New Federal Law Creates Reporting Requirements for the Disclosure of Beneficial Ownership Information

To combat illicit financial activities, such as money laundering or tax evasion, and prevent shell companies from shielding their beneficial owners, Congress enacted the Corporate Transparency Act which will provide law enforcement agencies with beneficial ownership information of certain companies formed in or registered to conduct business with the United States.

Effective January 1, 2024, the Corporate Transparency Act will impose new requirements for certain companies (“Reporting Company” or “Reporting Companies”) to disclose identifying information for each of the company’s beneficial owners and its company applicants by reporting to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of Treasury.

What Companies Must Report?

            Generally, Reporting Companies are corporations, limited liability companies, or similar entities, that are (1) created through filing documents with a Secretary of State, or similar office under the law of a State or Indian Tribe, or (2) are formed under the law of a foreign country and are registered to do business in the U.S. through filing documents with a Secretary of State, or similar office, under the laws of a State or Indian Tribe.

Currently, there are 23 categories of companies exempt from reporting. The following non-exhaustive list contains exemptions which may apply to a broad number of companies:

  • Publicly traded companies;
  • Companies which are already subject to regulatory reporting (banks, credit unions, securities brokers, etc.);
  • Subsidiaries of companies that are otherwise exempt;
  • Inactive companies not owned by a foreign person;
  • Tax exempt companies; and
  • Entities which employ more than 20 full-time employees, filed Federal tax returns that demonstrated more than $5 million in gross receipts or sales, and operate within a physical office in the U.S.

What is A Beneficial Owner?

            A beneficial owner is (1) an individual who directly or indirectly exercises substantial control over a Reporting Company, or (2) owns or controls at least 25% of the ownership interests of a Reporting Company.

            An individual exercises substantial control when the individual (1) serves as a senior officer of the Reporting Company (President, General Counsel, Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, or any other officer who exercises authority over these listed officers), (2) has authority to appoint or remove any senior officer or a majority of the board of directors, (3) directs, determines, or has substantial influence over important decisions made by the Reporting Company, or (4) exercises any other form of substantial control over the Reporting Company.

            A beneficial owner is not (1) a minor child as defined by the Reporting Company’s jurisdiction (however, the Reporting Company must report the information of the minor child’s parent or legal guardian), (2) an individual acting on behalf of a beneficial owner (nominee, custodian, agent, intermediary), (3) an employee of a Reporting Company whose substantial control over the Reporting Company is derived solely from the employment status of the employee—provided the person is not a senior officer, (4) an individual whose interest in the Reporting Company is a future interest through the right of inheritance, or (5) a creditor of a Reporting Company.

What is A Company Applicant?

For Reporting Companies created or registered on or after January 1, 2024, company applicant information must be reported alongside beneficial ownership information.

Only two individuals can qualify as a company applicant, (1) the individual who directly files the document creating or registering a Reporting Company; and, if there is more than one individual involved in filing the document, (2) the individual primarily responsible for directing the filing (e.g., a partner directing an associate or paralegal).  If an individual qualifies as a company applicant their information must be reported to FinCEN.

What Must be Reported?

Under the new law, Reporting Companies must submit a report to FinCEN containing: (1) the company’s full legal name, (2) the trade names of the company, (3) a complete and current address (the address of the company’s principal place of business or, if the principal place of business is not in the U.S., the primary location in the U.S. where the Reporting Company conducts business), (4) the jurisdiction the entity was formed in, or, for foreign companies, the jurisdiction in which the foreign company first registers, and (5) the company’s IRS Taxpayer Identification Number (“TIN”).

Further, Reporting Companies must submit a report to FinCEN providing information about each beneficial owner and company applicant. The report must include: (1) the individual’s full legal name, (2) the date and birth of the individual, (3) the individual’s current business or residential address, (4) a unique identifying number from either the individual’s non-expired passport, non-expired identification document from a State, local government, or Indian Tribe, or a non-expired driver’s license, and (5) an image of the document from which the unique identifying number was obtained.

Individual beneficial owners and company applicants may submit an application with their information directly to FinCEN to obtain a “FinCEN Identifier” (a unique identifying number assigned by FinCEN). The Reporting Company may then provide the FinCEN Identifier(s) to FinCEN in its report in lieu of submitting a report with the required information.

When Must Companies Report?

  • Companies formed or registered prior to Jan. 1, 2024, whether domestic or foreign, must file their initial report with FinCEN by Jan. 1, 2025.
  • Companies formed or registered on or after Jan. 1, 2024, but before Jan. 1, 2025, whether domestic or foreign, must file their initial report with FinCEN within ninety (90) days of the date which the company has been effectively created or registered to do business.
  • Companies formed or registered on or after Jan. 1, 2025, whether domestic or foreign, must file their initial report with FinCEN within thirty (30) days of the date which the company has been effectively created or registered to do business.
  • Companies that no longer meet exemption criteria, must file a report within thirty (30) days from the date it no longer meets exemption criteria.
  • Companies that meet exemption criteria after filing an initial report, must file an updated report within thirty (30) days with FinCEN stating that the company is no longer a reporting company.
  • Companies that change information previously reported to FinCEN, must file an updated report within thirty (30) days with FinCEN with the updated information.
  • Companies that filed a report with inaccurate information, must file a corrected report within thirty (30) days after the date on which the Reporting Company becomes aware of or has reason to know of the inaccuracy.

Penalties For Not Reporting

Any person who willfully fails to report or complete updated beneficial ownership information or willfully provides, or attempts to provide, false or fraudulent beneficial ownership information is subject to (1) a civil penalty of $500 each day the violation has not been remedied, and (2) fines of up to $10,000 or imprisonment for up to two years, or both.

For more information about the Corporate Transparency Act, contact Zachary M.D. Jones or any member of the Tydings Business, Corporate, and Tax practice group.

This alert has been prepared by Tydings for informational purposes only and does not constitute legal advice.