Summary: The Corporate Transparency Act (the “CTA”) was enacted to prevent bad actors from taking advantage of the U.S. financial system. It plans to achieve this goal by requiring millions of entities that were formed by filings with a Secretary of State or similar office (and foreign entities that apply to qualify to do business in a State or tribal entity) to provide personal information – including a copy of a personal identification item (such as a passport or driver’s license) and a legible picture of persons who are deemed to be “senior officers” or “beneficial owners.” Entities formed after January 1, 2024, will need to submit the same information and in addition up to two “Company Applicants”. If a person does not want to share his or her personal information with a reporting company, the CTA permits FinCEN to issue FinCEN Identifier Numbers whereby the person submits the required information directly to FinCEN and the reporting company then only reports the person’s FinCEN Identifier Number.
FinCEN is required to maintain the information in a secure, nonpublic database, using information security methods and techniques that are appropriate to protect non-classified information security systems at the highest security level. An entity or person can face a $10,000 penalty or prison term of up to 2 years for willful provision of false or fraudulent information or failure to file complete and accurate reports.
All filings are to be made electronically so that the information provided will be collected and stored in an electronic media. The reporting companies should institute security measures to protect this information from misuse.
Timing for Compliance: Entities in existence on January 1, 2024, will have until January 1, 2025, to comply and thereafter the CTA requires that the reports be updated within 30 days after the reporting company becomes aware that any information in a report was inaccurate. Entities formed on and after January 1, 2024 and before January 1, 2025, FinCEN has proposed to extend the time for filing an initial report to 90 days after the date of the state filing to form the entity was accepted. For entities formed thereafter, the CTA requires a report to be filed on or about 30 days after the filing is accepted. In practice, the initial report should be part of the formation process and in most cases may need to be filed before ownership interests have been issued or documented. A second updated filing would then have to be made once ownership interests are issued or determined and/or when additional officers are appointed.
Do Exemptions Apply? There are 23 exemptions from the reporting requirements, including for entities in regulated businesses, accounting firms (but not law firms), issuers who have a class of securities registered under Section 12 of the Securities Exchange Act of 1934 or are required to file periodic information under Section 15(d) of the Securities Exchange Act, and a number of entities that are already subject to governmental regulation.
A more general exemption for “large operating companies” exists, but in order to qualify, the entity must have shown at least $5 million of gross receipts or sales (from US sources) in its prior fiscal year income tax return and have 20 full time employees.
What Should Companies Do Now? While there is no filing that can be done at this time, existing entities will have to (a) determine if they are eligible for an exemption, and (b) if not exempt, institute a plan to obtain the information to comply. A compliance plan would include making clear that senior officers are required to provide the information as a condition of continued employment, the identification of any beneficial owners (individuals that own or control not less that 25% of the ownership interests in an entity – although for certain entities the requirement may be ownership or control of 25% of any class of ownership or other senior roles), and perhaps, creation of a program imposing penalties or consequences for the failure to provide the information on a timely basis. In addition, companies will have to make sure they have appropriate safeguards in place to maintain the confidentiality of the personal information.
Scam Alert: Finally, please note that FinCEN has been notified of recent fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act. The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests. Please do not respond to these fraudulent messages, or click on any links or scan any QR codes within them.
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