By Matthew Kipnis with Joseph Milizio
Beginning in 2024, most small businesses are required to file an ownership report with the Department of the Treasury’s Financial Crimes Enforcement Network.
Congress recently passed the Corporate Transparency Act (“CTA”). The CTA requires various business entities, primarily smaller ones, to file a Beneficial Ownership Information Report with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), identifying the entities’ “Beneficial Owners.” Beneficial Owners are individuals or entities that either possess at least a 25% ownership interest in the subject entity or directly or indirectly exercise substantial control over the subject entity.
The CTA is part of the wider Anti-Money Laundering Act of 2020, designed to combat laundering and other forms of illegal financial activity, including terrorism, by enabling law enforcement agencies to uncover the individuals behind LLCs, corporations, and other entities.
While it also authorizes FinCEN to share ownership information with other government agencies, as well as financial institutions under certain circumstances, the database of beneficial ownership information will not be publicly available.
WHO IS REQUIRED TO FILE THE REPORT
Both domestic and foreign companies operating in the US are required to file the report. The CTA defines a “domestic reporting company” as a corporation, limited liability company (LLC), or other entity registered with the Secretary of State or similar office.
The CTA doesn’t define “other entity,” but FinCEN has issued guidance suggesting this will include limited liability partnerships (LLP), business trusts, and most limited partnerships.
WHO ISN’T REQUIRED TO FILE THE REPORT
The CTA has 23 exempt entities that will not be required to file the report. These include companies already subject to federal or state regulations that require them to provide a regulatory body with beneficial ownership information (banks, insurance companies, accounting firms, publicly traded companies, tax-exempt entities, etc.) as well as companies with more than 20 full-time employees, which operate from a physical office in the US, and have more than $5 million in gross revenue evidenced by the filing of the prior year’s tax returns. Subsidiaries of exempt entities are also exempt.
As a result, the requirement to file the report is mostly being imposed on small businesses.
WHEN ARE BUSINESSES REQUIRED TO REPORT
The CTA is effective January 1, 2024. All domestic reporting companies created or registered beginning that date will be required to file their report within 30 days of formation, creation, or registration.
Companies in existence prior to the effective date will be required to file their report no later than January 1, 2025.
WHAT’S NEEDED IN THE REPORT
The Report will need to contain information about both the company and its owners. The following information will be required for a company:
- Company name and any trade or DBA (doing business as) names.
- Physical address of its principal place of business.
- Its jurisdiction of formation.
- Its IRS Taxpayer Identification number.
Foreign companies have additional reporting requirements.
For a company’s Beneficial Owners, the following information will be required:
- Full legal name.
- Date of birth.
- Current address.
- A unique identifying number from either an unexpired passport, state ID, or driver's license, and a copy of that document.
A “Beneficial Owner” is defined as any individual who owns or controls at least 25% of its ownership interests or who directly or indirectly exercises substantial control over the reporting company. The definition of substantial control may include senior officers, individuals who can appoint and remove senior officers, and anyone who determines or influences important decisions made by the company.
Individuals that will not be considered Beneficial Owners include:
- Minors (as long as the parents’ or guardians’ information is reported).
- Intermediaries or agents on behalf of others.
- Persons whose control over the company derives solely from their employment (e.g., managers).
- Persons whose only interest in the company is through right of inheritance.
- Creditors (unless they qualify as a beneficial owner through substantial control or equity ownership).
The Report must also contain the company applicant’s information. This will be the individual who directly filed the document that created the company, or, if several people were involved, the one mainly responsible for overseeing the filing.
WHAT HAPPENS IF THE REPORT IS INCORRECT OR NEEDS UPDATING
If a reporting company’s or beneficiary owner’s information changes, the company is required to file an updated report within 30 days from the change.
If incorrect information was reported, a corrected report must be filed within 30 days of the reporting company becoming aware of the inaccuracy.
Willful failure to provide accurate and timely information may result in both civil and criminal penalties, including a maximum civil penalty of $500 per day (up to $10,000) and imprisonment for up to two years.
For many businesses, the information required is straightforward. But many others have more complex ownership or beneficiary structures that may require more careful reporting. Especially in cases involving business reorganization, mergers and acquisitions, exit and succession planning, or related estate planning, compiling a comprehensive and accurate report may take longer. Such businesses are urged to start the process as soon as possible.
Importantly, LLCs, family limited partnerships, and other entities formed as estate planning vehicles are also included in the CTA requirement (if they are not subject to an exception).
For any questions or concerns, contact us.
Matthew Kipnis is a law clerk pending his bar admission in VMM’s Business & Transactional Law practice.
Managing Partner Joseph Milizio leads VMM’s Business and Transactional Law, Exit Planning for Business Owners, LGBTQ Representation, and Surrogacy, Adoption, and Assisted Reproduction Practices. He can be reached at firstname.lastname@example.org and 516.438.4385 x108.