Dear Client:
This alert is to inform you about a new federal law that affects most small businesses in the US. The law is called the Corporate Transparency Act (CTA) and it requires certain companies to report information about their beneficial owners to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).
What is the CTA and why was it enacted?
The CTA was passed by Congress in 2021 and takes effect on January 1, 2024. The purpose of the CTA is to prevent the misuse of anonymous shell companies for money laundering, tax evasion, terrorism financing, and other illicit activities. The CTA aims to enhance the transparency and accountability of the U.S. corporate system by creating a secure and confidential database of beneficial owners of reporting companies.
What is a reporting company and who is a beneficial owner?
A reporting company is any corporation, limited liability company, or similar entity that is registered or formed in the U.S. or that operates in the U.S. by filing an application to do business or obtaining a license. There are some exceptions for certain types of entities, such as publicly traded companies, banks, insurance companies, charities, trusts and others.
A beneficial owner is an individual who directly or indirectly owns or controls at least 25% of the equity interests of a reporting company or who exercises substantial control over a reporting company. A beneficial owner does not include a nominee, intermediary, custodian, agent, or employee who acts on behalf of another person.
What information do reporting companies have to provide to FinCEN?
Each reporting company that is not exempt must identify in its initial beneficial ownership report each of its beneficial owners and provide five pieces of personally identifiable information about each of those beneficial owners. This information includes:
– Full legal name
– Date of birth
– Current residential or business address
– Unique identifying number from an acceptable identification document (such as a passport or driver’s license)
– FinCEN identifier (a unique number assigned by FinCEN to each beneficial owner)
In addition, the initial beneficial ownership report must disclose the reporting company’s full legal name, any trade name or doing business as name, a complete current address, the state or jurisdictions of the reporting company’s formation, and the reporting company’s taxpayer identification number (TIN) or, where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of that jurisdiction.
How and when do reporting companies have to submit their reports to FinCEN?
Reporting companies must submit their initial beneficial ownership reports to FinCEN electronically through a secure online portal that is available on FinCEN’s website beginning in January 2024. The deadline for submitting the initial reports depends on when the reporting company was formed or registered:
- For reporting companies that were formed or registered before January 1, 2024, the deadline is January 1, 2025.
- For reporting companies that are formed or registered on or after January 1, 2024, the deadline is within 30 days of formation or registration. However, for reporting companies that are formed or registered on or after January 1, 2024 but before January 1, 2025, the deadline has been extended to 90 days to allow new entities additional time to understand the new reporting requirements.
Thereafter, reporting companies must update their beneficial ownership information within one year of any change in the information previously reported to FinCEN.
What are the penalties for non-compliance with the CTA?
The CTA imposes civil and criminal penalties for failing to report or update beneficial ownership information, or for providing false or fraudulent information. The penalties include:
A civil penalty of up to $500 per day for each day that the violation continues.
A criminal penalty of up to $10,000 and/or imprisonment for up to two years.
How will FinCEN protect the confidentiality and security of the beneficial ownership information?
FinCEN will store the beneficial ownership information in a confidential and secure database that will not be accessible to the public. FinCEN will only release the information upon:
– A request from certain federal or state agencies engaged in national security, intelligence or law enforcement activity
– Certain types of requests from a federal agency on behalf of foreign authorities
– A request by a financial institution “subject to customer due diligence requirements”
– A request by a federal regulator
FinCEN will also maintain records of each request for and disclosure of beneficial ownership information and will conduct audits to ensure compliance with the CTA.
What should you do next?
Please contact us to determine if your business qualifies as a reporting company subject to the reporting rules, and if you would like our assistance filing your initial report(s).
Please let us know if you have any questions or concerns about the CTA or the reporting process.