On January 1, 2024, the bipartisan Corporate Transparency Act (“CTA”) went into force. It requires most entities to report and timely update the information about their primary owners and officers (beneficial owners) with the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Existing entities have until January 1, 2025, to file the initial report, but the companies formed in 2024 will have to file the first report within 90 days of formation. Entities formed after 2024 will be required to report within 30 days of formation.

While it is not a recurring / annual requirement, following the initial report, any changes to the submitted information (including the beneficial owners’ addresses) must be reported within 30 days.

Congress enacted the CTA in 2021 as part of the National Defense Authorization Act for fiscal year 2021 to foster national security, anti-money laundering activities, and effective regulation. The CTA added 31 U.S.C. Section 5336 to the Bank Secrecy Act. Under the CTA, the FinCEN promulgated a final rule, codified as 31 C.F.R. Section 1010.380. To make CTA compliance easier for small businesses, the FinCEN issued a Small Entity Compliance Guide.

What Information Needs to Be Reported?

Reporting companies will be required to report to the FinCEN individuals who directly or indirectly, through any contract or arrangement, (1) own or control more than 25% of the entity or (2) exercise substantial control over it.

The report will need to contain the beneficial owners’ personally identifiable information (name, date of birth, address, and the identifying number and issuer of an acceptable identification document), as well as the reporting company’s information (such as names and address). For privacy purposes, the FinCEN offers beneficial owners the opportunity to submit all the personally identifiable information directly to the FinCEN and obtain an identifier number they would provide to reporting companies instead of providing it to the companies in full.

Defining “Substantial Control”

Under 31 C.F.R. Section 1010.380(d)(1), an individual has substantial control over a reporting company if this individual (1) serves as a senior officer, (2) has authority over the appointment or removal of any senior officer or a majority of the board of directors or similar body), or (3) can direct, determine, or has substantial influence over important decisions made by the reporting company.

These three criteria seek to identify the key individuals who stand behind it and direct its actions by reaching two kinds of control: (1) nominal or de jure authority and (2) functional or de facto authority. The listed criteria of “substantial control” are not exhaustive, and the regulations recognize that “control exercised in novel and less conventional ways can still be substantial.”

The regulations provide examples of indirect control, including acting as a trustee, principal beneficiary, or a grantor of a trust or similar arrangement, board representation, ownership or control of the majority of voting rights of the reporting company, control over one or more intermediary entities that collectively exercise substantial control over the reporting company, control over nominal owners, or via a contract, arrangement, or other understanding, relationship, or otherwise.

Which Entities Do Not Need to Report?

• General partnerships or domestic entities that are not formed by filing a document with Secretary of State or a similar agency.
• Tax-exempt entities.
• Large operating companies with operating offices in the U.S., more than 20 full-time employees, and $5,000,000 in annual gross receipts according to the last year’s tax filings (including the gross receipts of other entities through which it operated or entities owned by it but excluding foreign-sourced receipts).
• Foreign pooled income vehicles (however, they are required to disclose “an individual who exercises substantial control over the entity”).
• Subsidiaries of exempt entities (except money service businesses, pooled investment vehicles, and certain entities assisting tax exempt entities).
• Inactive entities (formed in or before 2020, which does not own any kind of assets, including any ownership interest in any other entity, not engaged in active business, not owned by a foreign person, which has not experienced any change in ownership and has not sent or received any funds in an amount greater than $1,000 in the past 12 months).
• Certain entities that are already required to report ownership information, including securities reporting issuers, banks, credit unions, depository institution holding companies, money services businesses, brokers or dealers in securities, securities exchange or clearing agencies, investment companies or investment advisors, venture capital fund advisors, insurance companies, state-licensed insurance producers, Commodity Exchange Act registered entities, accounting firms, public utilities, financial market utilities, and pooled investment vehicles.
• Governmental authorities.
• Any other entities to be excluded by the FinCEN in the future.

Which Beneficial Owners Do Not Need to Be Reported?

