The Corporate Transparency Act (CTA) was passed in 2021. It requires certain entities to report information about their beneficial owners to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Reporting under the CTA will begin on January 1, 2024, and FinCEN is currently not accepting any beneficial ownership information reports until that date.

Who is subject to the reporting requirements under the CTA?

The CTA applies to “reporting companies,” which FinCEN has defined as domestic companies and foreign entities that are registered to do business in the United States.
This memo will only discuss the domestic side of the reporting. Specifically, a domestic reporting company is defined as a corporation, a limited liability company, or “any other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.” This broad definition of what is a “reporting company” likely includes limited partnerships (e.g., family limited partnerships), limited liability partnerships, professional corporations, and professional limited liability companies. Note certain legal entities, including certain trusts, will be excluded to the extent that they are not created by the filing of a document with a secretary of state or similar office.

Additionally, the CTA provides more than 20 exemptions to this rule¹.  FinCen said in its final rulemaking that the CTA reporting requirements generally target smaller, more loosely regulated entities that may not be subject to any other reporting requirements. The CTA exempts certain more heavily regulated entities from its reporting requirements, intending to avoid imposing duplicative requirements with other reporting agencies. Some examples of entities that are exempt from the reporting requirements of the CTA include:

•  Financial institutions or certain issuers of securities in heavily regulated industries (e.g., issuers registered with the U.S. Securities and Exchange Commission, certain types of banks, credit unions, broker-dealers, etc.).
• Large operating companies with at least 20 full-time employees, more than $5,000,000 in gross receipts or sales, and an operating presence at a physical office within the United States.

The key is that many of the entities that are exempt from the CTA reporting requirements are already regulated by the federal government and/or a state government, and many already disclose their beneficial ownership information to a governmental authority.

Ultimately, entities formed or registered to do business in the U.S. should review the list of reporting exemptions provided under the CTA and work with their advisors at Topel Forman to determine if a reporting requirement exists.

What is reported under the CTA?

As stated previously, the CTA requires certain types of entities to report beneficial ownership information to FinCen. Beneficial ownership information refers to identifying information about the individuals who directly or indirectly own or control a company.

In general, a beneficial owner is any individual (1) who directly or indirectly exercises.“substantial control” over the reporting company or (2) who directly or indirectly owns or controls 25 percent or more of the “ownership interests” of the reporting company.

Whether an individual has “substantial control” over a reporting company depends on the power they may exercise over a reporting company. For example, an individual will have substantial control of a reporting company if they direct, determine, or exercise substantial influence over important decisions the reporting company makes. In addition, any senior officer is deemed to have substantial control over a reporting company. Other rights or responsibilities may also constitute substantial control.

“Ownership interests” generally refer to arrangements that establish ownership rights in the reporting company, including simple shares of stock as well as more complex instruments.
The CTA requires reporting companies to report the following information about their beneficial owners:

• The individual’s name, date of birth, and current residential address; and
• A unique identifying number from an acceptable identification document, such as a driver’s license or passport number.

The CTA imposes significant penalties for non-compliance. Failure to report the required information or any person who provides false information is subject to a civil penalty of not more than $500 for each day that the violation continues and may face fines of not more than $10,000, imprisonment for not more than two years, or both.

Additionally, criminal penalties may be imposed on individuals who willfully violate the CTA requirements and can include fines of up to $250,000 or imprisonment of not more than five years, or both. Individuals may also be subject to forfeiture of proceeds derived from violations. There are further possible criminal penalties under certain circumstances.
Conclusion

Impacted required reporting entities that do not qualify for an exemption will have to report information about their beneficial owners to the U.S. under the CTA. For the entities that were in existence before January 1, 2024, the deadline for compliance is within one year (due by January 1, 2025). Moving forward, new entities (i.e., those created after January 1, 2024) will be required to report the required information within 30 days of creation.

If you are required to report your entity’s beneficial ownership information to FinCEN, you will do so electronically through a secure filing system available via FinCEN’s website.

It is important to note that this is not a one-time requirement, and beneficial ownership changes that occur over time must be reported within 30 days of the occurrence(s), or the penalties for noncompliance could be imposed.

Please reach out to your Topel Forman advisor if you have any questions about the CTA or would like assistance in complying with the CTA.

Appendix
Below is a list of the types of entities that are exempt according to FinCen:

1.  Certain types of securities reporting issuers.
2.  A U.S. governmental authority.
3. Certain types of banks.
4. Federal or state credit unions as defined in section 101 of the Federal Credit Union Act.
5. Bank holding company as defined in section 2 of the Bank Holding Company Act of 1956, or any savings and loan holding company as defined in section 10(a) of the Home Owners’ Loan Act.
6. Certain types of money transmitting or money services businesses.
7.  Any broker or dealer, as defined in section 3 of the Securities Exchange Act of 1934, that is registered under section 15 of that Act (15 U.S.C. 78o).
8. Securities exchanges or clearing agencies as defined in section 3 of the Securities Exchange Act of 1934, and that is registered under sections 6 or 17A of that Act.
9. Certain other types of entities registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934.
10. Certain types of investment companies as defined in section 3 of the Investment Company Act of 1940, or investment advisers as defined in section 202 of the Investment Advisers Act of 1940.
11. Certain types of venture capital fund advisers.
12. Insurance companies defined in section 2 of the Investment Company Act of 1940.
13. State-licensed insurance producers with an operating presence vii at a physical office within the United States, and authorized by a State, and subject to supervision by a State’s insurance commissioner or a similar official or agency. 14. Commodity Exchange Act registered entities.
14. Any public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002.
15. Certain types of regulated public utilities.
16. Any financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
17. Certain pooled investment vehicles.
18. Certain types of tax-exempt entities.
19. Entities assisting a tax-exempt entity described above.
20. Large operating companies with at least 20 full-time employees, xii more than$5,000,000 in gross receipts or sales, and an operating presence at a physical office within the United States.
21. The subsidiaries of certain exempt entities.
22. Certain types of inactive entities were in existence on or before January 1, 2020, the date the Corporate Transparency Act was enacted.²

¹ For a full list of exemptions, see Appendix above
² List of exemptions taken from FinCen at https://www.fincen.gov/boi-faqs.