The Corporate Transparency Act (CTA), passed by Congress January 1st, 2021, became effective in 2022 and aims to fight money laundering and other illicit activity. It is likely your business is required to comply with the CTA and report specific information to the government, including your driver’s license or passport. As lawyers who work regularly with entities of all types, let us work with you to help you comply with your mandatory CTA reporting obligations.
To put it simply, the CTA requires “reporting companies” to report “beneficial ownership information” of each “beneficial owner” and each “applicant,” with respect to the reporting company, to the Financial Crimes Enforcement Network of the United States Department of Treasury (FinCEN). Clearly, there are some terms that must be defined, let’s walk through them one by one.
Reporting Company
A “reporting company” is any corporation, LLC, or other similar entity created via the filing of documents with a secretary of state or similar office under the law of a state. Additionally, a reporting company is any corporation, LLC, or other similar entity formed under the law of a foreign country and registered to do business in the US via the filing of documents with a secretary of state or similar office under the laws of a state. There remains some debate regarding the interpretation of the “similar entity” term, and we hope FinCEN or Congress will provide further clarification.
Naturally, there are a laundry list of exceptions to the “reporting company” class, with two of note. The first exception to being considered a reporting company is for entities that 1). employ more than 20 employees on a full-time basis in the US; 2). in the previous year filed federal income tax returns in the US demonstrating more than $5,000,000 in gross receipts or sales; and 3) have an operating presence at a physical office within the US. The second exception is for banks.
Beneficial Ownership Information
“Beneficial ownership information” is that information about each “beneficial owner” or each “applicant” that must be reported to FinCEN. The beneficial ownership information to be reported includes each beneficial owner’s and each applicant’s full legal name, date of birth, current residential or business street address, and a unique identifying number from an acceptable identification document (e.g., passport, driver’s license, or other government issued ID) or a FinCEN ID.
Beneficial Owner
A “beneficial owner” is any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise either exercises substantial control over the entity or owns not less than 25% of the ownership interests in the entity. More ambiguity surrounds the term “substantial control”. Additionally, it is unclear how the 25% ownership threshold will apply to LLCs with multiple classes of interest, consent or veto rights, and negotiated distribution priorities.
Of note, while the CTA requires each reporting company to report beneficial ownership information for its beneficial owners, there is no corresponding affirmative obligation that the beneficial owners furnish that information to the reporting company.
Applicant
Finally, an “applicant” is any individual who either files an application to form a corporation, LLC, or other similar entity under the laws of a State or Tribe; or registers or files an application to register a corporation, LLC, or other similar entity formed under the laws of a foreign country to do business in the US by filing a document with the secretary of state or similar office under the laws of a State or Tribe.
Furthermore, the applicant has a reporting obligation, meaning if an exempt entity has or will have a direct or indirect ownership interest in a reporting company, the reporting company or the applicant is required to report the name of the exempt entity.
When to Submit the Beneficial Ownership Information
The CTA provides three scenarios affecting the report date of beneficial ownership information. One, if reporting company formed or registered after effective date of the CTA, they must submit a report to FinCEN containing beneficial ownership information with respect to the reporting company at the time of its formation or registration.
Two, if reporting company formed or registered prior to the effective date of the CTA, they must submit a report to FinCEN no later than 2 years after the effective date of the CTA.
Three. if there are changes in reported beneficial ownership information, the reporting company must submit an updated report to FinCEN no later than 1 year after the changes.
Penalties for Non-Compliance
Importantly, the CTA sets a penalty of $500 per day the violation continues, and criminal penalties of imprisonment up to 2 years and fines up to $10,000.
Beresford Booth is Here to Help Your Business Comply with the CTA
Start working with your beneficial owners now to collect the necessary information you must report to FinCEN. The lawyers at Beresford Booth can help you update your contracts to require owners to provide the necessary information and provide such information to FinCEN, on your behalf, in a timely manner. Do not wait to contact us. Remember, compliance is mandatory.
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