The Corporate Transparency Act (“CTA”) was placed on the federal government’s books when the U.S. Senate overrode a veto of the 2020 National Defense Authorization Act on January 1, 2021. The intent was to restrict, if not eliminate, those opportunities for criminals, Russian oligarchs, terrorists, and other bad actors to fund their illicit activity by hiding and moving money through anonymous shell companies and other corporate structures here in the United States.
To close the loop that allows these bad actors to game our banking system by laundering money through entities that can then fund individuals and other illicit enterprises, reports will be required from both Domestic and Foreign Reporting Companies to disclose their “Beneficial Ownership Information” to the Financial Crimes Enforcement Network (“FinCEN”), a division of the U.S. Treasury. This initial reporting year (2024) is expected to be a huge undertaking for businesses, with an estimate of more than 90% of all entities in existence as of December 31, 2023, or 32.5 million, having to file by December 31, 2024. Reporting Companies created in 2024 will have to file by not later than 90 days after formation. Reporting Companies created beginning January 1, 2025, will have only 30 days to file its initial Beneficial Ownership Information Report.
What Constitutes a Domestic Reporting Company?
A Domestic Reporting Company is any entity created under state, federal, or tribal law by the filing of a document with a state’s Secretary of State, such as corporations (including nonprofit corporations), limited liability companies, and limited partnerships (including limited liability limited partnerships). Registration is also required of similar entities registered with a comparable office of a state or an Indian tribe. Foreign Reporting Companies are non-US entities that are required to register with a secretary of state or an Indian tribe.
Exemptions
There are, however, 23 exemptions from registering as a Reporting Company. Three of the exemptions most likely to be taken advantage of are:
- Tax exempt entities under the Internal Revenue Code Section 501(c), political organizations, and charitable trusts qualified under IRC Section 4947;
- Large operating companies, being a company with more than 20 employees on a full-time basis in the U.S. and over $5 million in either gross receipts or sales reported on the prior year’s federal income tax return; and
- Inactive entities in existence for more than one year, not engaged in an active business, not owned directly or indirectly by a foreign person, have not in the preceding 12 months experienced a change in ownership or received or sent funds in excess of $1,000, and do not hold any kind of assets.
HOAs May Not Be Exempt
It should be kept in mind that while many homeowners and condominium associations are nonprofit corporations under state law, that alone does not make them tax-exempt under section 501(c) of the Internal Revenue Code. Most homeowners and condominium associations are instead exempt from federal taxation pursuant to IRC Section 528 and will be considered Domestic Reporting Companies.
What Reporting Companies Need to Do
If your company or organization is a Domestic or Foreign Reporting Company, the company must file a “Beneficial Ownership Information Report.” A Reporting Company is required to identify all individuals who exercise “substantial control” over a company or owns or controls at least 25% of the ownership interests of the company. There is no limit on the number of individuals who may be found to exercise substantial control. An individual exercises substantial control if any of the four general criteria are met:
- The individual is a senior officer;
- The individual has authority to appoint or remove certain officers or a majority of directors of the Reporting Company;
- The individual is an important decision-maker; or
- The individual has any other form of substantial control over the Reporting Company.
A beneficial owner of a Reporting Company includes the President, Chief Financial Officer, General Counsel, Chief Executive Officer, Chief Operating Officer, or any other officer regardless of title who performs a similar function as those officers.
Because a board of directors or similar body generally has the ability to remove and appoint officers, the board of directors or other such body may constitute those individuals exercising substantial control over a Reporting Company, and that they themselves constitute beneficial owners, even in the case of a nonprofit corporation.
The 25 percent ownership interest of the company does not only include equity, stock or similar intangible rights. Joint ventures, capital or profit interests, warrants and convertible instruments and other instruments, contracts, arrangements, understandings, relationships or mechanisms used to establish control all constitute an ownership interest for reporting purposes.
If your company was created or registered on or after January 1, 2024, at least one, and possibly two, “Applicants” will have to be identified. An Applicant can be either a “direct filer,” being the individual who actually physically or electronically filed the documents that created or registered the company with the Secretary of State or a comparable office.
The second category of Applicant is the individual primarily responsible for directing or controlling the filing of the document creating or registering the company. It is not necessary that an individual actually or electronically file the document to create or register a company with the state, tribe or the federal government to be considered an Applicant.
A Reporting Company is required to submit the following information to FinCEN:
- Full legal name;
- Any trade or fictitious names;
- Current U.S. address (not a post office box);
- Jurisdiction of formation; and
- Taxpayer identification number.
Each Beneficial Owner and Applicant is required to provide:
- Full legal name;
- Date of birth;
- Complete current address; and
- The unique identifying number and issuing jurisdiction from, and an image of, one of the following non-expired documents:
- U.S. passport;
- State driver’s license; or
- Identification document issued by a state, local or tribal government.
(If none of the foregoing are available, a foreign passport is acceptable.)
(Note: There are special reporting requirements when a Beneficial Owner is a child and in other instances. Please refer to the current rules or contact us to discuss.)
A Beneficial Owner or Applicant may apply for a FinCEN identifier. Once obtained, the reporting company may report the FinCEN Identifier of a Beneficial Owner instead of providing the Beneficial Ownership information for that individual on the entity’s Beneficial Ownership Information Report. For individuals who are Beneficial Owners or Company Applicants for multiple entities, obtaining a FinCEN identifier may save some time, but it does not prevent the individual from providing the required information to FinCEN. If the information provided by a Reporting Company or pertaining to a Beneficial Owner (but not an Applicant) changes, either or both of the Reporting Company and Beneficial Owner must update that information within 30 days after the date on which the change occurred. Incorrect information previously reported for the Reporting Company, a Beneficial Owner, or an Applicant should be corrected within 30 days of discovering its inaccuracy.
Compliance Considerations and Possible Penalties
As noted at the outset of this article, the reporting requirements, while not lengthy, still require multiple levels of information – the Reporting Company, Applicant, and the Beneficial Owners. The types of companies required to report is extremely broad, being any entity that is created or registered by the filing with a state, federal or tribal office. While there are 23 exemptions from reporting, for most small businesses, including many nonprofit corporations, no exemption applies. Furthermore, anytime there is a change (e.g., an address has changed, or a driver’s license has expired) revised information must be uploaded within 30 days of the change.
While the initial reporting will be a burden, it is believed that the bigger burden may be recalling that information has to be updated within 30 days of any changes in the previously supplied information on the part of the Reporting Company, Beneficial Owner or, in limited situations, the Applicant. Calendaring various compliance requirements on an annual or more frequent basis is a simple way to confirm information remains current.
The willful failure to report complete or updated Beneficial Ownership Information to FinCEN, or the willful provision of or attempt to provide false or fraudulent Beneficial Ownership Information may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties, including imprisonment for up to two years and/or a fine of $10,000. Senior officers of an entity that fail to provide a required Beneficial Ownership Information Report may be held accountable for that failure.
Conclusion
While a reporting company may file on its own behalf, given the potentially substantial civil and/or criminal penalties, you may wish to have the attorneys at Jenkins & Kling, P.C. assist you in your registration and other compliance obligations. Please contact David Weiss at 314-561-5078 or at [email protected] or Mary Grimes at 314-561-5086 if we may be of service.