By Josie Jeremiah, Kate Roth, Sherrill Corbett, and Jessica Morgan
The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) recently published the “Final Rule” (effective Jan. 1, 2024) under the Corporate Transparency Act (CTA), part of the government’s efforts to curb money laundering and increase financial transparency.
The Final Rule is estimated to affect over 32 million entities, requiring them to file beneficial ownership information with FinCEN. This is important news for many established small businesses and for individuals planning to start new businesses. Failure to follow the strict requirements of the Final Rule can result in fines and criminal charges for noncompliance.
The CTA applies to domestic and foreign reporting companies, which could be any corporation, LLC, partnership, trust or other entity created in or registered to do business in the United States. While there are 23 types of entities exempt from the definition of reporting company (such as public companies, charities and any entity regulated by another government agency), practically speaking, the Final Rule captures small businesses, startups and most special purpose entities.
Reporting companies will need to provide FinCEN with beneficial ownership information on who owns or controls a company. Specifically, with some small exceptions, beneficial owners directly or indirectly exercise substantial control or own at least 25% of the reporting company. The Final Rule provides numerous examples of who qualifies as having substantial control.
Reporting companies are also required to identify the company applicant –the individual who filed the application with specified governmental authorities to create or register it to do business, or the individual primarily responsible for the filing of the application. Qualifying reporting companies that exist prior to the effective date are not required to report on their company applicant.
Qualifying reporting companies formed prior to 2024 must comply by Jan. 1, 2025. Any reporting company formed or registered to do business after the effective date is required to report within 30 days of formation or registration. Beneficial ownership changes must be reported within 30 days to correct or update information in a previously filed report. The 30-day period begins on the date the company becomes aware of any inaccuracy.
The expected cost to reporting companies to prepare and file their beneficial ownership reports is around $85 for companies with simple ownership and management structures. In the event of willful violations (by intentional act or omission) of the reporting requirements, reporting companies could be subject to civil penalties of up to $500 per day of a continuing violation and further criminal penalties of up to $10,000 and imprisonment for up to two years. For incorrect or incomplete information, a correction submitted within 90 days of the original report will prevent enforcement action.
The new reporting requirements have raised privacy concerns, which the CTA has addressed through data protection parameters. FinCEN must store the reporting data in a secure nonpublic database, using the highest level of security. Penalties are steep for those that violate these protections. Unauthorized disclosure of the information could result in a criminal penalty of up to $250,000 or five years in jail.
Affected business owners should make a list of all entities they own and control. Each company should be analyzed by a CPA or legal counsel before Dec. 31, 2023 to determine what reporting obligations are required. Shell entities with no business operations should be considered for merger or dissolution. Businesses interested in future expansion should consider the series LLC structure.
Do you have questions on how/if the Corporate Transparency Act applies to your business? Contact the experienced Financial Services team at Tonkon Torp.
Filed under Corporate Transparency Act, Business Law, Financial Services & Investment Management