Changes to Corporate Ownership: The Corporate Transparency Act

The Corporate Transparency Act

UPDATE: On March 11, 2024, the U.S. Justice Department, on behalf of the Department of Treasury filed a Notice of Appeal in response to the Alabama District Court decision declaring the Corporate Transparency Act unconstitutional. After the filing, FinCEN set forth the following statement:

While this litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court’s order. Other than the particular individuals and entities subject to the court’s injunction… reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.

For entities formed or first registered prior to January 1, 2024 (whose reporting deadline is December 31, 2024), reporting requirements may be more clear by either the courts before the year-end deadline or by FinCen in response to the court filing. However, newly created entities or those filed on or after January 1, 2024, that are not part of the limited group of Plaintiffs in the North District of Alabama case, the required filings are to be made within the 90 day period. For questions concerning this Update, please contact our office at contactus@oplaw.com or call us at our office at 954-280-4651.

The federal government enacted legislation requiring the submission of “beneficial ownership” information that will affect millions of existing and future business entities, including corporations and limited liabilities companies. While Congress initially passed this requirement in the Corporate Transparency Act in 2021, the law will take effect on January 1, 2024. This Act will create new compliance obligations for the smallest private companies to report detailed information on the beneficial ownership and persons with substantial control over these entities with the Treasury Department’s Financial Crimes Enforcement Network (FinCen).

The following information is current; however, the government may continue to change some of the Act’s requirements. In order to make sure that you are compliant, you may wish to contact our corporate legal team within the next 90 days.

What is the beneficial ownership requirement?

Beneficial ownership refers to identifying information about the individuals who directly or indirectly own or substantially control a company such as a corporation or limited liability company. An individual who has substantial control over a business entity includes (i)senior officers, (ii) individuals that have authority to appoint or remove certain officers or a majority of directors, directs, determines, or (iii) has substantial influence over important decisions made by the reporting company, or (iv) an individual that is an important decision maker for the company.

There are exclusions from the definition which include (i) a minor child, (ii) an individual acting as a custodian, agent, nominee on behalf of another individual, (iii) an employee whose substantial control over or economic benefits from such entity are derived strictly from the employment status of the employee, as long as that person in not a senior officer of the reporting company; (iv) a creditor of a reporting company; and (v) an individual whose interest in a reporting company is through inheriting a future interest in the reporting company.

Why even have this requirement?

The government’s stance is that, by having this reporting requirement, it would make it easier to identify bad actors that may hide behind or benefit from questionable gains through shell or other questionable corporate entities. By identifying such bad actors, through the implementation of this Act, the government is attempting to deter illicit financial activity and potential national security threats that may result otherwise.

What is a “reporting company”?

A “reporting company” is defined as either a domestic or foreign reporting company as follows:

1. A “domestic reporting company” is (i) a corporation, (ii) a limited liability company, or (iii) created by the filing of a document with the secretary of state or any similar office under the law of a state or Native American tribe.
2. A “foreign reporting company” is (i) a corporation, limited liability company or other entity (ii) formed under the law of a foreign country and (iii) registered to do business in any state or tribal jurisdiction by the filing of a document with the secretary of state or any similar office under the law of a state or Native American tribe.

When is this reporting required?

If a business is created or registered to do business before January 1, 2024, that business entity will have until January 1, 2025 to file its initial beneficial ownership information report. However, a company created or registered on or after January 1, 2024 will have 90 days to file its initial beneficial ownership information report. After December 31, 2024, companies will have to file the beneficial information report within 30 days of the effective date or filing date of the entityunder applicable law.

Are there exemptions to this requirement?

There are currently 23 types of entities that are exempt from this reporting requirement. These entities include nonprofits, large operating companies, and publicly traded companies that meet specified requirements. Examples of exempt companies include securities brokers, insurance companies, accounting firms, credit unions, banks, tax-exempt entities, and public utility companies.

In particular, the large operating company exemption applies to an entity that (i) employes more than 20 full-time employees in the United States, (ii) has an operating presence at a physical office in the United States, and (iii) has filed a federal income tax or information return in the United States for the previous tax year showing more than $5 million of gross receipts or sales, excluding gross receipts or sales from sources outside of the United States.

How do I prepare for the Corporate Transparency Act?

All companies should determine, prior to year-end, if they are exempt from this Act. If not, each company should identify individuals who “substantially control” the reporting company or directly or indirectly own or control at least 25% of the ownership interests in the reporting company or have “any other form of substantial control” over the reporting company.

If there are any businesses that are inactive for a certain period of time or not needed that are not exempt from this Act, one may consider dissolving those entities so that one does not have to do the required reporting.

What type of information is required to be reported under the CTA?

The following information is required for a reporting company:

1. The full legal name of the reporting company;
2. Any trade name(s), fictitious names, or other names under which the business is conducted;
3. The current address of the business in the United States;
4. The jurisdiction of formation or registration;
5. The taxpayer number issued by the IRS (or the tax ID number issued by the foreign jurisdiction and the name of that jurisdiction).

The beneficial owners and company applicants are required to provide information including:

1. Full legal name of individual
2. Date of birth
3. Current street address
4. Unique identification number and issuing jurisdiction from either a non-expired photo identification that is issued by the United States (such as a passport) or state driver’s license or a non-expired passport issued by a foreign government and a copy of such applicable government issued document.

There are exceptions to these requirements; and instead of providing the foregoing, the reporting company can provide the reporting individual’s FinCEN Identification Number, if previously applied for and assigned to said individual.

What does this all mean?

The Act may continue to evolve but one thing is for certain: requiring companies reporting beneficial ownership is here to stay. We will help navigate and guide you with what you need to do, not only to prepare for the requirements of the Corporate Transparency Act, but also to make sure that are compliant with the Act itself. Our team will provide you with the individual attention that you need to better understand and identify what is required for you and your company to comply. For more information, please contact us by phone at 954-384-6114.