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November 27, 2023 Opinion & Commentary | Expert’s Corner

Corporate Transparency Act creates new reporting requirements for small businesses

By Stephanie Cummings and Matthew H. Gaul
Stephanie Cummings

Beginning Jan. 1, 2024, U.S. businesses, for the first time, will be required to report their beneficial ownership directly to the federal government.

This fundamental shift in reporting requirements is targeted to affect small businesses, irrespective of business type or history, under the theory that small businesses are the companies most likely to be engaged in money laundering.

Matthew H. Gaul

Failure to comply with reporting requirements carries significant criminal and financial penalties.

These new requirements are a result of the Corporate Transparency Act (CTA), enacted in January 2021, which provides the federal government — via the Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of Treasury — ownership and control information of small companies.

The breadth of this law will impact many types of entities, such as real estate and family holding companies, main street businesses, small manufacturers, and many others.

Given the enormity of the undertaking of the CTA’s requirements, the implementation of the act has been delayed for several years, but is now set to go into effect on Jan. 1, 2024.

The CTA requires that businesses — such as LLCs, corporations and certain other entities — known under the CTA as “reporting companies,” identify each individual who has a 25% or more beneficial interest in, or “substantial control” of, the organization.

The required identifying information includes name, address, date of birth, and a copy of government identification, such as a driver’s license.

Failure to make the report in a timely manner carries penalties of $500 per day (up to $10,000 per violation) and up to two years in prison for “control persons” of the business, which includes most officers, directors, managers and general partners.

There are currently 23 reporting company exemptions, designed to exclude certain businesses with existing oversight structures.

These include: federal or state credit unions; most companies required to file U.S. Securities and Exchange Commission reports, including public companies, investment advisers and investment funds; accounting firms; most tax-exempt entities; and wholly owned subsidiaries of exempted companies.

One of the most important exemptions is known as the “large operating company” exemption, which applies to businesses that have all three of the following: more than 20 full-time employees; more than $5 million in gross receipts or sales; and an operating presence with a physical office within the U.S.

Even if exempted, businesses should carefully review their entity structures to determine whether any affiliates are subject to reporting requirements.

Non-exempt reporting companies formed prior to Jan. 1, 2024, have until Dec. 31, 2024 to report their beneficial owners and control persons.

Beginning Jan. 1, newly formed companies must report their beneficial ownership within 30 days of formation, and report two “company applicants.”

Those are the individuals who direct the filing of the organizational documents, such as the organizer or incorporator, and the person who actually makes the Secretary of the State filing, such as a lawyer or filing service employee.

Any changes to a reporting company’s information, such as a beneficial owner’s address change, must be reported to FinCEN within 30 days. Willful failure to do so could subject the control persons of the business to criminal and financial liability.

However, if an individual provides the business with a personal FinCEN number, it would be the individual’s responsibility to keep personal information current.

All reporting will be completed by a FinCEN website portal that will not likely be available until Jan. 1, 2024.

Despite its imminent effective date, there are many questions left unanswered by the Department of Treasury’s regulations and official guidance, leaving compliance in some cases less than straightforward.

Anyone who has an interest in a business entity, whether as an officer, director, manager or owner, should look closely at the CTA to make sure they are ready for next year’s reporting requirements.

Stephanie Cummings and Matthew H. Gaul are partners at law firm Carmody Torrance Sandak & Hennessey LLP.

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