[Updated] Compliance Alert: the Corporate Transparency Act

See update #1 below

You may have already heard of the Corporate Transparency Act (CTA). It is a new federal law requiring most businesses to register with the Financial Crimes Enforcement Network (FinCEN). Congress designed the CTA to combat money laundering and enhance corporate accountability. This post will provide an overview of how to comply with the CTA.

Beneficial Owners

Nearly all businesses will have to disclose comprehensive “Beneficial Ownership” information to FinCEN. A select few will be exempt based on reporting status or if the business works in an industry that is already heavily regulated – see the list of exemptions here.

A “Beneficial Owner” is an individual who (directly or indirectly) wields substantial control over a company or reaps economic benefits from a company. The definition is purposefully broad to capture individuals who may wish to evade detection. The CTA considers anyone holding 25% or more of the business’s equity, board members, directors, and anyone else who exercises substantial control over the business to be a Beneficial Owner. Of course, other entities may hold equity or exercise control over a business; the CTA also requires businesses to provide information about the individuals who control such parent entities.

See below for the disclosure requirements for Beneficial Owners.

Deadlines and disclosures

Starting January 1, 2024, most businesses must submit Beneficial Owner information to FinCEN. The form is currently unavailable, and FinCEN will not accept filings before January 1, 2024. A business’s deadline depends on when it was formed:

(1) if formed before January 1, 2024, the deadline is January 1, 2025;

(2) if formed in 2024, the deadline is 90 days from the successful registration of the company*; and

(3) if formed in or after 2025, the deadline is 30 days from the successful registration of the company.

* Item (2) above was updated on November 29, 2023, so the landscape is still shifting.

All businesses subject to the CTA must submit basic information about the business and the Beneficial Owners. For each Beneficial Owner, the business must provide the name, date of birth, residential address, and an identifying number from an acceptable identification document (e.g., passport, US driver’s license, etc.) along with a copy of the document.

If the company is formed on or after January 1, 2024, the company will also need to provide the above information about the company applicant itself, including the individual who filed the creation or registration document and the individual primarily responsible for directing or controlling the creation or registration.

Businesses are required to keep Beneficial Owner information current. While there’s no specified update schedule, significant shifts in business ownership necessitate revising this information. Changes that require an update include alterations to the business name, substantial changes in ownership or control, or any changes to information provided by a Beneficial Owner.

Practical tips to prepare for compliance

1. Don’t wait to form your entity. If you form your business before the end of 2023, you will have an additional nine months to file your Beneficial Owner information.

2. Start gathering information from Beneficial Owners now. If there are multiple Beneficial Owners, getting the required information and documentation might take time. Additionally, Beneficial Owners might be concerned about sharing copies of their personal records, so founders might have to be persistent about gathering the required information.

3. If you have questions, you can check the FinCEN FAQ for useful additional information or call or email us for assistance.

How goodcounsel can help

The CTA is complicated, and failure to comply can lead to substantial fines and possible criminal penalties. goodcounsel is here to provide you with additional information, advice, and assistance with CTA compliance. Please reach out if you need assistance.

Update #1 – 05/20/2024

The guidance provided by FinCEN makes it clear that anyone who owns 25% or more of a company’s equity or serves as an officer or director is a beneficial owner. However, remember that the definition is nonexhaustive, so while these individuals are automatically considered beneficial owners, anyone who exercises substantial control over the business could be considered a beneficial owner. This definition is expansive, so we recommend you seek assistance if you are unsure if a person would be considered a beneficial owner.

Categorised as: Corporate transparency act, Legal Issues

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