In an effort to combat the proliferation of anonymous shell companies used for criminal purposes in the United States, Congress enacted the Corporate Transparency Act (the “CTA”), which requires Reporting Companies to report personal identifying information about the Beneficial Owners and Company Applicants to the Financial Crimes Enforcement Network (“FinCEN”), which will maintain the personal identifying information in a secure database for use by governmental authorities and certain financial institutions.

What is a Reporting Company?

Reporting Companies include domestic corporations, limited liability companies, or other entities created by filing with a secretary of state or similar office under the laws of a state or an Indian tribe and corporations, limited liability companies, or other entities formed under the laws of a foreign country that has registered to do business in the United States.

Exceptions from the Definition of Reporting Company

The CTA lists 23 exempted entities that are not considered Reporting Companies and are exempt from the CTA’s reporting obligations. Examples include banks, SEC-reporting companies, public accounting firms, insurance companies, and tax-exempt entities. A specific exemption exists for “Large Operating Companies,” which are defined as companies (i) that directly employ more than 20 full-time employees in the United States, (ii) maintain a United States operating presence at a physical office (owned or leased) in the United States, (iii) and filed a federal income tax or information return with the IRS for the previous year showing more than $5 million in gross receipts or sales.

Who is a Beneficial Owner?

A “Beneficial Owner” is an individual who exercises Substantial Control over a Reporting Company or owns or controls at least 25% of the ownership interests of a Reporting Company.

Indicators that an individual exercises “Substantial Control” include his/her title and responsibilities (such as the President, CEO, COO, CFO, or other officer, regardless of their title, who performs similar functions), an individual who has the authority to appoint or remove a senior officer, or an individual who is an important decision-maker.

Determining who has 25% or more ownership of the Company is more clear cut. The Reporting Company will need to determine which individuals own or control 25% of the ownership interest.

Who is a Company Applicant?

It is important to note that a Reporting Company formed on or after January 1, 2024 is required to report Company Applicant information. Companies in existence prior to January 1, 2024 will not be required to report Company Applicant information.

A Company Applicant is an individual involved with the formation or registration of a Reporting Company. This will include the individual who directly filed the document that formed the company or who first registered the foreign company with a secretary of state, as well as the individual who was responsible for directing and controlling the creation or registration document.

Explanation of the Reporting Obligations

When filing the initial report on FinCEN’s Beneficial Ownership Information E-filing System, the Reporting Company must report:

• Reporting Company Information: Its full legal name, trade name, current address, jurisdiction of formation, and tax ID number (or if a foreign company, the foreign tax ID number).
• Beneficial Owner Information: Individual’s full name, date of birth, residential address, unique ID number from a driver’s license or passport, and an image of the individual’s passport, driver’s license, or ID issued by a state.
• Company Applicant Information: Same information as the Beneficial Owner, except if the Company Applicant formed the company during the course of its business, it should use the individual’s business address instead of its residential address.

Reporting Deadlines

• Reporting Companies that are formed prior to January 1, 2024 have until January 1, 2025 (but don’t wait until the last minute!).
• Reporting Companies that are formed between January 1, 2024 and December 31, 2024 will have 90 days from formation.
• Reporting Companies that are formed on January 1, 2025 and later will have 30 days from formation.
• Reporting Companies will have 30 calendar days after a change of previously reported information occurs related to the Reporting Company or a Beneficial Owner. Similarly, a Reporting Company will have 30 calendar days after it becomes aware or should have been aware of an inaccuracy in its reporting.

Explanation of Penalties for Non-Compliance with the CTA

Reporting Companies that willfully fail to report, fail to update information pertaining to their Beneficial Owners, and willfully fail to correct inaccurate beneficial ownership information will be subject to both civil penalties in the amount of $500 per day and criminal penalties in the amount of $10,000 and imprisonment for no more than two years.

Approximately 32 million companies will incur the new administrative burden to comply with the CTA requirements, which include ongoing reporting requirements.

Goodell Devries’s corporate attorneys stand ready to assist clients in determining whether their companies are impacted by the CTA and to assist in the necessary filings. Contact the author, Kaitlin Corey, at kcorey@gdldlaw.com for more information.

Kaitlin Corey works with companies of all sizes by assisting them with general corporate governance, mergers and acquisitions, and intellectual property protection and management.