To make it more difficult for bad actors to use shell companies to launder their money or hide assets, the United States is creating a national database containing information about the owners of companies formed or doing business in the United States. Under the Corporate Transparency Act (CTA), the vast majority of entities formed or doing business in the United States are required to file a report containing information about itself and each of its “Beneficial Owners”. The required information must be filed electronically through the Financial Crimes Enforcement Network’s (FinCEN) online filing system.
1. Who Must Report
The CTA requires all “Reporting Companies” to file reports identifying their Beneficial Owners. A Reporting Company is any entity that was formed or is registered to business in the United States that does not meet one of the 23 specific exemptions. These exemptions generally include highly regulated entities like financial institutions and publicly traded companies, tax-exempt nonprofits, certain large operating companies (20+ US based employees and $5M+ in yearly revenue), and certain inactive entities.
2. Key Deadlines
Effective Date: The rule took effect on January 1, 2024.
Deadline for Existing Entities: Reporting Companies created or registered before January 1, 2024, have until January 1, 2025, to file initial reports.
Deadline for New Entities: Reporting Companies created or registered after January 1, 2024, will have 30 days after their creation or registration to file their initial reports. For Reporting Companies that are formed in 2024 this 30-day deadline was extended to 90 days.
Deadline for Updated Reports: Reporting Companies are required to file an updated report within 30 days of any change to the previously reported information.
3. Who is a Beneficial Owner
A Beneficial Owner is an individual or entity that either 1) owns or controls at least 25 percent of the ownership interests of the entity; or 2) exercises substantial control over the entity.
In calculating ownership interests, all options and convertible instruments are treated as having been exercised.
Examples of “substantial control” include anyone who is able to make important decisions on behalf of the entity, anyone who serves as a senior officer for a Reporting Company, and anyone who has the authority to appoint or remove a senior officer of the Reporting Company.
4. What Must be Reported
The CTA requires each Reporting Company to report information about itself and to report four pieces of information about each of its Beneficial Owners. Entities created after January 1, 2024, must also report those same four pieces of information about that entity’s Company Applicant (the individual who files the document that forms the entity, and the individual who directs or controls the filing of that document).
A Reporting Company must report:
The Reporting Company’s:
Full legal name and any tradename or d/b/a;
Business street address (cannot be a PO box);
Jurisdiction of formation; and
Taxpayer Identification Number (TIN).
For each Beneficial Owner, the Beneficial Owner’s:
Full legal name;
Date of birth;
Current residential or business street address; and
A unique identifying number from an acceptable identification document, and an image of the identification document from which the unique identifying number was obtained. Acceptable identification documents are:
a nonexpired U.S. passport;
a nonexpired state, local, or Tribal identification document;
a nonexpired State-issued driver’s license; or
if an individual lacks one of those other documents, a nonexpired foreign passport.
5. Ongoing Obligations
In addition to filing the initial reports described above, a Reporting Company is required to file an updated report within 30 days of any change to the previously reported information. Common examples of situations that would require an updated report to be filed include: (1) a change in address of a beneficial owner; (2) the death of a beneficial owner; or (3) a management decision resulting in a change in beneficial owner. For example, whenever a change occurs that results in an individual moving above or below the 25 percent of total ownership interests threshold, an updated report must be filed.
6. Penalties for Noncompliance
Violations of the CTA, including failing to report information or willfully reporting false or fraudulent information, can lead to civil or criminal penalties. Civil penalties can be up to $500 for each day the violation continues. Criminal penalties include fines up to $10,000 and/or imprisonment for up to two years.
7. Resources
Hutchinson Black and Cook attorneys Ryan Robinson and Marianne Luu-Chen published an article in the Colorado Lawyer magazine discussing the CTA in greater detail.
In addition, FinCEN has published useful reference material on its website.
Next Steps
Hutchinson Black and Cook is prepared and happy to assist you in understanding and complying with these new requirements. If you have any questions or if you would like more details regarding these new requirements, please reach out.
Notice Regarding United vs. Yellen
News release can be found here.
On March 1, 2024, a federal district court in Alabama entered a final declaratory judgment, concluding that the Corporate Transparency Act exceeds the Constitution’s limits on Congress’s power and enjoining the Department of the Treasury and FinCEN from enforcing the Corporate Transparency Act against the plaintiffs. FinCEN will comply with the court’s order for as long as it remains in effect. As a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action.