Attention Corporate and LLC Clients: Effective January 1, 2024, there are new corporate reporting requirements for corporations and LLCs in the United States under the Corporate Transparency Act.
Beginning on January 1, 2024, both domestic U.S. companies and foreign companies doing business in the United States will need to comply with reporting requirements under the Corporate Transparency Act (“CTA”) by providing information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the U.S. Department of the Treasury. The new reporting requirements were implemented to address corruption in the use of shell and front companies. According to FinCen, lack of transparency in corporate ownership “…hurts ordinary Americans because [it] results in an uneven playing field for honest and legitimate U.S. businesses.”
Who Will Need to Report
The CTA applies to most domestic (and foreign) companies, including corporations and limited liability companies. Exemptions are limited and extend mainly to companies that are already heavily regulated (i.e., regulated public utilities, venture capital fund advisors, investment companies, large operating companies, etc.). Importantly, there is no small business exception to the reporting requirements, so many of our clients will be impacted by this new regulation.
What Information Needs to Be Reported
A reporting company will have to report information about: (1) its beneficial owners, (2) the Company Applicant(s), and (3) the Company itself.
For each beneficial owner and Company Applicant, the Company will need to submit the individual’s: (a) full legal name, (b) date of birth, (c) complete current address (for Company Applicants, a business address may be used, but in all other cases a residential address must be used), and (d) a “unique identifying number” from an acceptable identification document together with copies of such identification document (for example, drivers’ license or passport).
Who Is A Beneficial Owner
A “beneficial owner” is any individual who: (a) directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise either exercises substantial control over the reporting company or (b) owns or controls at least 25% of the ownership interests of the reporting company. For those owners who do not hold more than 25%, an analysis will need to be done whether such individual has “substantial control” over the entity, but it will typically include any individual who serves as a senior officer of the company or as a member of the board of directors.
Who Is A Company Applicant
The Company Applicant is defined as any individual who directly files the document that registers the Company to do business in the United States, and any individual who is primarily responsible for directing or controlling such filing. Notably, there can be more than one Company Applicant.
What Does the Company Report About Itself
The Company will also need to report: (1) its full legal name and any trade name or dba; (2) its current address; (3) its jurisdiction of formation; and (4) its Employer Identification Number.
Timing of Reporting
For current companies already in existence, beneficial owner information will need to be provided to FinCEN prior to January 1, 2025. For companies formed on or after January 1, 2024, reporting is required within 30 days of the acceptance of the company’s formation or registration filing. Changes in the beneficial ownership information also need to be reported within 30 days of such change.
How to Report
The U.S. Department of Treasury is currently working on a “secure nonpublic database” to receive, store, and maintain beneficial ownership information to comply with this requirement. The database is expected to open on January 1, 2024. No filings can be made before January 1, 2024.
Who Will Have Access to the Reported Information
Other than FinCen, beneficial ownership information and other reported information will be provided upon request to: (a) any federal agency engaged in national security, intelligence, or law enforcement activity, or (b) to a state or local law enforcement agency if a court of competent jurisdiction has authorized the agency to seek the information in a criminal or civil investigation. In addition, with the consent of the reporting company, a financial institution can obtain beneficial ownership information to facilitate compliance with customer due diligence requirements of a financial institution.
Violations
Failure to meet the reporting requirements or the unauthorized disclosure of beneficial owner information can result in civil or criminal actions.
Conclusion
The new reporting requirements under the CTA will undoubtedly have significant implications for our clients. Companies will need to be more diligent in gathering and monitoring information about their beneficial owners, including updating formation and investor questionnaires to include identifying questions for purposes of beneficial ownership disclosure, as well as ensuring routine contact with beneficial owners to stay on top of any changes in beneficial owner information.
Scherer Smith & Kenny LLP is available to address any questions you may have related to these new regulations and to implement new processes for gathering reporting information and completing the reporting. For additional assistance or questions, please contact Heather G. Sapp hgs@sfcounsel.com, or Brandon D. Smith at bds@sfcounsel.com.
-Written by Heather G. Sapp