By William G. “Bill” Smith, LL.M. and Rachel L. Sears

The Corporate Transparency Act (the “CTA”) and its final regulations embody a significant shift in the way the United States government collects entity ownership information. The CTA’s primary aim is to combat money laundering and illicit financial activities, often associated with the use of opaque shell companies. The CTA mandates the establishment of a nonpublic centralized beneficial ownership registry, a secure database maintained by the Financial Crimes Enforcement Network (“FinCEN”) within the U.S. Department of the Treasury. This registry will gather and retain information about the true beneficial owners of legal entities, ensuring that law enforcement, financial institutions, and relevant authorities can access the necessary data to effectively combat financial crimes. However, in doing so, the CTA creates an administrative reporting burden on law-abiding entities and individuals.

Crucial Provisions of the Corporate Transparency Act
Who Must Report: The CTA defines a “Reporting Company” as any entity that must file with a secretary of state or other domestic governmental authority unless an exemption applies. These entities include corporations, limited liability companies (LLCs), limited partnerships, and similar structures, as well as foreign entities registered to do business in the United States. There are twenty-three types of entities exempt from reporting. Examples include: publicly-traded companies; governmental authorities; certain entities already registered with various governmental agencies; certain registered tax-exempt entities; and “large” companies with more than 20 full-time employees and more than $5,000,000 in annual gross revenue.

Defining “Beneficial Owners”: Beneficial owners are individuals who, directly or indirectly, exert significant control over the entity or own or control at least 25% of the ownership interests. Their full legal names, dates of birth, and addresses must be reported to FinCEN.

Company Applicants: A Reporting Company must also report applicants who directly file the document with the secretary of state to create or register the Reporting Company. At most, two individual applicants must be disclosed: the one who files and the one who directs the filing; for instance, an attorney instructing a paralegal to file.

Reporting Deadlines: Reporting Companies formed prior to January 1, 2024, must file no later than January 1, 2025. Reporting Companies formed on or after January 1, 2024, must file within 30 days following formation. FinCEN cannot accept reports prior to January 1, 2024. FinCEN’s instructions and other technical guidance will be available at www.fincen.gov/boi.

Penalties and Safe Harbors: A person who willfully or knowingly violates the reporting requirements will be liable for civil penalties of not more than $500 each day the violation continues, with a maximum penalty of $250,000, face imprisonment of 5 years or less, or both. A company applicant can correct inaccurately reported information within 90 days after submission.

Conclusion
With the effective date of January 1, 2024 quickly approaching, entities and their advisors need to start identifying all the Reporting Companies in their organizational structures and gathering the required information on all of its beneficial owners.

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