Fall Marks the Final Season to Prepare for the Corporate Transparency Act
White and Bright, LLP
The Corporate Transparency Act (CTA) was designed to assist the Financial Crimes Enforcement Network (FinCEN) in combating money laundering and other financial crimes by imposing new reporting requirements on qualifying entities.[1] The CTA became law on January 1, 2021, as part of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021.[2] However, the regulations that implement Section 6403 of the CTA were not issued until September 30, 2022; these regulations will become effective on January 1, 2024.[3]
Despite its nomenclature, the CTA’s impact will not be limited to corporations; it is also aimed at all limited liability companies and similar entities[4] — whether domestic or foreign — aside from specific limited exceptions.[5] Entities that do not qualify for exemptions to the CTA reporting requirements are referred to as reporting companies.[6]
Reporting Companies Must Report Specified Information to FinCEN.
Reporting companies will be required to submit initial reports directly to FinCEN.[7] These initial reports will include information on the entity itself, such as the name of the company, any trade names, a current address, the state of formation, and the Taxpayer Identification Number issued by the Internal Revenue Service.[8] The reports will also include the name, date of birth, address, and unique identifying number for each beneficial owner and company applicant, as well as an image of each document providing these identifying numbers.[9] A unique identifying number may be obtained from a passport issued by the United States government, a government identification document, a driver’s license, or, if the individual does not possess any of the other sources, from a passport issued by a foreign government.[10]
Once a reporting company has filed an initial report, it will need to file updated reports to reflect subsequent changes in the company or beneficial owner information within 30 days of the date each change occurs.[11] A reporting company must also file a corrected report within 30 days of learning that information shared in a previous report was inaccurate.[12]
Company Applicants File Formation or Registration Documents.
The definition of a company applicant is fairly straightforward. For a domestic reporting company, a company applicant is the individual who files the document creating the company.[13] For a foreign reporting company, a company applicant is the individual who first registers the company to do business in a state or tribal jurisdiction.[14] In either case, if more than one individual is responsible for filing the formation or registration document, the individual who is primarily responsible for directing or controlling the filing will be considered the company applicant.[15]
Beneficial Owners Exercise Substantial Control or Own at Least 25% of the Company.
In contrast to the clear-cut definition of company applicants, whether an individual is a beneficial owner of a reporting company is much more nuanced. An individual may be classified as a beneficial owner if that individual – whether directly or indirectly – exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests in the reporting company.[16] The definitions of “substantial control” and “ownership interests” are both varied and somewhat open to interpretation.
Substantial Control: An individual exercises substantial control over a reporting company when the individual serves as a senior officer, has authority to appoint or remove a senior officer, determines important company decisions, or has “any other form of substantial control over the reporting company.”[17] Despite the catch-all provision included in the definition of substantial control, the Code of Federal Regulations also provides that an individual may directly or indirectly exercise substantial control by engaging in board representation, asserting rights associated with a financing arrangement, controlling an intermediary entity that controls the reporting company, or entering into other arrangements or understandings.[18]
Ownership Interests: Ownership interest includes any equity, stock, or similar instrument, regardless of whether the instrument is transferable.[19] It also includes any capital or profit interest[20] and any instrument convertible into equity or stock.[21] Options to buy or sell ownership interests are also themselves considered ownership interests,[22] and these options must be treated as exercised at the time of the report.[23] Ownership interests may be owned or controlled directly or indirectly;[24] for example, an individual has an ownership interest in a reporting company if the individual controls one or more intermediary entities that separately or collectively own or control the reporting company.[25]
Exceptions: The definition of “beneficial owner” includes carveouts for individuals who are acting in certain capacities. A minor child is not considered a beneficial owner so long as the reporting company submits the requisite information for the child’s parent or legal guardian.[26] The definition also excludes individuals acting as agents,[27] employees whose control is solely derived from their employment status,[28] individuals with only future company interests through rights of inheritance,[29] and creditors of the reporting company.[30]
Reporting Requirements Will Be Different for Companies Created Before the New Year.
