The Corporate Transparency Act (CTA),1 a new law taking effect on January 1, 2024, will require companies that are formed under the laws of a U.S. state, territory or Indian tribe and foreign entities that register to do business in a U.S. state, territory or Indian tribe (reporting companies) to file information regarding their beneficial owners and corporate applicants in a database maintained by the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN). The CTA was enacted to increase transparency in business activities, prevent money laundering, and improve the ability of FinCEN and other agencies to protect U.S. national security and the U.S. financial system from illicit activities. As a result of the CTA, many enterprises not otherwise accustomed to public disclosure laws will be required to file reports with FinCEN that disclose (1) the beneficial owners of the entity (which is broadly defined and includes individuals who own or control 25 percent or more of the ownership interests of the entity and all persons exercising substantial control over the affairs of the entity), and (2) for reporting companies formed on or after January 1, 2024, the individual who directly files a document with the state governmental agency to form the entity or register it to do business and the individual directing or controlling the filing of such document (company applicants).
For entities formed during the first year after the CTA takes effect, personal information about beneficial owners and corporate applicants must be provided to the FinCEN database within 90 days after the entity is formed or registered to do business. Starting on January 1, 2025, the 90-day period to make an initial filing for a newly created entity will be reduced to 30 days. For entities created and existing prior to the effective date of the CTA, reporting companies must provide the required information regarding their beneficial owners by January 1, 2025. The information that must be supplied about beneficial owners and corporate applicants includes name, date of birth, address, and identification number and a copy of an identification document such as a passport or a U.S. driver's license.
The first step that many companies will take is to determine whether they qualify for any of the 23 exemptions from the CTA filing requirements that are specified in the CTA and implementing regulations. Note that each company in a corporate structure must be individually considered to determine if that specific entity qualifies for an available exemption. Many complex corporate structures may include a mix of entities exempt and not exempt from the CTA filing requirement. Many of the exemptions are for entities that are already subject to some form of governmental oversight or regulation – for example, banks and certain financial institutions and companies whose securities are publicly traded in the United States.
Notable examples of other available exemptions include:
Large operating companies: an entity that (i) has more than 20 full-time employees in the United States, (ii) reported over $5 million in gross receipts or sales on the prior year’s tax return, determined on a consolidated basis for entities included on an affiliated group tax return (but excluding gross receipts or sales from sources outside the United States), and (iii) has an operating presence at a physical office in the United States that is not shared with any unaffiliated entity.
Investment companies or investment advisers: an entity that is (i) an investment company as defined in section 3 of the Investment Company Act of 1940 or an investment adviser as defined in section 202 of the Investment Advisers Act of 1940 and (ii) registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 or the Investment Advisers Act of 1940.
Venture capital fund advisers: an investment adviser that: (i) is described in section 203(l) of the Investment Advisers Act of 1940 and (ii) has filed Item 10, Schedule A, and Schedule B of part 1A of Form ADV, or any successor thereto, with the SEC.
Subsidiaries of certain exempt entities: an entity that is a subsidiary of one or more entities that is exempt from filing under the CTA (unless such exemption is due to qualification as a money transmitting business, pooled investment vehicle or an entity assisting a tax-exempt entity),
Inactive entities: an entity in existence on or before January 1, 2020 that (i) is not engaged in an active business, (ii) is not owned by any foreign person, (iii) has not experienced a change of ownership in the preceding 12 months, (iv) has not sent or received funds greater than $1,000 in the preceding 12 months and (v) does not hold any kind or type of assets, including any ownership interest in any other entity.
Careful analysis may be required to determine if and when these exemptions apply. However, many small privately owned business entities will be reporting companies required to file an initial beneficial ownership disclosure filing and an updated report within 30 days after any change to the reporting company or beneficial owner information reported on a prior filing.
There are civil and criminal penalties for willful non-compliance with the CTA's filing requirements. Civil penalties are up to $500/day of violation, and criminal penalties include up to a $10,000 fine and/or imprisonment of up to two years.
See the accompanying fact sheet for more details. You can also find more information on the FinCEN's BOI website.
- The CTA is Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA), Public Law 116–283 (January 1, 2021). Division F of the NDAA is the Anti- Money Laundering Act of 2020, which includes the CTA. section 6403 of the CTA, among other things, amends the Bank Secrecy Act by adding a new Section 5336, Beneficial Ownership Information Reporting Requirements, to subchapter II of chapter 53 of title 31, U.S. Code.
Client Alert 2023-284
