By The Corporate Group at Brown Moskowitz & Kallen, P.C.
The Corporate Transparency Act and New Disclosure Requirements
A new federal law, taking effect January 1, 2024, imposes new disclosure requirements on privately held companies. The Corporate Transparency Act (the “Act”) takes aim primarily at smaller companies in industries that are not highly regulated. The Act — part of the U.S. Anti-Money Laundering Act of 2020 — is intended to penetrate multiple layers of entities to identify, and thus deter, illegal activities, including terrorist financing, money laundering, and tax fraud.
Businesses that meet the definition of a “reporting company” are required to report certain information about the entity and its beneficial owners via the U.S Treasury Department’s Financial Crimes Enforcement Network (FinCen) secure website. The data will be available to U.S. law enforcement and other government agencies, including the IRS, and select financial services companies, but not the public.
Definition of “Reporting Company”
There are two types of reporting companies under the Act: A domestic entity formed or registered by filing a document with the office of the secretary of state, or any applicable office, under the law of a state or Indian tribe and a foreign entity formed under the law of a foreign country and registered to do business in any U.S. state or U.S. tribal jurisdiction. Unless an exemption applies, discussed below, EVERY business formed in the U.S. or doing business in the U.S. is subject to reporting under the Act – including corporations, limited liability companies, and most limited partnerships. Most trusts are likely excluded since they are not created by filing with a state authority.
Exemptions from Reporting
There are 23 exempt categories of business entities. A full list can be found in the reference guide posted by FinCEN on its website: Beneficial Ownership Information Reporting | FinCEN.gov. The more common exemptions cover public companies, “large operating companies,” public accounting firms, regulated insurance companies, registered investment companies and advisers, registered venture capital fund advisers, banks, securities brokers and dealers, exchanges, regulated public utilities, tax-exempt non-profits and trusts, subsidiaries of exempt entities, and “inactive entities.” The exemption for “large operating companies” requires constant monitoring of employee levels and revenues. The law defines this entity as one that (i) employs more than 20 employees full-time in the U.S. (no aggregation), (ii) has filed U.S. income tax returns for the prior year reflecting more than $5 million in aggregate gross receipts or sales from U.S. sources, and (iii) operates a physical office in the U.S.
Data to Report
Reporting companies must report data about the entity, beneficial owner information (“BOI”), and, for entities formed on or after January 1, 2024, company applicant information. Information to be reported about a reporting company includes the entity’s legal name, trade names, DBAs, address, federal Tax ID number and the jurisdiction of formation or registration. The law describes a “beneficial owner” as an individual who, directly or indirectly, exercises substantial control over a reporting company or owns (directly or indirectly) or controls at least 25% of the ownership interest therein. The information to be reported includes legal name, birthdate, residential street address, and the identifying number from and a copy of ID such as a non-expired driver’s license or passport. A “company applicant” is the person who “directly files” the document that creates the reporting company (e.g., the certificate of formation) or who is primarily responsible for directing such filing. The same personal information that is reported for beneficial owners is to be reported for up to two company applicants. Reporting companies must collect, store, and report personally identifiable information (“PII”) securely or risk penalties under the Act.
The Chart below lists the filing deadline for initial reporting by reporting companies. Reporting companies must report any changes in BOI to FinCEN within 30 days after a change occurs.
Date Formed or Registered in U.S.
- Formed or registered before January 1, 2024
- Formed or registered on or after January 1, 2024, but prior to January 1, 2025
- Formed or registered on or after January 1, 2025
- January 1, 2025
- Within 90 calendar days of receiving actual or public notice of the effective date of creation or registration
- Within 30 calendar days of receiving actual or public notice of the effective date of creation or registration
Civil and Criminal Penalties for Noncompliance
The penalties for providing false or fraudulent information or failing to submit a complete initial or updated report are fines of $500 per day up to a maximum of $10,000, imprisonment for up to two years, or both. Penalties for the unauthorized disclosure or use of BOI are fines of $500 per day up to a maximum of $250,000 and imprisonment for up to five years for the knowing unauthorized disclosure or use of BOI. The prompt correction of inaccurate information (within 90 days of becoming aware) may avoid penalties.
BMK is Ready to Help Your Business Navigate the CTA
Contact us today at (973) 376-0909 if you would like help analyzing whether your business is a reporting company under the CTA. We can answer your questions about the CTA and advise the next steps your business should take regarding (i) updating of contracts, company documents and deal agreements, (ii) creating or updating company internal policies/procedures, and (iii) implementing internal systems for collecting and reporting data securely. Accurate data collection and reporting with a process for ensuring the security of PII are key to staying compliant with the Act.
Disclaimer: Any legal advice regarding the application of the Act and reporting obligations requires a new Firm engagement. BMK’s existing client engagements do not contemplate legal advice or analysis regarding compliance with or reporting obligations under the Act.
©Copyright 2023, Brown Moskowitz & Kallen, P.C. All rights reserved. This article is for informational purposes only and is not intended to constitute, and does not constitute, legal advice.