Corporate Transparency Act — 2024 Beneficial Ownership Information Reporting  

The Corporate Transparency Act (“CTA”) was enacted January 1, 2021, as part of the National  Defense Authorization Act, representing the most significant reformation of the Bank Secrecy Act  and related anti–money laundering rules since the U.S. Patriot Act. The CTA is intended to address  and guard against money laundering, terrorism financing, and other forms of illegal financing by  mandating certain entities (primarily small and medium size businesses) to report “beneficial  owner” information to the Financial Crimes Enforcement Network (“FinCEN”).  

The CTA authorizes FinCEN, a bureau of the U.S. Treasury Department, to collect, protect, and  disclose this information to authorized governmental authorities and to financial institutions in  certain circumstances.  

Our firm is sending you this communication to provide you with some general information  regarding the new reporting rules as well as initial steps you should take to address the implications  of the CTA to your organization.  

What entities are subject to the new CTA reporting requirements?  

Entities required to comply with the CTA (“Reporting Companies”) include corporations, limited  liability companies (LLCs), and other types of companies that are created by a filing with a  Secretary of State (“SOS”) or equivalent official. The CTA also applies to non-U.S. companies  that register to do business in the U.S. through a filing with a SOS or equivalent official. Since the  definition of a domestic entity under the CTA is extremely broad, additional entity types could be  subject to CTA reporting requirements based on individual state law formation practices.  

There are a number of exceptions to who is required to file under the CTA. Many of the exceptions  are entities already regulated by federal or state governments and as such already disclose their  beneficial ownership information to governmental authorities.  

Another notable exception is for “large operating companies” defined as companies that meet all  of the following requirements:  

∙ Employ at least 20 full-time employees in the U.S.  

∙ Gross revenue (or sales) over $5 million on the prior year’s tax return  ∙ An operating presence at a physical office in the U.S.  

Who is considered a “beneficial owner” of a Reporting Company? 

A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” or  owns or controls at least 25% of the company’s ownership interests.  

An individual exercises “substantial control” if the individual (i) serves as a senior officer of the  company; (ii) has authority over the appointment or removal of any senior officer or a majority of  the board; or (iii) directs, determines, or has substantial influence over important decisions made  by the Reporting Company. Thus, senior officers and other individuals with control over the  company are beneficial owners under the CTA, even if they have no equity interest in the  company.  

In addition, individuals may exercise control directly or indirectly, through board representation,  ownership, rights associated with financing arrangements, or control over intermediary entities  that separately or collectively exercise substantial control.  

CTA regulations provide a much more expansive definition of “substantial control” than in the  traditional tax sense, so many companies may need to seek legal guidance to ultimately determine  who are deemed beneficial owners within their organization.  

Phase-in of reporting requirements  

As currently promulgated, the CTA’s reporting requirements will be phased-in in two stages:  ∙ All new Reporting Companies — those formed (or, in the case of non-U.S. companies,  registered) on or after January 1, 2024 — must report required information within 30 days after their formation or registration.  

∙ All existing Reporting Companies — those formed or registered before January 1, 2024  — must report required information no later than January 1, 2025.  

How to prepare for the CTA  

With the CTA introducing a new and expansive reporting regime, now is the time to assess the  new rules’ implications on your organization. Some questions and comments for your company to  consider now, although not meant to be all inclusive, include:  

∙ Is your company subject to the CTA or do you qualify for any of the exemptions?  ∙ If your company is not exempt, how should you calculate percentages of “ownership  interests” to determine whether any owners meet the 25%-ownership threshold? In many  companies with simple capital structures, the answer will be obvious. It may be much less  obvious, however, for companies with complicated capital structures (given the expansive  definition of “ownership interest”), or companies in which some ownership interests are  held indirectly — for example, through upper-tier investment entities, holding companies,  or trusts.  

∙ How do you assess and determine each person who exercises “substantial control” over the  company? There may well be multiple people who qualify, given the expansiveness (and  vagueness) of the “substantial control” definition.  

∙ What new processes and procedures should the company put in place to monitor future  changes in its beneficial owners and reportable changes on existing beneficial owners that will require timely updated reports to FinCEN? Note that the types of information that must  be provided to FinCEN (and kept current) for these beneficial owners include the owner’s  legal name, residential address, date of birth, and unique identifier number from a non expired passport, driver’s license, or state identification card (including an image of the  unique-identifier documentation). A word of caution, this is going to be a trap for Reporting  Companies, as you will need to rely on beneficial owners to timely update you on  reportable changes to their information (e.g., ownership changes, moves, marriages,  divorces, etc.). As a result, a company’s operative documents may need to be revised to  include provisions related to the CTA such as representations, covenants, indemnifications,  and consent clauses. For example, the operating agreement may require:  

o A representation by each shareholder, member or partner, as applicable, that it will  be in compliance with or exempt from the CTA;  

o A covenant by each shareholder, member or partner, as applicable, requiring  continued compliance with and disclosure under the CTA or to provide evidence of  exemption from its requirements;  

o An indemnification by each shareholder, member or partner, as applicable, to the  company and its other shareholders, members or partners, as applicable, for its  failure to comply with the CTA or for providing false information; and  

o A consent by each disclosing party for the company to disclose identifying  information to FinCEN, to the extent required by law.  

Take immediate action now!  

As the CTA is not a part of the tax code, the assessment and application of many of the  requirements set forth in the regulations, including but not limited to the determination of  beneficial ownership interest, necessitate the need for legal guidance and direction. As such, since  we are not attorneys, our firm is not able to provide you with any legal determination as to whether  an exemption applies to the nature of your entity or whether legal relationships constitute  beneficial ownership.  

We strongly encourage you to reach out as soon as possible to legal counsel with expertise in this  area to assist your organization with the steps you need to take to ensure compliance with the CTA,  if applicable. Note that penalties for willfully violating the CTA’s reporting requirements  include (1) civil penalties of up to $500 per day that a violation is not remedied, (2) a criminal  fine of up to $10,000, and/or (3) imprisonment of up to two years.  

For additional information regarding the beneficial ownership reporting requirements under the  CTA, refer to FinCEN’s Frequently Asked Questions document at faqs.  

As always, please feel free to contact us if you have any questions.