Reporting Under the Corporate Transparency Act Is Coming – Are You Prepared?

In September 2023, The Financial Crimes and Enforcement Network (FinCen) issued its final rules for compliance with the Corporate Transparency Act (CTA) and these rules are now in effect.  In brief, the CTA requires all non-exempt reporting companies to file reports listing their beneficial owners and the persons responsible for the formation of the reporting company (called company applicants).  Reporting companies include corporations, limited liability companies (LLC), or any other entities created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.  Reporting companies also include any corporation, LLC, or other entity, formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. 

While the deadline for filing the report with FinCen for reporting companies in existence prior to January 1, 2024 is still some time away -- reporting companies created or registered before January 1, 2024 will have until January 1, 2025 to file their initial reports – it is not too early to begin the process of evaluating whether a reporting company will have to file and gathering the necessary information.  The need for this is even more urgent for reporting companies formed after January 1, 2024 -- reporting companies created or registered after January 1, 2024 will have either 90 days (for those formed before January 1, 2025) or 30 days (for those formed on or after January 1, 2025) after receiving notice of their creation or registration, to file their initial reports.     

While there are a number of exemptions from reporting under the CTA, the most salient exemptions for most reporting companies are: (a) large operating company exemption, (b) certain entities which have made (or are required to make) filings under the Securities Exchange Act of 1934, and (c) a controlled or wholly owned subsidiaries of certain exempt entities.  The large operating company exemption requires the entity to (a) employ more than 20 full time employees in the United States, (b) have an operating presence at a physical office within the United States, and (c) have filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as reported as gross receipts or sales (net of returns and allowances), excluding gross receipts or sales from sources outside the United States.  The requirement to have 20 full time employees does not permit a company to aggregate employees over multiple affiliates or subsidiaries.  The subsidiary exemption also does not apply to ownership by certain exempt entities (such as pooled investment companies).

Beneficial owners that must be reported for a reporting company include any natural person who either, directly or indirectly: (1) exercises substantial control over a reporting company; or (2) owns or controls, directly or indirectly, 25% or more of the ownership interests of a reporting company.  In most instances, all senior officers of the reporting company and anyone who has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) will be considered to be a beneficial owner regardless of the amount of ownership held by such individual.  ‘‘Senior officer’’ means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function.

Required CTA Reporting Information

The final rule requires the following information be supplied for each reporting company:

• The full legal name of the reporting company;

• Any trade name or ‘‘doing business as’’ name of the reporting company;

• A complete current address consisting of:

  • In the case of a reporting company with a principal place of business in the United States, the street address of such principal place of business; and

  • In all other cases, the street address of the primary location in the United States where the reporting company conducts business;

• The state, tribal, or foreign jurisdiction of formation of the reporting company;

• For a foreign reporting company, the state or tribal jurisdiction where such company first registered; and

• The Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company, or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction

The final rule requires that the following personal identifying information about each beneficial owner be provided to FinCEN:

• Full legal name;

• Date of birth;

• A current, residential street address; and

• A copy of a non-expired government-issued identification document and the unique identifying number and issuing jurisdiction of such document.

In addition, certain personal information must also be reported on persons who direct the formation of a reporting company –known as company applicants.  This includes the person who actually filed the paperwork to create the reporting company and the person who directed that such filing be made.  This might include outside counsel if a reporting company used an outside law firm to create the reporting company.

Given that the information required may take some time to collect, in-house counsel should start collecting the necessary information now.  The collection of this paperwork will not stop with the direct beneficial owners of the reporting company.  For example, a reporting company which is not exempt that is directly owned by other legal entities (e.g., not individuals) that are not exempt may have to collect the information for all individuals who are beneficial owners of the other legal entities in the chain of ownership.  For example, if 25% or more of a reporting company’s ownership is held by  a second legal entity that is not exempt, the beneficial owners of the second entity would also have to be reported.  If in turn the 25% or greater of the second legal entity’s ownership is held by a third legal entity, the third legal entity’s beneficial owners (if not exempt) would also need to be reported.  Also, when there is a chain of companies, it is likely that senior officers of each link in the chain may need to be disclosed.  Depending on a company’s structure this could entail examining a number of legal entities and their beneficial owners.

Examining Legal Structure for CTA Reporting Requirements

In-house counsel should start examining their company’s legal structure to determine which, if any, legal entities may be considered a reporting company and who might be considered a beneficial owner.  In-house counsel of companies with complex subsidiary structures may also want to consider whether to reorganize their structure to take advantage of exemptions – such as the controlled or wholly owned subsidiary exemption.  Also, since the timeframe to file for new entities created after January 1, 2024 is relatively short, in house counsel should be gathering this information now to be prepared to file the necessary reports.  Furthermore, in house counsel should document in writing their conclusions as to whether a reporting company must make a filing and review that conclusion periodically and whenever circumstances may change.

Also the CTA required reporting companies to continuously monitor the information it has filed and to file amended reports within 30 days of its occurrence.  This may include changes of address for its beneficial owners, or changes in the document numbers (e.g., if a new driver’s license has a different number than the previous one).  This also includes if a previously exempt reporting company becomes obligated to file (e.g., if it qualified as a large operating company at the time the initial report was due and it ceases to be a large operating company).  Moreover, the final rules make any person who causes the information not to be correct or any senior officer of the reporting company to be liable for a failure to keep the information current.  This requirement will require in-house counsel to set up an on-going compliance program to make sure that they become aware of any changes to the beneficial owners and to the status of the legal entities.  Because the reporting company and its senior officers are liable for any penalties associated with a failure to file, in-house counsel will want to work with its beneficial owners to make sure that they provide the necessary information and keep the in house counsel apprised of any changes. 

Finally, as part of the CTA compliance program, in-house counsel will want to ensure that the personal information (PII) gathered as part of iota compliance with the CTA is protected.  Reporting companies must ensure the confidentiality and security of sensitive data, adhering to stringent data protection standards. This includes secure storage, restricted access, and measures to prevent unauthorized disclosure. The CTA underscores the importance of safeguarding this information, recognizing its sensitivity and potential misuse.

CTA Reporting Checklist

Klemchuk has prepared a checklist that a reporting company can use to begin the process of determining whether that will need to file an initial report and the information that they will need to gather.  You can get a copy of that checklist here.

Additional Discussion of the CTA Can Be Found At:

• Reporting Under the Corporate Transparency Act is Coming – Are you prepared?

• Beneficial Ownership Reporting – Now a Reality for Most Small Businesses

• What Small Businesses Need to Know About the Corporate Transparency Act

For more information on corporate law, see our Corporate and Commercial Legal Services and Industry Focused Legal Solutions pages.

Klemchuk PLLC is a leading intellectual property law firm focusing on litigation, anti-counterfeiting, trademarks, patents, and business law. We help clients protect innovation and increase market share through investments in IP.

This article has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please consult your attorneys in connection with any fact-specific situation under federal law and the applicable state or local laws that may impose additional obligations on you and your company. © 2024 Klemchuk PLLC