As of January 1, 2024, many entities conducting business in the United States will face new reporting requirements for both the entity itself, and those individuals who exercise “substantial control” over the entity. These new reporting requirements come from the Corporate Transparency Act (CTA), which is part of the National Defense Authorization Act. The aim of the CTA is to reduce the use of small business entities for terrorist financing, tax fraud, money laundering, and other illicit activities.

The CTA will require many entities and their owners to disclose certain information with the Financial Crimes Enforcement Network (FinCEN) to accomplish these goals.

Will my business be affected?

Maybe. The reporting requirements imposed by the CTA apply to businesses that fit the criteria of a “Reporting Company” as defined by the Act. The statute defines a Reporting Company as a corporation, limited liability company, or other entity that is (1) created by filing a document with the secretary of state or similar office under the laws of that state or Indian Tribe, or (2) formed under the laws of a foreign country and authorized to do business in the United States by filing a document with a secretary of state under the laws of any given state or Indian Tribe. While this definition seemingly includes every conceivable business, there are a number of exceptions. The exceptions are fact specific.

Of note, the reporting requirements will apply to most business entities that are privately owned, maintain fewer than 20 full time employees and report $5,000,000 or less in gross revenue, and are not otherwise an exempt entity.

Specifically, there are 23 types of entities that are exempt from filing with FinCEN:

  1. Issuers of reporting securities;
  2. Governmental authorities;
  3. Banks;
  4. Credit Unions;
  5. Depository Institution Holding Co.;
  6. Money services business;
  7. Securities broker or dealer;
  8. Securities exchange or clearing agency;
  9. Other Exchange Act registered entity;
  10. Investment company or investment advisor;
  11. Venture capital fund advisor;
  12. Insurance company;
  13. State-licensed insurance provider;
  14. Commodity Exchange Act registered entity;
  15. Accounting firm registered under §102 of the Sarbanes-Oxley Act (SOX);
  16. Public utility;
  17. Financial market utility;
  18. Pooled investment vehicle;
  19. Tax-exempt entity;
  20. Entity assisting a tax-exempt entity;
  21. Large operating entity;
  22. Subsidiary of an exempt entity; and
  23. Inactive entity.

What information will I be required to file?

“Reporting Companies” must file a statement with FinCEN containing the entity’s full legal and any trade or assumed names, address, jurisdiction of formation, and the federal taxpayer identification number.

Additionally, “Beneficial Owners” of reporting companies will be required to file a similar statement. The CTA defines a Beneficial Owner as any individual who, directly or indirectly, either exercises substantial control over such Reporting Company or who owns or controls at least 25 percent of the ownership interests of such Reporting Company. The regulations make clear that substantial control is a low threshold. Additionally, while entities cannot qualify as Beneficial Owners, an individual might have substantial control over an entity where that individual has substantial control over another entity, which maintains substantial control over the Reporting Company (i.e., when an entity holds an ownership interest in another entity). Similarly, in some cases an individual may indirectly have substantial control over an entity by way of a trust. These rules are still developing.

Who will have access to this information?

The information collected by reporting companies will be collected and stored with FinCen. The reports will not be accessible to the public and are not subject to the Freedom of Information Act. However, select government agencies will have access to the information, including: (1) federal agencies engaged in natural security, intelligence, and civil and criminal law enforcement; (2) the Department of Treasury; and (3) state and local law enforcement agencies in connection with criminal or civil investigations.

When do I need to report, and what happens if I don’t?

Reporting companies created or registered prior to January 1, 2024, will have until January 1, 2025 to comply with the CTA filing requirements. Reporting companies created or registered January 1, 2024, and beyond will have 90 days following receipt of their creation or registration documents to file their initial reports. The failure of an entity or individual to comply with the CTA, as well as false or fraudulent reports, could result in civil fines of $500 a day for every day of noncompliance, as well as criminal penalties up to a $10,000 fine or two years in jail.

How can Dawda Mann help?

Complying with the CTA may seem like a daunting task, but the corporate attorneys here at Dawda Mann are well versed in the CTA and its reporting requirements. Contact us to see whether your business must comply with the CTA reporting requirements.

This summary publication is for informational purposes only and does not constitute legal advice nor does it create an attorney-client relationship. Please contact your Dawda Mann attorney with specific legal questions.