The Corporate Transparency Act: New Reporting Obligations Starting in 2024
The Corporate Transparency Act (“CTA”), which takes effect on January 1, 2024, was enacted with the goal of enhancing transparency in corporate ownership, as part of an effort to combat illicit actors from using shell companies to hide their identities and launder money. The regulations are intended to protect U.S. national security, provide critical information to law enforcement, and to promote financial compliance. As a result, starting in 2024, millions of entities will be required to report certain information, including information regarding an entity’s beneficial ownership, with the Financial Crimes Enforcement Network (“FinCEN”).
This article is intended to provide an overview of the reporting requirements mandated by the CTA.
What entities will be required to report information to FinCEN?
Entities required to report information to FinCEN are called reporting companies. There are two types of reporting companies:
- Domestic reporting companies are corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
- Foreign reporting companies are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.
There are 23 types of entities that are exempt from the reporting requirements. Examples of such exempt entities include certain banks, credit unions, governmental authorities, insurance companies, and tax-exempt entities.
What do reporting companies need to report?
The information that needs to be reported depends on when the company was created or registered.
- If a reporting company is created or registered on or after January 1, 2024, the reporting company will need to report information about itself, its beneficial owners, and its company applicants.
- If a reporting company was created or registered before January 1, 2024, the reporting company only needs to provide information about itself and its beneficial owners. The reporting company does not need to provide information about its company applicants.
What information will a reporting company have to report about itself?
A reporting company will have to report:
- Its legal name;
- Any trade names, “doing business as” (d/b/a), or “trading as” (t/a) names;
- The current street address of its principal place of business if that address is in the United States (for example, a U.S. reporting company’s headquarters), or, for reporting companies whose principal place of business is outside the United States, the current address from which the company conducts business in the United States (for example, a foreign reporting company’s U.S. headquarters);
- Its jurisdiction of formation or registration; and
- Its Taxpayer Identification Number (or, if a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of the jurisdiction).
What information will a reporting company have to report about its beneficial owners and company applicants?
For each individual who is a beneficial owner or company applicant, a reporting company will have to provide:
- The individual’s name;
- Date of birth;
- Residential or business address; and
- An identifying number from an acceptable identification document such as a passport or U.S. driver’s license, and the name of the issuing state or jurisdiction of identification document.
The reporting company will also have to report an image of the identification document used to obtain the identifying number in item 4.
Note that an individual may request a “FinCEN identifier” from FinCEN, which FinCEN will issue after the individual provides the above information. Once a beneficial owner or company applicant has obtained a FinCEN identifier, reporting companies may report it in place of the otherwise required four pieces of personal information about the individual in its reports to FinCEN.
Who is a beneficial owner of a reporting company?
A beneficial owner is an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests. It is important to understand that beneficial ownership may be held directly or indirectly.
An individual can exercise substantial control over a reporting company in four different ways: (1) the individual is a senior officer (e.g., the company’s president); (2) the individual has authority to appoint or remove certain officers or a majority of directors (or similar body) of the reporting company; (3) the individual is an important decision-maker for the reporting company; or (4) the individual has any other form of substantial control over the reporting company. Note that a trustee of a trust or similar arrangement may exercise substantial control over a reporting company.
Any of the following may be an ownership interest: equity, stock, or voting rights; a capital or profit interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership. A reporting company may have multiple types of ownership interests.
The CTA also provides for certain exceptions to the beneficial owner definition.
Who is a company applicant?
Only the following individuals qualify as company applicants:
- The individual who directly files the document that creates or registers the company; and
- If more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing.
Updating reports
If there is any change to the required information about a reporting company or its beneficial owners in a beneficial ownership information report that the reporting company filed, it must file an updated report no later than 30 days after the date of the change.
Changes to previously reported information about a company applicant need not be reported.
How does a reporting company report its information to FinCEN?
The form to report beneficial ownership information is not yet available. Once available, information about the form will be posted on FinCEN’s beneficial ownership information webpage.
Disclaimer
This Legal Update / Bulletin is for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. This update should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
Authors
& Katrina Hermosillo, Paralegal