• Minor children.
• Nominees, intermediaries, custodians, or agents acting on behalf of another individual.
• Employees acting solely as employees (not applicable to senior officers).
• Individuals whose only interest in the reporting company is through a right of inheritance. The regulations clarify that the exact moment when a person’s ownership begins depends on the applicable authorities, such as the will, state laws, the terms of a trust, or other valid applicable instruments.
• Creditors of the reporting company (individuals who meet the beneficial owner requirements only through rights of interests for the payment of a predetermined sum of money, such as a debt incurred by the reporting company, or a loan covenant or other similar right associated with such right to receive payment that is intended to secure the right to receive payment or enhance the likelihood of repayment.
• Indirect owners through an exempt entity.

Additional Requirements for Entities Formed after January 1, 2024

In addition to beneficial owners, entities formed after January 1, 2024 will need to disclose their company applicants (individuals directly filing the formation documents with state agencies and those primarily responsible for directing such filings). In a situation where a business owner directs that the formation documents be filed with state authorities by a law firm, both the business owner and a law firm attorney/paralegal will need to be reported to the FinCEN.

Ownership Calculation

Given that the CTA requires disclosure of aggregate ownership percentage, including through indirect ownership, the new requirement presents a challenge to reporting companies (and their group companies) with a complex ownership structure or voting rights. For example, in case a reporting company has different classes of stock, like separate voting and profit stock, the regulations suggest calculating the ownership as a percentage of the total outstanding capital and profit interests of the entity, without more clarification. In entities taxed as corporations, an individual holds the greater of their total combined voting power or total combined value. The regulations include a catch-all provision that states that in case the foregoing rules do not permit the relevant calculations to be performed with reasonable certainty, any individual who owns or controls 25% or more of any class or type of ownership interest of a reporting company shall be deemed to own or control 25% or more of the ownership interests of the reporting company.

Who Will Access the Beneficial Ownership Registry?

Beneficial ownership information will not be made available to the public but will be accessible to government regulatory and investigatory bodies. Any improper access or use of this information will be punishable by civil and criminal penalties.

Under the CTA, the FinCEN may only disclose beneficial ownership information upon receipt of a request from:

1. A federal agency engaged in national security, intelligence, or law enforcement activity, for use in furtherance of such activity;
2. A state, local, or Tribal law enforcement agency, if a court of competent jurisdiction authorizes the law enforcement agency to see the information in a criminal or civil investigation;
3. A federal agency on behalf of a law enforcement agency, prosecutor, or judge of another country that requests assistance in an investigation or prosecution;
4. A financial institution, with the consent of the reporting company, to facilitate the compliance of the financial institution with customer due diligence requirements, and
5. A federal regulator authorized by law to assess, supervise, enforce, or otherwise determine the compliance of a financial institution with customer due diligence.

The CTA also authorizes Department of Treasury personnel to access beneficial ownership information for tax administration purposes or if their official duties require such inspection or disclosure.

Penalties

The CTA provides that it is unlawful to (1) willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, or (2) willfully fail to report complete or updated beneficial ownership information. A person who makes the willful filing is liable for a civil penalty of up to $500 for each day the violation continues, and a criminal penalty of up to $10,000 and two years in prison. The rules make it clear that it is the reporting company who is the one ultimately liable for proper reporting.

The CommLaw Group can help!
Although the beneficial ownership reporting deadline for existing companies is not until January 1, 2025, our clients are encouraged to determine whether the reporting requirements apply to them and prepare their filings in advance. Contact us if you need assistance in making the filings, and we will be happy to help you address this new compliance requirement!

Jonathan S. Marashlian – Tel: 703-714-1313 / E-mail: jsm@CommLawGroup.com
Michael Donahue — Tel: 703-714-1319 / E-mail: mpd@CommLawGroup.com
Diana Bikbaeva – Tel: 703-663-6757 / E-mail: dab@CommLawGroup.com