Beginning January 1, 2024 (“Effective Date”), under the Corporate Transparency Act (“CTA”) millions of businesses are subject to a new beneficial ownership reporting requirement.
The purpose of the CTA is to make it harder for bad actors to hide or benefit from ill-gotten gains through shell companies or other opaque ownership structures. Under the CTA, certain domestic and foreign companies are required to reveal information about their beneficial owners and individuals handling corporate paperwork to the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
Qualifications as a Reporting Company:
All companies, including companies formed domestically and companies formed under foreign laws but registered to operate in any state, territory or Indian tribe in the United States, like corporations, limited liability companies, limited partnerships, and other similar entities must report their beneficial ownership to FinCEN.
Exemptions:
There are numerous company types that are not subject to the CTA reporting requirements. In general, these are highly regulated businesses, such as tax-exempt nonprofit entities, tax-exempt trusts, and specific entities already under regulatory oversight, including public companies, registered investment companies, and registered investment advisors.
There is also an exemption for "Large Operating Companies," which are companies that have over 20 full-time employees in the United States, maintain a physical office presence within the United States and garner more than $5 million in gross receipts or sales from sources within the United States. However, a company can lose its status as a Large Operating Company if it fails to maintain each of the necessary requirements (for example, if it no longer has at least 20 full-time employees). Upon losing its exempt status, the new reporting company has 30 days to file a report with FinCEN.
Reporting Timelines:
Reporting companies established before January 1, 2024, are required to submit a report to FinCEN no later than January 1, 2025.
Reporting companies established after January 1, 2024, are required to submit a report to FinCEN within 30 calendar days upon receiving notification of formation or registration from the secretary of state.
Reporting companies must report any changes in beneficial ownership information within 30 days of such change.
Required Information:
Reporting companies must provide their legal name, trade name (if applicable), principal place of business, jurisdiction of formation, and taxpayer identification number.
Each officer, director, anyone who has substantial influence over important decisions in the company, anyone who owns or controls 25% or more of its ownership interests, and any individuals directly involved in filing for, or controlling, the creation or registration of the company must also provide their name, date of birth, residential address, and photograph. Rights convertible into ownership interests, such as options, warrants, and convertible notes, are treated as exercised when calculating ownership.
Both reporting companies and senior officers deliberately failing to file or update a report may face penalties of $500 per day for ongoing violations, up to $10,000, and/or imprisonment for up to two years. Reporting companies are granted a safe harbor if they voluntarily rectify an inaccurate report within 90 days of its filing.
Confidentiality of Beneficial Ownership Information:
Beneficial ownership information is not public information. However, it is accessible to authorized entities like law enforcement, government agencies with a court order, federal financial regulators, and institutions that have the consent of the reporting company.
Any person who knowingly discloses reported beneficial ownership information without proper authorization could be fined $500 per day, up to $250,000, and/or face imprisonment for up to five years. If the unauthorized beneficial ownership information disclosure is part of a pattern involving more than $100,000 in 12 months or violates another U.S. law, the fines could be increased to a maximum of $500,000, and imprisonment could extend up to ten years.
Conclusion:
Many privately owned companies are now subject to beneficial ownership reporting requirements, which typically must be resolved within 30 days.
The lawyers at Palmer Kazanjian are ready and able to answer your legal questions, recommend best practices, and help your business comply with these new requirements.