Both the deadlines for filing initial reports and the information reported will be different for companies that were created or registered before January 1, 2024. While the general provisions of the CTA require reporting companies to submit information for both beneficial owners and company applicants,[31] companies formed or registered before the new year are not required to report information related to company applicants.[32] Instead, these companies will only be required to disclose the fact that they were formed or registered prior to January 1, 2024.[33] Because reporting companies are only required to file updated reports based on changes to information that has previously been submitted to FinCEN,[34] companies created before January 1, 2024, may not ever need to disclose company applicant information.
Companies that are created or registered before the upcoming new year will also have a longer period to submit an initial report than companies created after the effective date. Domestic reporting companies that are created on or after January 1, 2024, will need to file initial reports within 30 days of when the company receives notice that the creation is effective or when a secretary of state provides public notice of the company creation, whichever is sooner.[35] Similarly, foreign reporting companies created on or after the new year will need to file reports within 30 days of when the company receives notice that it has been registered or when a secretary of state provides public notice of the registration.[36] In contrast, companies formed before January 1, 2024, will have until January 1, 2025, to file their initial reports.[37] The longer window of time provides companies that were created before the new year with plenty of time to gather the information required for compliance with the CTA.
Attorneys Should Start Preparing Corporate Clients for CTA Compliance Now.
Attorneys should help their corporate clients handle any formation or restructuring in these last few months before the requirements imposed by the CTA go into effect in order to maximize the benefits afforded to pre-existing entities. Companies that are formed or registered before the new year will have more time to gather necessary information and more privacy with respect to company applicants. With winter approaching fast, attorneys should inform their clients of the new CTA requirements as soon as possible, help them gather information needed for initial reports, and ensure that they have procedures in place for documenting future changes in company or beneficial owner information.
Kalli Sarkin practices at White and Bright, LLP with a focus on corporate and real estate transactions and can be reached at ksarkin@whiteandbright.com or (760) 747-3200.
[1] Federal Register, The Daily Journal of the United States Government: Beneficial Ownership Information Reporting Requirements. September 30, 2022. Available at: https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements.
[2] National Defense Authorization Act for Fiscal Year 2021, https://www.congress.gov/bill/16th-congress/house-bill/6395.
[3] 87 F.R. 59498-01.
[4] 31 C.F.R. § 1010.380(c)(1).
[5] 31 C.F.R. § 1010.380(c)(2).
[6] 31 C.F.R. § 1010.380(c)(1).
[7] 31 C.F.R. §1010.380(b)(1).
[8] 31 C.F.R. §1010.380(b)(1)(i).
[9] 31 C.F.R. §1010.380(b)(1)(ii).
[10] 31 C.F.R. §1010.380(b)(1)(ii)(D).
[11] 31 C.F.R. §1010.380(a)(2)(i).
[12] 31 C.F.R. §1010.380(a)(3).
[13] 31 C.F.R. §1010.380(e)(1).
[14] 31 C.F.R. §1010.380(e)(2).
[15] 31 C.F.R. §1010.380(e)(3).
[16] 31 C.F.R. §1010.380(d).
[17] 31 C.F.R. §1010.380(d)(1)(i).
[18] 31 C.F.R. §1010.380(d)(1)(ii).
[19] 31 C.F.R. §1010.380(d)(2)(i)(A).
[20] 31 C.F.R. §1010.380(d)(2)(i)(B).
[21] 31 C.F.R. §1010.380(d)(2)(i)(C).
[22] 31 C.F.R. §1010.380(d)(2)(i)(D).
[23] 31 C.F.R. §1010.380(d)(2)(ii)(A).
[24] 31 C.F.R. §1010.380(d)(2)(ii).
[25] 31 C.F.R. §1010.380(d)(2)(i)(D).
[26] 31 C.F.R. §1010.380(d)(3)(i).
[27] 31 C.F.R. §1010.380(d)(3)(ii).
[28] 31 C.F.R. §1010.380(d)(3)(iii).
[29] 31 C.F.R. §1010.380(d)(3)(iv).
[30] 31 C.F.R. §1010.380(d)(3)(v).
[31] 31 U.S.C. § 5336(b)(2)(A).
[32] 31 C.F.R. §1010.380(b)(2)(iv).
[33] Id.
[34] 31 C.F.R. §1010.380(a)(2)(i).
[35] 31 C.F.R. §1010.380(a)(1)(i).
[36] 31 C.F.R. §1010.380(a)(1)(ii).
[37] 31 C.F.R. §1010.380(a)(1)(iii).