Navigating the Corporate Transparency Act

Effective January 1, 2024, the Corporate Transparency Act (“CTA”) requires “reporting companies” to report company information, beneficial owner information, and company applicant information to the Financial Crimes and Enforcement Network (FinCEN). The CTA’s purpose is to enable law enforcement to more effectively counter illegal activity such as money laundering, tax fraud, and the financing of terrorist activities via shell companies.

Who Must Report:

All companies that are created or registered, respectively, by a filing with any Secretary of State or similar office, such as a corporation or a limited liability company (LLC), are considered “reporting companies” and must report to FinCEN unless the company falls under one of the CTA’s enumerated exemptions.

Most company exemptions apply to heavily regulated entities such as financial institutions, securities brokerages, and tax-exempt organizations. However, there are two primary exceptions that may apply to a broad cross-section of companies.

First, the “large operating company” exemption excuses a company from reporting if that company:

1. Employs more than 20 full-time employees located in the United States,
2. Maintains a physical operating presence in the United States, and
3. Filed a federal tax return in the previous year showing more than $5 million in gross receipts or sales (excluding gross receipts or sales from sources outside the United States).

For purposes of the employment requirement, employees must be directly employed by a company, meaning that employee headcount across a corporate structure cannot be consolidated. However, for purposes of calculating a company’s gross revenue, the company may use the company’s federal tax filing from the previous year, which may include consolidated income from disregarded subsidiary entities.

Second, the “subsidiary” exception excuses a company from reporting if that company’s ownership interests are controlled or wholly owned, directly or indirectly, by certain exempt entities—including companies exempt under the large operating company exemption. Thus, for example, if a parent company meets the large operating company exemption, any wholly owned subsidiaries would also be exempt under the subsidiary exemption.

When to Report:

1. Initial Report

If the company was formed before January 1, 2024, the company’s report to FinCEN must be filed before January 1, 2025. Alternatively, if the company is formed between January 1, 2024, and January 1, 2025, the company will have 90 days to file a report upon the earlier of (1) the company receiving notice of the company’s formation or (2) the Secretary of State publicly announcing the creation of the company. If the company is formed after January 1, 2025, the entity will have 30 days to file a report upon the earlier of (1) the company receiving notice of the company’s formation or (2) the Secretary of State publicly announcing the creation of the company.

2. Corrected Report for Incorrect Information Previous Submitted

Additionally, if there is a mistake with respect to any information previously submitted to FinCEN, the reporting company must file a corrected report within 30 days of when the company becomes aware of or has reason to know of the inaccuracy.

3. Updated Report for Change in Information Previously Submitted

If there is a change with respect to any information previously submitted to FinCEN concerning the reporting company or its beneficial owners, including a change in the reporting company’s name or a beneficial owner’s name, address, or unique identifying number, the reporting company must file an updated report within 30 days of the date on which such a change occurs.

What to Report:

FinCEN requires domestic reporting companies to submit three different categories of information: (1) reporting company information, (2) beneficial owner information, and (3) company applicant information (for entities created after January 1, 2024).

Individuals and reporting companies may obtain a “FinCEN identifier” that, in lieu of the information normally required by FinCEN, may be submitted for that individual or company. Thus, individuals whose information would otherwise need to be submitted numerous times by multiple reporting companies should consider applying for a FinCEN identifier.

Finally, the information disclosed to FinCEN is not publicly accessible, and may only be disclosed to law enforcement, financial institutions conducting required due diligence with customer consent, and federal and state regulators assessing financial institutions.

1. Reporting Company Information

The reporting company’s initial report must include the company’s:

• • Full legal name;
  • Trade name(s) or “doing business as” name(s) (DBAs);
  • Principal place of business address in the United States;
  • State of formation; and
  • IRS Taxpayer Identification Number (TIN) or Employment Identification Number (EIN).

A parent company cannot file a single report on behalf of themselves and its subsidiaries. Rather, each company—parent and subsidiaries alike—that meets the definition of a “reporting company” must submit its own initial report, as well as follow ups to account for incorrect or updated information.

2. Beneficial Owners

The reporting company’s initial report must also include information for each “beneficial owner” of the company. There are two categories of beneficial owners: (a) those who directly or indirectly exercise “substantial control” over the reporting company, and (b) those who own or control at least 25% of the reporting company’s “ownership interest.”

However, the CTA exempts certain individuals from classification as a “beneficial owner,” including (i) employees of a reporting company whose “substantial control” comes solely from their employment status, provided such employees are not senior officers, and (ii) creditors of a reporting company who would only be classified as a beneficial owner because of a right or interest derived solely from an obligation of the reporting company to pay a predetermined sum of money.

• • Individuals Exercising Substantial Control

Generally, individuals exercise “substantial control” over a reporting company if they (i) are a senior officer (President, CEO, CFO, COO, etc.), (ii) have the authority to appoint or remove officers or a majority of the board of directors, or (iii) can direct the strategic or major actions of the reporting company. An individual typically exercises their “substantial control” through board representation, ownership of a majority of the ownership or voting rights of a reporting company, or control over another entity, or multiple entities, that separately or collectively exercise control over a reporting company.

• • Individuals Owning or Controlling 25% of the Reporting Company

If an individual directly or indirectly owns 25% of the reporting company, they are considered a beneficial owner, and the reporting company must submit the required information for such a beneficial owner. An “ownership interest” in a reporting company includes any equity or stock, profit interest, convertible interest, option, or any other arrangement or instrument used to establish ownership. An individual’s ownership interest also encapsulates both joint ownership of an ownership interest, and indirect ownership by means of ownership or control of another entity or multiple entities, that separately or collectively, own or control an ownership interest in the reporting company. If there are multiple classes stock with varying voting power and/or ownership interests, the applicable percentage of ownership is the individual’s percentage interest of the total outstanding voting power or collective value of all classes of ownership interests.

• • Required Information for Beneficial Owners

A reporting company must submit the following information for each of its individual “beneficial owners”:

• • • Their full legal name;
    • Their date of birth;
    • Their residential address;
    • A unique identifying number and the issuing jurisdiction, which can typically be satisfied by a non-expired U.S. passport, state identification document, or state driver’s license; and
    • An image of the document from which the unique identifying number was obtained (passport, ID, driver’s license).

3. Company Applicant Information

The reporting company’s initial report must also include information on the company applicant(s). A “company applicant’ is the individual who directly files the document that creates the reporting company entity and, if more than one individual is involved, the individual primarily responsible for directing the filing.

For reporting companies formed before January 1, 2024, the reporting company is not required to report information concerning its company applicant.

For reporting companies formed after January 1, 2024, the reporting company must submit the same information for company applicants as required for beneficial owners. However, if the filing was made in the course of such company applicant’s business, the address required is that of the applicant’s business.

4. Conclusion

In conclusion, the Corporate Transparency Act adds additional filing responsibilities for existing and newly filed companies. Additionally, reporting companies must ensure that they update their FinCEN filings upon any change in information for the reporting company or any beneficial owner. Moving forward, business owners, senior officers, and attorneys must be cognizant of filing deadlines, add notification provisions in employment contracts and subscription agreements for changes in information previously reported to FinCEN, and ensure that any change in the reporting company’s information is properly disclosed.

The team at Kessler Collins, P.C. can assist in determining both the applicability of the Corporate Transparency Act and who qualifies as a “beneficial owner” of a reporting company. Further, we can help submit the requisite information to FinCEN and facilitate the drafting and implementation of internal company procedures to ensure that your company stays compliant with the Corporate Transparency Act’s requirements.

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