According to Dictionary.com and anyone who has seen a Star Trek episode, a Red Alert is the most urgent form of alert, warning that danger is imminent. The Corporate Transparency Act (the “CTA”) is a federal law with a filing requirement for almost every corporation, limited liability company, and limited partnership. The CTA requires that a Beneficial Ownership Information Report (the “Initial Report”) be filed by the Reporting Company with FinCEN, the Financial Crimes Enforcement Network, a bureau of the U.S. Treasury. Failure to comply with the CTA’s reporting requirements can result in significant civil and criminal penalties.

The due date for the Initial Report for your corporation, limited liability company, or limited partnership is:

• If your entity is already in existence on December 31, 2023 – due on January 1, 2025. 
• If your entity is created from January 1, 2024 through December 31, 2024 – due 90 days after it is created. 
• If your entity is created on or after January 1, 2025 – due 30 days after it is created. 

Perhaps the most challenging due date occurs when there is a change in any of the information previously reported for the Reporting Company or a Beneficial Owner, such as a change in address. An Updated Report is due 30 days after the change occurred, not 30 days after learning of the change.

When the Reporting Company becomes aware or has reason to know that an error was made on the Initial Report or an Updated Report, a Corrected Report is due 30 days after that.

There are civil and criminal penalties for willfully failing to timely file a complete and accurate Initial Report and any required Updated Report or Corrected Report. The civil penalty is not more than $500 per day. The criminal penalty is a fine of not more than $10,000, imprisonment for not more than 2 years, or both.

The requirement to file this Initial Report and any required Updated Report or Corrected Report comes from the CTA passed by bipartisan supermajorities in the House and the Senate on January 1, 2021. The purpose of the CTA is to fight money laundering and terrorist financing, which are both often run through small companies to mask the identities of the individuals who own or control the money laundering or terrorist financing operations. Europe has had a similar measure in operation for many years and the U.S. is now catching up.

When filing the Initial Report, there are three important terms from the CTA that we have to keep in mind: the Reporting Company, a Beneficial Owner, and a Company Applicant.

The “Reporting Company” is the entity required to file the Initial Report, Updated Reports, and Corrected Reports with FinCEN. A Domestic Reporting Company is created by filing a document with the Secretary of State or a similar office. A Foreign Reporting Company is created in a foreign country and registered to do business in any State by filing a document with the Secretary of State or a similar office.

A “Beneficial Owner” is an individual who directly or indirectly owns or controls at least 25% of the Reporting Company or an individual who directly or indirectly exercises substantial control over the Reporting Company even if they do not have an ownership interest in the Company, such as a Trustee of a trust.

A “Company Applicant” is an individual who filed the document with the Secretary of State that created the Reporting Company and an individual who was primarily responsible for directing or controlling the filing.

The Beneficial Ownership Information Report filed by the Reporting Company must include the following information:

• For the Reporting Company – the full legal name; any trade name or doing business as name; the complete current street address of the principal place of business of the Company; the State of formation; and the Employer Identification Number. 
• For each Beneficial Owner – the full legal name; date of birth; complete current residential street address; and a photocopy of a non-expired U.S. passport, a non-expired State driver's license, a non-expired State ID with a picture on it, or a non-expired foreign passport. 
• For each Company Applicant – the same information as for a Beneficial Owner except if the Company Applicant formed the Reporting Company in the course of their business, then use the street address of the business. If the Reporting Company was already in existence on December 31, 2023, then the Company Applicant’s information is not included on the Initial Report. 

Beneficial Owners and Company Applicants may instead provide that information directly to FinCEN and obtain a FinCEN Identifier number, which is then included on the Initial Report. The online application form for a FinCEN Identifier will not be available until January 1, 2024.

There are twenty-three listed exemptions for entities that are not required to file an Initial Report. Most of those exemptions are for entities already subject to disclosure rules like publicly traded companies, banks, and tax-exempt entities, so those exemptions will not relieve most corporations, limited liability companies, or limited partnerships from the filing requirement or harsh penalties.

However, the exemption for large operating companies may provide some relief. To be a large operating company, the following three tests must all be met: (1) it has more than 20 full time employees; (2) it has an operating presence at a physical office within the U.S.; and (3) it filed a Federal income tax or information return in the U.S. for the previous year demonstrating more than $5,000,000 in gross receipts or sales, excluding gross receipts or sales from sources outside the U.S.

Action Items

The following are some actions to consider in light of the CTA reporting requirements:

1. If you have a corporation, limited liability company, or limited partnership which is not being used, dissolve it by December 31, 2023 so that no Reports are required.
2. If you are planning to create a new corporation, limited liability company, or limited partnership in the next six months, create it by December 31, 2023 so that the Initial Report is not due until January 1, 2025.
3. Have your Reporting Companies establish CTA compliance procedures and clearly designate an owner, employee, or outside professional who will have the responsibility for timely filing the Initial Report and being the repository to receive the necessary information to file Updated Reports.
4. If you are a Beneficial Owner of many corporations, limited liability companies, and limited partnerships or will be a Company Applicant, consider applying for a FinCEN Identifier number on or after January 1, 2024.
5. If your Reporting Company has individuals who are not owners but are senior officers or others with substantial control of the Reporting Company, have an analysis done of the facts and circumstances to determine if they have to be included as Beneficial Owners on the Initial Report or Updated Reports.
6. Update your shareholders agreements, LLC operating agreements, limited partnership agreements, and employment agreements with non-owners who have substantial control to require that Beneficial Owners provide and update the appropriate person with the information needed for filing an accurate and timely Initial Report and for filing accurate and timely Updated Reports.