Are you a small business owner? Do you own and operate a corporation, LLC, PLLC, or other privately held business filed with the Secretary of State? If so, the Corporate Transparency Act, 31 U.S.C. § 5336 (“Act”), that was recently adopted by Congress will require you to register certain “personally identifiable information” with the Financial Crimes Enforcement Network (“FinCEN”), which is a subsidiary of the U.S. Department of Treasury, beginning January 1, 2024. The Act’s main purpose is to address money laundering issues, and put the United States on pace with other foreign governments who have been implementing international monetary control policies for several years.
Who Must Report?
The Act is aimed at small businesses, and it is projected that there will be 32,556,929 entities across the country that will be subject to the Act’s reporting requirements. The Act calls any company that must register with FinCEN a “reporting company.” Pursuant to the Act, reporting companies include all corporations and limited liability companies, as well as all limited partnerships, LLPs, LLLPs, PCs, PLLCs, and any other similar entities that are organized by filing with the Secretary of State to register with FinCEN. Further, any Non-U.S. entity that is qualified to transact business in the U.S. will be subject to the Act’s reporting requirements. It is unclear whether a single-member LLC would be required to report because there is an exemption for sole proprietorships, however because even a single-member LLC must file with the Secretary of State it would seem that it would also be considered a “reporting company” under the Act.
There are 23 statutory exemptions to the Act that do not require certain entities to register with FinCEN. These exemptions apply to non-profits, general partnerships, sole-proprietorships, and any type of business that does not have to file with the Secretary of State. The exemptions also extend to regulated industries such as banks, brokers, dealers, registered investment advisors, investment companies, and insurance companies. Additionally, exempt status also extends to accounting firms that are registered under the Sarbanes-Oxley Act; any entity established under U.S., State, or tribal law that exercises governmental authority; political entities; tax-exempt trusts; any entity that exclusively provides financial assistance or governance rights to any of the above; and dormant entities.
Since the Act is aimed at small businesses there is a rather significant exemption for large companies called the “large operating company exemption.” This exemption applies to companies that have 20 full time employees, at least $5 million in annual revenue, and a physical presence in the U.S. The physical presence component must be a space that is exclusively owned or leased by the company. If the company shares an office space the company will not be able to claim the exemption. Turning to new entities, any new entity that is formed after January 1, 2024, must file with FinCEN within 30 days of formation unless it qualifies for one of the statutory exemptions. Even if a new entity will eventually qualify for the large operating company exemption it still must initially register with FinCEN within 30 days of formation. After the first 30 days, if the entity can establish its size, revenue, and presence it may file an update with FinCEN and claim the exemption.
What Information Must Be Reported?
The Act requires that the “beneficial owner” report personally identifiable information to FinCEN. A “beneficial owner” is anyone who exercises substantial control over the entity or someone who owns or controls at least 25% of the entity. Under the Act, “substantial control” means someone who “(1) serves as a senior officer of a reporting company (not [a] secretary or treasurer); (2) has the authority to appoint or remove a senior officer or majority of the board; (3) directs, determines, or has substantial influence over important decisions; [or] (4) has any other form of substantial control over the reporting company.” Employees that are exempt from the reporting requirements include someone whose control stems only from their employment status, an individual acting as an agent, a minor, an individual who only has the right of inheritance, or a creditor.
The initial report must include the full legal name of the reporting company, any trade names, or other names the company may use, the current address where the company conducts business, and the IRS taxpayer identification number (including an EIN). The report must also include personal information of each beneficial owner and “each company applicant.” A company applicant is the individual who directly filed an application to form a U.S. covered entity and/or the incorporator/organizer. The personal information must include the beneficial owner’s legal name, date of birth, residential street address, a unique identification number (such as a driver’s license, passport, or FinCEN identifier number), and an image of the identification document.
The disclosed personal information will not be publicly accessible; it will only be available to federal law enforcement, intelligence, and national security agencies. It will also be accessible to foreign law enforcement agencies (through federal agencies), federal regulators, and financial institutions if there is client consent.
When Do I Have to Report and What Are the Penalties for Failing to Comply?
The Act’s reporting requirement will become effective on January 1, 2024. Entities that are already existing will have until December 31, 2024, to submit the required information. Any entity that is formed on or after January 1, 2024, however, will be subject to the Act’s 30-day requirement. This requirement places an obligation on a newly formed entity to file the necessary information – detailed above – within 30 days of the new entity filing its formation documents. Luckily, the reporting requirement only has to be filed once unless something changes such as an address change, a change in ownership, or if the company qualifies for an exemption. If a company does need to make a change, it simply has to file an update with FinCEN.
It is important for companies to be aware of the new obligations the Act will require. If a company does not comply, the company may be subject to both civil and criminal penalties. If a company is knowingly providing fraudulent information or is willfully failing to report complete and/or updated information, any individual or the company itself may be penalized. Specifically, the beneficial owners, company applicants, persons who are in charge of managing the reporting obligations, or senior officers may find themselves the subject of such penalties. The penalties range from a monetary fine of $500 per day that the company is not in compliance, all the way to a $10,000 fine, and up to two years in jail.
If you are a business owner who will be impacted by the Corporate Transparency Act and you wish to know more about how your business will be impacted and how to comply with the Act’s requirements, please contact Zachary E. Stewart at zach@crlaw.biz or any of the attorneys at Cooper & Riesterer, PLC.
