Under the Corporate Transparency Act (CTA), a new reporting requirement takes effect as of January 1, 2024, that is a shift from how private companies have historically kept the identity of their owners or those who control the organization. It requires many small businesses (unless they fall under an exemption) to file a Beneficial Ownership Information Report (Report) with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCen). FinCen issued regulations that provide guidance on exactly who must file, the timing requirements of the filing and the required information of the Report and the Regulations. If you are a small business owner, you will need to understand the requirements because non-compliance can result in substantial and severe criminal and civil penalties.

By way of background, the CTA was passed by Congress primarily to help combat financial crimes such as money laundering, tax evasion and fraud, terrorism and other illegal acts. It is based on the premise that criminals and bad actors seek to conceal their ownership of their entities and use these entities to conceal and commit their crimes. The legislation essentially creates a national database whereby beneficial ownership information will be collected so that United States can better protect its national interests and stop illegal activities. Once collected, FinCen is authorized to disclose the information to a limited group of federal agencies, law enforcement, certain foreign agencies and financial institutions with consent from the company.

However, the reality is that completely legitimate companies engaging in legal activities are required to file the Report. In fact, every limited liability company, corporation, or other entity created by the filing of a document with a Secretary of State or similar office is required to file a Report unless it qualifies for an exemption. Generally speaking, there are 23 categories of exempt entities, which for example are already regulated (e.g. banks, publicly traded companies, certain tax exempt entities, insurance companies and accounting firms). The aforementioned list is illustrative and not exhaustive. There is also an exemption for a “large operating company.” A large operating company is an entity that (1) employs more than 20 full-time employees in the U.S., (2) has an operating presence at a physical office within the U.S. and (3) has filed an information return or federal income tax return in the U.S. for the prior year demonstrating more than $5 million in gross receipts or sales.

If your entity was formed prior to January 1, 2024, and your entity is deemed a reporting company, you must file the initial Report with the required information about the company and about its beneficial owners no later than January 1, 2025. If your entity is created after January 1, 2024, you must file a Report containing the required information about the company, its beneficial owners and its company applicants within 30 calendar days of the date on which creation becomes effective.

In short, the reporting company must provide basic information about the company as required as well as each of the beneficial owners and applicants, such as (1) full legal name, (2) date of birth, (3) current residential street address, (4) unique identifying number and the jurisdiction of the issuer from either a driver’s license, current U.S. passport or acceptable ID document, or if the individual has none of those, a foreign passport, and (5) an image of the document that reflects the unique identifying number.

The CTA and the Regulations provide definitions on who constitutes a beneficial owner. This includes beneficial owners who are individuals and who, directly or indirectly, either exercise substantial control over the reporting company or own or control at least 25% of its ownership interests. A company will need to undergo an analysis on who within their organization exercises “substantial control” (this could be not only an owner, but a manager, board of director, and potentially an officer or other executive) in addition to looking at ownership interests. This is not necessarily a bight-line analysis and will require a company to engage in a thorough review of its organization, owners, structure and governing documents.  A reporting company will also have to file updates when there are changes to any of the information. Finally, FinCen has provided a way that individuals can apply for a unique number called a FinCEN Identifier, so that if issued, the individual may simply provide the FinCEN identifier to the reporting company.