) an application to form an entity under the laws of a state or tribe, or (ii) a document to register or apply to register an entity formed under foreign law to do business in the U.S. For example, a company applicant would include both the attorney or paralegal who files the application to form the entity and the corporate officer, director, or other individual who directs such filing.
Individuals who will be required to regularly disclose their beneficial ownership can apply for a FinCEN Identifier which will require a one time disclosure with FinCEN. Once obtained, the FinCEN Identifier will be all that is required to disclose as a beneficial owner or company applicant.
Next Steps
Existing entities and entities that are formed prior to January 1, 2024 will be required to file an initial report before January 1, 2025. Entities that are formed after January 1, 2024 will be required to file an initial report within 30 days after formation. Reporting companies will also be required to report any changes, including changes related to beneficial ownership, within 30 days of such change. Because FinCEN is still developing its filing system, the process for filing initial reports and reporting changes is yet to be determined.
With 2024 fast approaching, it is important to prepare now to comply with the Act. Entities should begin working to determine whether they are subject to the reporting requirements, identifying beneficial owners, and advising such beneficial owners of their disclosure obligations. For questions, please contact a member of Koley Jessen’s Corporate Department.
Special thanks to Law Clerks, Morgan Herchenbach and Kristin Thompson, in the preparation of this article.