In 2021, the Corporate Transparency Act (“CTA”) was enacted as part of the Anti-Money Laundering Act of 2020 in an effort to crack down on illicit finance and increase transparency as to who owns interests in various entities or is involved in their formation.
The CTA establishes a beneficial ownership reporting requirement for most corporations, limited liability companies and other entities created or registered to do business in the United States. Under the CTA, the implementation of the reporting process was delegated to the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”), but the reporting process was not to begin until final rules, which were to be issued by FinCEN, became effective.
On September 29, 2022, FinCEN issued the first of three planned rules designed to implement the CTA. This first rule (the “Rule”) addresses (i) when the rules go into effect (i.e., January 1, 2024), (ii) which companies need to report, (iii) the information that needs to be reported, (iv) how reporting is to be made, and (v) the timing for reporting both for companies existing on the date the rules go into effect and for companies first formed after the date the rules go into effect. The rules contemplate that there will be a centralized database of the reported beneficial ownership information, accessible to the U.S. government and certain other regulatory authorities and financial institutions. Unlike information that is available through a public database such as Florida SunBiz, the information reported to FinCEN will not be accessible by the general public.
New Requirements for Reporting Companies
The Rule requires each Reporting Company (discussed in further detail below) to report information to FinCEN about the Reporting Company and about certain of its direct and indirect owners, designated as beneficial owners, with certain additional information about “company applicants” required to be provided by those Reporting Companies created or registered to do business on or after January 1, 2024.
Under the CTA and the Rule, a person is considered a beneficial owner of a Reporting Company if the person is an individual who, directly or indirectly, either exercises substantial control over the Reporting Company or owns or controls at least 25 percent of the ownership interests of such Reporting Company.
Under the CTA and the Rule, a company applicant includes the individual who files the document to create or register the reporting company, and, if applicable, the individual primarily responsible for controlling and directing such filing. There will never be more than two company applicants.
Reporting Companies and Exempt Companies
If a corporation, limited liability company or other entity is 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, or if an entity is formed under the law of a foreign country filing of a document with the secretary of state or any similar office under the law of a State or Indian tribe, then it will be considered a “Reporting Company,” unless it falls under one of the exemptions.
The CTA and the Rule include twenty-three statutory exemptions from the definition of a “reporting company” under the CTA. These exemptions include certain regulated companies, governmental authorities, tax exempt entities, inactive businesses, large operating companies, and subsidiaries of certain exempt entities. However, the majority of companies will not be exempt from the reporting requirements.
Required Information for Beneficial Owners and Company Applicants
Generally, the Rule requires the following information to be reported to FinCEN about beneficial owners and company applicants:
- Full legal name
- Date of birth
- Residential address (except for a limited exception for certain company applicants)
- Unique identifying number and issuing jurisdiction from one of the following:
- Non-expired passport issued by the United States government;
- Non-expired identification document issued by a State, local government, or Indian tribe for the purpose of identifying the individual;
- Non-expired driver’s license issued by a State; or
- If none of the above documents are available, then a non-expired passport issued by a foreign government.
- Image of the document from which the unique identifying number was obtained
Required Information for Reporting Companies
The Rule requires the following information to be reported to FinCEN about the Reporting Company:
- Full legal name
- Any trade name or “doing business as” name
- Complete current address consisting of
- The street address of the principal place of business (if located in the United States); and
- The street address of the primary location in the United States where the Reporting Company conducts business (in all other cases).
- The State, Tribal or foreign jurisdiction of the Reporting Company
- The State or Tribal jurisdiction where the company first registers (for a foreign Reporting Company)
- The IRS Taxpayer Identification Number (including an EIN) of the Reporting Company, or, if a foreign Reporting Company has not been issued a Taxpayer Identification Number, then a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction
Reporting Companies created or registered to do business before January 1, 2024, will need to report the required information about their beneficial owners to FinCEN on or before January 1, 2025.
For Reporting Companies created or registered to do business on or after January 1, 2024, the initial report must be filed within 30 days of the earlier of the date on which (i) the Reporting Company receives actual notice that its creation (or registration) has become effective or (ii) a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the domestic Reporting Company has been created or the foreign Reporting Company has been registered.
Assume the following:
- Partners A and B engage an attorney to form a member-managed limited liability company (the “LLC”)
- Partners A and B will be the only members of the LLC and there are no other individuals who would be deemed “beneficial owners” under the Rule
- The attorney prepares the organizational documents and directs a paralegal to file the organizational documents with the state office to create a Reporting Company
- The Reporting Company receives actual notice of its creation on October 1, 2024
In this example, the LLC would be required to file the initial report on or before October 31, 2024. The initial report would include the required information for the LLC, two beneficial owners (Partners A and B) and the two company applicants (the attorney and paralegal).
Assume the same hypothetical, but that the LLC is created on November 1, 2022. In this example, the LLC would be required to file the initial report on or before January 1, 2025. The initial report would include the required information for the LLC and the two beneficial owners. The company applicants would not be included in the report.
Updates and Corrections to Reports
It is important to note that a Reporting Company is not done complying with the Rule once it files its initial report with FinCEN. In addition to the filing of the initial report, a Reporting Company must make additional filings as follows:
- If and when there is any change with respect to any of the required information previously submitted concerning the Reporting Company or its beneficial owners (such as the addition or deletion of a beneficial owner), an update to such report must be filed with FinCEN within 30 calendar days after the date on which such change occurs
- If any report was inaccurate when filed and remains inaccurate, a corrected report must be filed with FinCEN within 30 days after the date on which such Reporting Company becomes aware or has reason to know of the inaccuracy.
FinCEN does not expect a Reporting Company to file an amended report upon termination or dissolution. Also, Reporting Companies will not be required to update information concerning company applicants, however, Reporting Companies are required to correct any inaccurate information previously reported about company applicants).
Existing companies should determine whether they fall within one of the exemptions from the definition of a Reporting Company.
If not, they should start familiarizing themselves with FinCEN’s definition of “beneficial owner.”
Although the analysis of who is a “beneficial owner” should be relatively straightforward for most closely held operating companies, such as in the examples set forth above, the analysis is likely to be more complicated for multi-tiered corporate structures, such as when intermediate entities or holding companies are involved.
Additionally, Reporting Companies should consider adopting policies or procedures to monitor compliance with their reporting obligations under the CTA, including designating a member from their management or compliance personnel to be responsible for monitoring the required information on a current basis and making sure that any updated filing to report changes in the required information is timely made.
The final rule may be read here.
 Note: “Substantial control” and “ownership interests” are broadly defined terms that may involve complex calculations and may include beneficial owners that are not intuitive. For instance, “ownership interests” includes, among other things, any instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership, and is not restricted to direct forms of ownership such as stock in a corporation or membership interests in a limited liability company.