Are you prepared for the Corporate Transparency Act’s new reporting requirements?
The Corporate Transparency Act’s (the “CTA”) new beneficial ownership reporting requirements are rapidly approaching. Starting on January 1, 2024, any newly created domestic or foreign (i.e., companies organized outside of the US but registered to do business in the US) entities that don’t fall under an exemption to the rule will have 90-days from their organization to file an initial beneficial ownership report. Any existing entities (i.e., created before January 1, 2024) that don’t fall under an exemption to the rule will have until January 1, 2025 to file their initial beneficial ownership report. Finally, entities created after January 1, 2025 will have 30-days from organization to file their initial beneficial ownership report.
This article covers the basic questions of the law so you may help your company prepare and comply with the new reporting requirements. Questions like, is my company required to report? What individuals need to be identified on my reports? What information will go into the reports? And, what can I do to help prepare my company for these reporting requirements?
A. What is the CTA?
The CTA was included in the National Defense Authorization Act passed in 2021. The new law sets requirements on companies that fall within the definition of a “reporting company” to file reports that identify two categories of individuals: (i) the “beneficial owner(s)” of the reporting company, and (ii) the “company applicant(s)” of the reporting company. The Department of Treasury, led by the Financial Crimes and Enforcement Network (“FinCEN”), issued its final rule in September 2022 (the “Final Rule”) to help clarify questions that stemmed from the initial enactment of the CTA. The purpose of the CTA and its reporting requirements is intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity in the US.
B. Is My Company Required to Report? If So, What Must It Report?
What is a Reporting Company?
Under the CTA, a reporting company means any corporation, limited liability, or other similar entity that is created under the law of a State or Indian Tribe; or a foreign company registered to do business under the law of a State or Indian Tribe. This definition is broadly drafted to capture any and every entity doing business in the US. However, the CTA provides for twenty-three (23) exemptions to the general definition of a reporting company.
In general, the exemptions primarily focus on entities that are already highly regulated by other federal or state agencies (e.g., companies registered with the Securities Exchange Commission, financial institutions regulated by federal banking agencies, or tax-exempt entities). However, there are two exemptions worth noting that may apply to companies that do not fall with the highly regulated industries. One is the “large operating company” exemption and the second is the “wholly owned subsidiary” exemption.
First, a large operating company means any entity that (i) employs more than 20 employees on a full-time basis in the U.S.; (ii) filed in the previous year a Federal income tax return in the US demonstrating more than $5,000,000 in gross receipts or sales in the aggregate; and (iii) has an operating presence at a physical office in the US. This exemption may be met or lost at any time throughout a company’s existence. So, determining whether your company meets this exemption is an on-going requirement.
Second, a wholly owned subsidiary means any entity of which the ownership interests are controlled or wholly owned, directly or indirectly, by one or more exempt entities is also exempt. So, for example, if your company is wholly owned by a large operating company, the smaller, wholly owned, subsidiary is also exempt.
If a reporting company does not fall under one of the twenty-three exemptions, it must report the following information about itself on its initial report:
- Full legal name of the company;
- Any trade name or “doing business as” name, regardless of whether the name is filed with a state or not;
- Complete current address (cannot be a P.O. box);
- A unique identifying number (e.g., taxpayer identification number); and
- The jurisdiction of organization.
Who are Beneficial Owners?
Under the CTA, a beneficial owner means, with respect to an entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.
Generally, the substantial control prong looks at individuals within your company that are involved in making or influencing important business decisions. A few examples of “important decisions” the Final Rule provides includes reorganization, dissolution or merger; major expenditures or investments; issuances of any equity or incurrence of any significant debt; or amendments of any substantial governance documents. Typically, these individuals include: directors, engaged shareholders and “senior officers” (i.e., CEO, CFO, COO, General Counsel and any other officers who performs these similar functions).
The second prong looks at the actual ownership interest of your company. However, ownership interests are not just limited to simple shares owned by individuals. It also accounts for more complex instruments, such as capital or profit interests, convertible instruments, and any other instrument that may establish ownership. An important rule in determining the ownership percentage calculation is that all interests are treated as exercised. So, for example, if someone owns a warrant that has an option to be exercised and converted into shares that warrant would be treated as exercised for purposes of determining the total ownership percentage the individual has in the company.
There are a few exceptions to who is a beneficial owner as well. The exceptions include: (i) a minor child; (ii) a nominee, intermediary, custodian or agent on behalf of another individual; (iii) an employee, whose control over or economic benefit from the reporting company are derived solely from the employment status of the person; (iv) interests that stem from right of inheritance not yet inherited; and (v) a creditor.
After determining who the beneficial owner(s) are in your company, the company must then report the following information about its beneficial owner(s) on its initial report:
- Full legal name
- Date of birth
- Complete and current residential address
- Unique identifying number and the issuing jurisdiction for one the following documents:
- US Passport
- State Driver’s license
- Other identification document issued by a State; or
- Foreign passport if individual doesn’t have (i) – (iii); and
- An image of the document that the unique identifying number came from under (iv).
Who is a Company Applicant?
Under the CTA, a company applicant is any individual who files an application to form a corporation, limited liability company, or other similar entity in the US; or registers a foreign company to do business in the US. The Final Rule clarifies that a reporting company may have more than one company applicant. They are the individual(s) who actually file the organizational document in a state, as well as the individual(s) who are primarily responsible for directing or controlling the filing of the relevant document.
The information to be reported is the same as required for beneficial owners, except there is no requirement for existing reporting company to report their company applicant(s). Additionally, for companies created after January 1, 2024, there is no on-going duty to update this information. Finally, company applicant(s) may report their business’s address if the filing is done within the ordinary course of business.
C. Other Considerations.
Duty to update and/or correct.
The CTA incorporates an on-going duty to update or correct the information that is included on a company’s initial report and subsequent updated reports. Generally, any triggering events (i.e. changes to beneficial owners) will require an updated report. This must be done within 30 days from when the triggering event becomes effective.
Who has access to my reports?
Information on the reports will not necessarily be public information (i.e., any person may not have access to this sensitive information). The reports will be submitted to FinCEN on their website (Beneficial Owner Secure System aka “BOSS”), however, the information will only be available to federal agencies and state and local law enforcement agencies for purposes of investigating money laundering, terrorist financing and other illicit activities.
D. What Can You Do Now to Prepare?
There are three steps any company can take to help themselves prepare for the CTA’s new reporting requirements. These steps include:
Organizing your current company book and records.
Gathering the organizational documents and shareholder records is the first step in identifying who the beneficial owners are in your company. I previously drafted an article to help understand what goes into creating and maintaining an organized company book, which will help with this step.
Create an internal compliance policy/system for recognizing updating triggers.
It is important for your company to recognize triggers that will require an updated report to be filed because of the on-going duty to update any information that may change after the initial report is filed. Examples of triggers that would require an updated report to be filed may be (i) issuing addition shares or a shareholder transferring shares, or (ii) a change in your management structure or “senior officers”.
Consult with legal counsel.
Depending on the complexity of your company’s structure, it may be necessary or beneficial to consult with legal counsel on organizing your company book, identifying the beneficial owners in your company, and/or creating an internal compliance policy/system. Even though reporting requirements are right around the corner, there are still a number of questions that FinCEN will need to clarify related to these reporting requirements once this law takes effect. Legal counsel can monitor all updates issued related to these requirements and provide guidance to help your company comply with the rules.