Get Ready for the New Corporate Transparency Reporting Rules

The complete list of entities that are exempt from the reporting rules is too lengthy to list here — ranging from government units to nonprofit organizations to insurance companies and more. Notably, an exemption was created for a “large operating company” that employs more than 20 employees on a full-time basis, has more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources), and physically operates in the United States. However, many of these companies already must meet other reporting requirements providing comparable information.

An entity that initially qualifies for the large operating company exemption but subsequently falls short must file a beneficial owner report. On the other hand, an entity that might not currently qualify can update its status with FinCEN and obtain an exemption.

Under the CTA, a nonexempt entity must provide identifying information about its beneficial owners. A beneficial owner is defined as someone who, directly or indirectly, exercises substantial control over a reporting company, or owns or controls at least 25% of its ownership interests. An individual has substantial control of a reporting company if he or she:

• Is a senior officer of the company,
• Has authority over the senior officers or a majority of the board of a company,
• Has substantial influence over the company’s important decisions, and
• Has any other type of substantial control over the company.

This generally includes individuals who are directly related to ownership interests in the company, but indirect control may also result in classification as a beneficial owner. See “Who Isn’t a Beneficial Owner?” below for a list of individuals excluded from the definition of a beneficial owner.

The CTA requires reporting companies to provide identifying information about their company applicants. A company applicant is defined as someone who is:

• Responsible for filing the documents that created the entity (for a foreign entity, this is the person who directly files the document that first registers the foreign reporting company to conduct business in a state), or
• Primarily responsible for directing or controlling filing of the relevant formation or registration document by another.

This rule often encompasses legal personnel acting in a business capacity.

Other Important Issues

The reporting requirements are extensive. Specifically, the report to FinCEN must include the following information:

• The legal name of the entity (or any trade or doing-business-as name),
• The address of the entity,
• The jurisdiction where the entity was formed,
• The entity’s Taxpayer Identification Number, and
• The name, address, date of birth, unique identifying number information of the beneficial owners (such as a U.S. passport or state driver’s license number), and an image of the document that contains the identifying number.

Reporting Compliance

Reporting companies have either 30 days or one year from the effective date (January 1, 2024) to comply with the reporting requirements. Beneficial ownership information won’t be accepted by FinCEN until the effective date.

The determination of whether a reporting company has 30 days or one year to comply depends on its date of formation. Reporting companies created or registered prior to January 1, 2024, have one year to comply with the CTA by filing initial reports. Those created or registered on or after January 1, 2024, will have 30 days upon receipt of their creation or registration documents to file the initial reports.

After the initial filing, reporting companies then have 30 days to file an updated report after any change with respect to information previously reported. In addition, reporting companies must correct inaccurate information in previously filed reports within 30 days after the date the reporting company becomes aware of the error.

What are the penalties for failing to comply with the new reporting rules? An omission or fraudulent report could result in civil fines of $500 a day for as long as the reports are missing or remain inaccurate. Failure to comply may also trigger criminal penalties of a $10,000 fine or even jail time of two years.

Who Isn’t a Beneficial Owner?

The following individuals are not treated as beneficial owners of a reporting company under the Corporate Transparency Act (CTA):

• Someone acting as a nominee, intermediary, custodian or agent on behalf of a beneficial owner,
• An employee of the reporting company who has substantial control over the entity’s economic benefits due to their employment status (but only if the individual isn’t a senior officer of the entity),
• An individual whose only interest in a reporting company is a future interest through a right of inheritance,
• Any creditor of the reporting company (unless the creditor exercises substantial control or has a 25% ownership interest in the reporting company) and
• A minor child.

However, for minor children, the reporting company must report information about the child’s parent or legal guardian.

The Corporate Transparency Act (CTA) is designed to reduce exposure to serious crimes, such as terrorist financing, money laundering, and other illicit activities. However, it could also lead to increased scrutiny of family offices, investment angels, and other private individuals who have typically been exempt from such oversight. Reporting companies have either 30 days or one year to comply with the new rules, depending on their business structure.

Next Steps

To ensure compliance, your company should first evaluate its current situation to determine if it needs to meet the new obligations. If so, it should collect the required information, update and refine its internal policies for accurately reporting the data, and establish a system for monitoring the reporting processes. For additional guidance, companies should contact their professional business advisors.