In one of the most sweeping federal regulatory changes regarding small businesses, pursuant to the Corporate Transparency Act (CTA), the federal government now requires the vast majority of small businesses to register with and report “beneficial ownership information” to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Department of the Treasury. And, to put some teeth into the requirement, civil and even criminal penalties can result from a failure to comply.
Subject to very few exceptions, if you have a small business in the United States that exists through an entity (e.g., an LLC or a corporation), the new law requires you to register with FinCEN before the end of 2024. Any new entity formed on or after January 1, 2024, will need to register within 30 days of formation. However, at the start of 2024, that 30-day timeframe may be extended at least until 90 days after formation, given that the reporting system is not yet operational. Any entity formed after January 1, 2024, will also need to report “company applicants,” which are the individuals who control or effectuate the document filings that create or first register the entity.
The CTA and its implementing regulations essentially apply to every entity formed by the filing of a document with a secretary of state or any similar office under the laws of a state or Indian Tribe, such as an LLC, corporation, or a trust, or foreign entities registered to do business in the United States, subject to limited exemptions.
Most of the exemptions apply to types of entities that already report to a federal regulator, such as broker/dealers, public utilities, public companies reporting to the SEC, credit unions, and venture capital entities. However, a general exemption exists for a “large operating company” if it employs more than 20 full-time employees in the United States, maintains a physical operating presence in the United States, and has reported gross receipts or sales in the United States of more than $5 million in its previous year’s federal tax filing.
Companies that are not exempted from the reporting requirements will need to report some basic information about the entity itself as well as information about the “beneficial owners.” The definition of “beneficial owner” includes those who own or control at least 25% of the ownership interest in an entity, as well as any individual who exercises “substantial control” over the entity. Substantial control is defined broadly to include not only a senior officer, but also any “important decision-maker” or anyone with “any other form of substantial control.”
The information required to be disclosed about the beneficial owners includes the person’s name, date of birth, address, and a “unique identifying number,” such as a passport number or state driver’s license number, as well as an image of that document. Further, to the extent that the information changes after having been filed, any updated information must be reported within 30 days of the change. This information will be maintained and used by FinCEN, with the stated goal of investigating money laundering and other illegal activity, but will not be publicly available (or at least not intentionally so). Generally, it will be disclosed only to federal and state law enforcement agencies in specified circumstances and, with the reporting company’s consent, to financial institutions in connection with their know-your-customer (KYC) obligations. However, both New York and California are considering similar data collection efforts, and New York’s current proposal contemplates a publicly searchable database.
Given that this is a new requirement and that it may take companies time to identify all “beneficial owners” and obtain the required information, it would be wise to start gathering and organizing this information sooner rather than later. Reporting company owners and managers may also want to consider adding compliance language to their governing documents, such as their operating agreements or shareholder agreements, requiring owners and managers to provide the company with the necessary information, and update such information if there is any change.
Please feel free to reach out if you have any questions concerning these issues.