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Corporate Transparency Act: Reporting Beneficial Ownership

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On January 1, 2024, the Corporate Transparency Act (the “Act” or the “CTA”) will take effect. This new federal law is expected to affect about 32.6 million small and medium-sized businesses in unregulated industries during its first year, and 5 million additional companies each year in years 2-10. If the Act applies, a company may be required to report information about the people who own or control it—the company’s beneficial owners—to the U.S. Treasury Department’s Financial Crimes Enforcement Network or FinCEN. If a business is otherwise regulated or larger in size than small or medium under the CTA, exemptions may apply. If a company is subject to an exemption, it will not have to comply with the CTA unless circumstances change. The CTA requires smaller and medium-sized businesses to file with a national database in 2024 based on their date of formation. Ongoing monitoring and notification of changes in their reported information are also required, with only a short 30-day turnaround time for reporting such changes. The “reporting company”– any firm subject to the CTA’s reporting requirements–is responsible for the filing, and the filing requires three categories of information: (1) Reporting Company information; (2) Beneficial Owner information (“BOI”); and (3) Company Applicant information (only required if the entity is formed on or after January 1, 2024).

Reporting company reports must include information such as legal names and trade names or DBAs, addresses, the jurisdiction of formation or registration, and taxpayer identification numbers (TINs). Beneficial owner and company applicant reports are provided at the individual level and must include legal name, birthdate, address (in most cases, a residential street address), an identifying number from a driver’s license or passport, and an image of that approved document. In most instances, the information must be updated any time the reported information is changed. This process can be somewhat simplified by applying for a FinCEN identifier (which is optional), after which the individual is allowed to use the identifier number rather than submit personal information for each report subject to updating requirements.

Violations of the reporting obligations can incur (a) a civil penalty of not more than $500 for each day that the violation continues or has not been remedied; and (b) a fine of not more than $10,000, imprisonment for not more than two years, or both. The statute and regulations do, however, limit violations to willful conduct.

The CTA governs corporations, limited liability companies, and other similar entities created in or registered to do business in the United States. The CTA may involve the following businesses and industries in particular: Agriculture, Real Estate, Construction, Estate Planning, Privately Held Businesses and Enterprises, Developers, Franchises, International, Corporate, Intellectual Property, Mergers and Acquisitions, Wealth Planning, Entertainment, Tribal Entities, and Alaska Native Corporations.

To prepare for the CTA, companies should review their existing and expected business structure in consultation with their lawyers, and determine whether the CTA applies. If none of the exemptions applies, and the CTA does, companies in consultation with their lawyers should consider what process to use to gather the required information, how it will be reported to FinCEN in a timely manner, and how to monitor that information in the future. As an existing business, the reporting company will have until January 1, 2025, to file. FinCEN is not accepting reports until January 1, 2024. However, if the entity is formed in 2024, the company will have 30 days to file (on Sept. 28, 2023, FinCEN proposed to amend the rule to allow 90 days instead of 30, but the amendment is not final). Thus, if a company plans to form an entity in 2024, it might consider forming the entity in 2023.  There is no fee for reporting to FinCEN. Businesses should consult with a lawyer of their choosing with regard to whether the CTA will apply.

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