The Financial Crimes Enforcement Network (“FinCEN”), a division of the US Treasury Department, issued its final rules (the “Reporting Rules”) under the Corporate Transparency Act (“CTA”), establishing reporting requirements of the beneficial ownership and control of companies formed or registered to do business in the United States and defined as “reporting companies” under the CTA. The CTA became effective in 2021 as part of the Anti Money Laundering Act of 2020, and the Reporting Rules’ stated purpose is “to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on entities doing business in the United States.”
The Reporting Rules will specifically impact the private investment world as well as many owners and managers of other small businesses in the US. This is because the Reporting Rules require entities to file reports with FinCEN containing certain information about the individuals with beneficial ownership and/or substantial control of those entities. The required ownership and control information will be familiar to anyone who has disclosed beneficial ownership information to a bank or lender to obtain financing. But beginning next year, the Reporting Rules will require certain entities to self-report beneficial ownership and substantial control information directly to FinCEN as a standing requirement to do business in the United States. The Reporting Rules are not optional, and they impose significant penalties for non-compliance (monetarily and imprisonment).
While the purpose of the CTA is not to compile a publicly available corporate ownership or control database, it may seem that it effectively eliminates the privacy and anonymity features individuals desire by forming a limited liability company, a limited partnership, or other corporate entity. The information required to be reported, however, is not subject to disclosure in response to requests under the Freedom of Information Act or similar laws. FinCEN is only permitted to disclose such information to certain agencies and only for limited purposes, including, for example, to financial institutions to assist in anti-money laundering activities, and to national security, intelligence, and law enforcement agencies.
Entities to Which the Reporting Rules Apply
The Reporting Rules apply to “reporting companies,” defined as foreign or domestic entities either formed in or registered to do business in the United States through the filing of a document with a secretary of state or similar authority, and include limited liability companies, limited partnerships, corporations, etc.
The CTA has exempted several types of entities from the definition of a “reporting company,” noting that many of the exempted entity types are already subject to substantial federal and/or state regulation. With respect to small businesses, relevant exemptions include:
(1) “large operating companies,” which are companies with more than 20 employees, $5M in revenue, and a physical presence in the US; and
(2) “inactive entities,” which are companies not engaged in active business and formed before January 1, 2020, have no assets, are not owned by a foreign person, and that have not received or sent money over $1,000 or had an ownership change in the past year.
Information that Must Be Reported
Reporting companies must file a report that includes certain information about itself and each of its “Beneficial Owners” and “Company Applicants.” Beneficial Owners are generally individuals who own or control 25% or more of the entity’s ownership interests (directly or indirectly), or who exercise “substantial control” over the entity (e.g., manager of a limited liability company, general partner of a limited partnership, etc.). A Company Applicant is the individual who registers or files the formation documents for the reporting company. In addition to a manager or owner of a reporting company, a Company Applicant would also include individuals like lawyers that form or register the reporting company.
The reporting must file information including the following: full legal name; any trade name or “doing business as” name; principal place of business address; jurisdiction of formation; and taxpayer identification number.
Reporting companies must also provide the following for each Beneficial Owner and Company Applicant: legal name; date of birth; residential street address (Beneficial Owner and/or Company Applicant) or the business address (Company Applicant); and a passport or driver’s license number and a copy of the document.
The Reporting Rules require new reporting companies (formed or registered in the US on or after January 1, 2024) to file their report with FinCEN within 30 days of formation or registration within the US. Existing reporting companies (registered in the US before January 1, 2024) must file their initial report by January 1, 2025. Existing reporting companies do not need to include information on the Company Applicant. Importantly, reporting companies have 30 days to file an update when the reporting company’s information or any of its Beneficial Owner’s information has changed.
Failure to comply with the Reporting Rules and update or file initial reports can result in civil penalties of $500 per day of noncompliance and criminal penalties of up to $10,000 and 2 years imprisonment.
Impact and Going Forward
As detailed above, unless an exemption applies, the Reporting Rules will affect many US small business owners who may not even be aware of the CTA and Reporting Rules, yet will be subject to the associated obligations and potential liability. This is not a complete summary of the CTA and Reporting Rules and only highlights some of the central points. Earlier this year, FinCEN published beneficial ownership information reporting guidance, as well as FAQs on the Reporting Rules that include a Small Entity Compliance Guide. Even with such guidance, it still may be difficult for affected entities to correctly determine whether they are a “reporting company” or fall within an exemption. Managers and directors of entities are encouraged to begin planning now on how to best comply with the CTA if they haven’t already started.