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By Clarissa L. Walstrom, Frost Brown Todd LLP
Effective January 1, 2024, new regulations under the Corporate Transparency Act (“CTA”) require reporting companies to disclose certain information related to their beneficial owners and, for companies formed on or after January 1, 2024, information related to “company applicants.” The purpose of the CTA is to promote transparency in ownership of privately held companies to combat criminal activity affecting interstate and international commerce.
Both foreign and domestic reporting companies must file beneficial ownership reports with the Financial Crimes Enforcement Network (“FinCEN”). Under the CTA, a “domestic reporting company” is a corporation, limited liability company, or other entity that is created by filing a document with a state agency or Indian tribe, and a “foreign reporting company” is a corporation, limited liability company, or other entity formed under the laws of a foreign country and registered to do business in any State or tribal jurisdiction.
There are 23 exemptions from the definition of reporting company, including public companies, certain other companies that make filings under the Securities Exchange Act of 1934, the Investment Advisors Act of 1940, the Commodity Exchange Act or the Investment Company Act, governmental authorities, credit unions, banks and bank holding companies, money services businesses, insurance companies and state-licensed insurance producers, public company accounting firms, public utilities, financial market utilities, pooled investment vehicles, tax-exempt entities and entities assisting tax-exempt entities, “large operating companies,” subsidiaries of certain exempt entities, and inactive entities that meet certain requirements. Many companies will rely on the large operating company exemption from the reporting requirements, which applies to companies that employ more than 20 full time employees in the United States, have a physical office in the United States, and filed federal income tax returns demonstrating more than $5,000,000 in gross receipts of sales.
Non-exempt companies must timely file a beneficial ownership report with FinCEN. Reporting companies formed before January 1, 2024, must file the initial report with FinCEN before January 1, 2025. Reporting companies formed on or after January 1, 2024, but before January 1, 2025 only have 90 days from the date of formation to file the initial report. Those formed on or after January 1, 2025 will have only 30 days to file the report.
Beneficial ownership reports must include the legal name and trade names, address, jurisdiction of formation (or registration, in the case of foreign reporting companies), and TIN (including EIN) of the reporting company and the name, address, date of birth, and unique identifying number (such as a passport or driver’s license number), including an image of the document containing the unique identifying number, of each beneficial owner and, if applicable, company applicant. Alternatively, the reporting company can provide the unique FinCEN identifier for any company applicant or beneficial owner, if the individual has obtained one. After the initial report is filed, the reporting company must file updated reports or corrective reports reflecting any change in, or correcting, the information previously disclosed within 30 days.
The CTA defines a “beneficial owner” as an individual, not an entity, that (i) exercises substantial control over the reporting company, directly or indirectly, or (ii) owns at least 25% of the ownership interests of such reporting company. A “company applicant” is the individual who directly files the document that creates the reporting company and the individual who is primarily responsible for directing or controlling the filing, if different. For example, an attorney who is the incorporator of the company and the paralegal who makes the filing with the appropriate state agency would both be company applicants.
Beneficial ownership reports will be available only to financial institutions in limited circumstances and governmental agencies “in furtherance of” national security, intelligence, or law enforcement activity.
A reporting company’s failure to comply with the requirements of the CTA with regard to beneficial ownership reports could result in penalties for the reporting company and its beneficial owners and is punishable by up to two years imprisonment. To avoid these penalties, it is important to consult a knowledgeable attorney to determine whether a particular company qualifies as exempt from the reporting requirements.
If you would like to take an even deeper look at the CTA, how it may affect you, and what you should do if that is the case, you can view The Corporate Transparency Act – What You Need to Know About this New Law by scanning the QR code. This program was recently put on by IndyBar’s Business Law Section and provides viewers with more details on this new law.•
Clarissa L. Walstrom is a Managing Associate at Frost Brown Todd LLP in the firm’s Corporate Law practice group. She assists clients in structuring, negotiating, and documenting complex business transactions, including mergers, acquisitions, divestitures, reorganizations, and capital and finance transactions. She also regularly assists clients with forming new businesses and restructuring existing companies.
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