On January 1, 2024, the Corporate Transparency Act (the “CTA”), federal legislation passed in 2021 requiring most private companies to file reports disclosing their beneficial owners, became the law of the land in the United States. Through the CTA, the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of Treasury, is empowered to maintain secure, online databases of beneficial ownership information for use by law enforcement and banking entities. Those companies that are required to report (“Reporting Companies”) that were formed on or after January 1, 2024 have 90 days to file reports with FinCEN. As of January 1, 2025, the reporting window will be reduced to 30 days. In addition, existing companies that are Reporting Companies must file reports prior to January 1, 2025.
The CTA brings with it a dizzying array of terminology and acronyms that are important for any owner of a beneficial interest in a company doing business in the US needs to know.
“Beneficial Ownership Information” or “BOI” refers to information about the individuals who own or control a company, whether directly or indirectly. As a general rule, anyone who owns a 25% or greater interest in the company, or exercises “substantial control,” must be listed in the report.
“Reporting Companies” include most private companies formed by the filing of a document with a State, including foreign companies that do business in the US. There are 23 categories of entities that are exempt from the reporting requirements of the CTA. These include (i) publicly-traded companies; (ii) companies in regulated industries (e.g., banking, insurance, public utilities); (iii) governmental authorities; and (iv) securities issuers, exchange or clearing agencies, and investment companies and investment advisers. FinCEN has advised that entities not formed by a public filing with a State (e.g., general partnerships; common-law trusts) are not Reporting Companies, but there remain some areas of uncertainty (notably, limited liability partnerships, which are general partnerships that have elected limited liability status pursuant to a public filing).
“Substantial Control” includes senior officers of a company; anyone with the authority to appoint or remove officers or a majority of directors; and anyone who is otherwise an important decision-maker for the company. FinCEN’s guidance on this term is evolving, and there are many unanswered questions, but FinCEN maintains a Frequently Asked Questions (“FAQ”) page providing many answers, as well as a Small Entity Compliance Guide. In addition to individuals exercising “Substantial Control,” all beneficial owners of at least 25% of the ownership interests in a Reporting Company must provide BOI.
Reporting Companies are obligated to report any changes in information regarding BOI within thirty (30) days of the change.
Failure to file a report or otherwise comply with the reporting and updating requirements of the CTA can be punished by (i) civil penalties of $500 per day the violation continues, and/or (ii) criminal penalties which may include imprisonment for up to two (2) years, and a fine of up to $10,000.
“But I heard it was struck down by a federal court! Do I still need to comply?”
You may have heard in the news that the CTA has been ruled unconstitutional. There is some truth in that statement, but it is limited to the plaintiffs in the case, and the jurisdiction of the U.S. District Court for the Northern District of Alabama. The decision in the case of Small Business United v. Yellen is being appealed to the United States Court of Appeals for the 11th Circuit. It is widely seen as an isolated decision, at least at this point, and it is unlikely that the entire reporting regime of the CTA will be toppled. However, interested parties are challenging the CTA’s constitutionality in other federal courts, and some of the disclosure requirements could be modified in the future if required by judicial action.
What does this mean for you? If you are an owner of a private company, you need to have your ducks in a row, or you and your key employees could be subject to substantial penalties. Lenders are requiring confirmation of CTA filings as part of their Know Your Customer (“KYC”) inquiries. And if you own numerous entities, now is the time to start gathering information so you can meet the January 1, 2025 reporting deadline for companies formed prior to January 1, 2024.
If you have questions, contact Scott Matthews at (302) 757-7809 or scott@tarabicosgrosso.com