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December 12, 2022
Hunter Traynor, Esq.
This article discusses the Corporate Transparency Act (the “Act”), which was enacted by Congress in January 2021. The Act implements reporting requirements for most business entities (“businesses”) created in the United States. The crux of the Act is Congress’s attempt to combat money laundering and related illicit activities through the disclosure of businesses’ “beneficial owners.”
The Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) is the agency that will receive information reported pursuant to the Act. On September 20, 2022, FinCEN released the first of three final rules implementing the Act. The remainder of this article highlights the main reporting requirements outlined in this first set of rules and discusses considerations for both current and future businessowners.
What types of businesses are required to report?
In general, all businessowners should assume the Act applies to their business, including businesses formed to hold real estate, conduct farming operations, and provide products and services on “Main Street.” Congress painted with a broad brush. First, the Act applies to for-profit businesses that are created through a state-level filing, i.e., a state Secretary of State. In general, this covers almost all business entities except for general partnerships and certain trusts. Regardless of the business form, the Act then provides twenty-three exemptions based on size and industry. This includes an exemption for large businesses, defined as businesses with 1) more than twenty full-time employees; 2) more than $5,000,000 in yearly gross receipts; and 3) a physical operating presence in the United States.
The Act also exempts nonprofits and certain heavily regulated businesses like publicly traded companies, banks, insurance companies, and public utility companies. The rationale behind these industry-specific exemptions is that the federal government already collects detailed ownership information for these industries. Again, despite the twenty-three exemptions, business owners should operate under the assumption that the Act applies to their businesses, unless advised otherwise by their attorney.
What type of information must be reported?
If the Act applies to a business, the business must report to FinCEN its 1) full legal name; 2) any trade names it uses; 3) its current registered address; 4) the jurisdiction in which it operates; and 5) its employer identification number (EIN).
The Act also requires that a business report identifying information for every “beneficial owner” of the business. A beneficial owner is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (another broad brush stroke) 1) exercises “substantial control” over the business; 2) owns or controls at least 25% of the ownership interests in the business; or 3) receives “substantial economic benefit” from the assets of the business. FinCEN’s final rule better defines “substantial control” and “substantial economic benefit,” though the contours of these terms are beyond the scope of this article. The Act exempts certain individuals from the beneficial ownership reporting requirements, including minors and those who receive a business interest solely through inheritance.
Every beneficial owner of a business must report 1) their full legal name; 2) their date of birth; 3) their residential address; and 4) a photocopy of a driver’s license, passport, or other state-issued identifying document. These requirements—namely requirement 4—will impose practical concerns for all businesses covered by the Act. Perhaps most practically concerning, if any of this information changes for a beneficial owner of a business, the business must report the updated information within 30 days of the change.
When do the reporting requirements begin?
All businesses created after January 1, 2024, must submit the required information within 30 days of receiving notice of their creation from the Secretary of State.
All businesses created before January1, 2024 will have until January 1, 2025, to submit the required information. Again, all active businesses are required to comply with the Act regardless of if they were formed prior to the Act.
What are the penalties for noncompliance?
Certain willful violations of the Act may result in civil and criminal penalties, including civil fines of $500/day, criminal fines of up to $250,000, and up to (5) years in prison. The Act includes a 90-day safe harbor to make corrections to good faith inaccuracies.
What is next?
Be aware that January 1, 2024, will be here before we know it. In the meantime, all (current or future) businesses good first step would be to create an internal record of beneficial owners along with the information required by the Act. This will prevent last-minute scrambling to fax driver’s licenses of owners and obtain residential addresses, especially if a partial business owner lives across the country.
The Firm’s business services team is at work to accommodate the requirements imposed by the Act. We will continue to circulate information as we monitor further guidance issued pursuant to the Act. Please do not hesitate to contact your attorney if you have any immediate questions or concerns.
