On January 1, 2021, Congress enacted the Corporate Transparency Act (codified as 31 U.S.C. §5336) (“CTA”) within the larger National Defense Authorization Act (“NDAA”). The NDAA authorized funds for the Department of Defense, the military, the Department of Energy, and other matters relating to financial intelligence, money laundering, and homeland security. The CTA, despite being a small portion of the NDAA, stands to be a “big deal” for private companies.

Beginning January 1, 2024, businesses formed in the U.S. or foreign businesses that operate in the U.S. may be required to report information about the company’s “beneficial owners” (i.e., the people who own or control it) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). Historically, FinCEN has been tasked with national security relating to financial matters. The new reporting requirements are similarly geared to preventing criminals from using companies for money laundering, corruption, tax evasion, drug trafficking, fraud, and other crimes. Essentially, it signals the end of anonymous shell companies whose owners are concealed from the U.S. government.

Who is required to report? The CTA governs corporations, limited liability companies (“LLCs”), and similar legal entities that are required to be registered with a state secretary of state or similar office. 31 U.S.C. §5336(a)(11)(A). In Illinois, the Secretary of State governs corporations, not-for-profit (“NFP”) corporations, LLCs, limited partnerships (“LPs”), and limited liability partnerships (“LLPs”). The Illinois Secretary of State does not register sole proprietorships, general partnerships, or trusts.

Who is exempt from reporting requirements? The CTA contains 23 different categories of entities that are exempt from reporting requirements, including banks, credit unions, tax-exempt entities registered with the IRS, public utilities, and some types of larger companies. 31 U.S.C. §5336(a)(11)(B). The exemptions generally cover entities that are already subject to oversight by another federal or state agency or law, such as most insurance companies, investment advisors and broker-dealers, and certain public accountants.

What information must be disclosed? FinCEN is developing a disclosure form to cover the categories of information required to be reported by the CTA, which include information about the company, its beneficial owners, and the individuals that formed the company (if different). The company must state its legal name and any trade name(s), the U.S. business address, the jurisdiction in which the company was formed (if domestic) or registered (if foreign), and the Taxpayer Identification Number (“TIN”) assigned by the IRS. For each beneficial owner and company applicant, the company must provide the person’s legal name, birth date, home address (unless the person is an attorney or corporate formation agent forming the company in the course of his or her business), identifying number (e.g., driver’s license, state identification card, passport, etc.), and a copy of the photo identification document. 31 U.S.C. §5336(b); 31 C.F.R. §1010.380(b).

Who is a “beneficial owner”? The CTA defines the term “beneficial owner” as any individual who exercises substantial control over the reporting company, or who owns or controls at least 25% of the company. 31 U.S.C. §5336(a)(3). Those with “substantial control” may include persons who hold executive positions or offices, or are authorized to make important decisions for the company, even if they are not owners. In FinCEN’s published examples, titles such as CEO, CFO, COO, President, and general counsel are “beneficial owners” because they are senior officers entitled to exercise substantial control over the company. See also 31 C.F.R. §1010.380(d).

Who is a “company applicant”? The CTA defines the term “company applicant” as the individual who files the document that created or registered the company. 31 U.S.C. §5336(a)(2). If more than one individual is involved in the filing of the document, the individual who is primarily responsible for directing or controlling that filing is a “company applicant” along with the person who directly filed the formation or registration document. FinCEN’s published guidance indicates that a “company applicant” may include a spouse, business partner, attorney, or accountant, merely by virtue of the ministerial act of filing the document creating the company. Only companies created or registered on or after January 1, 2024 must report its company applicants. Entities created or registered prior to January 1, 2024 do not need to report this information. See also 31 C.F.R. §1010.380(e).

When is the report due? FinCEN will begin accepting disclosure reports on January 1, 2024. Companies created or registered before January 1, 2024 must file their initial report within one year, or by January 1, 2025. Companies created or registered after January 1, 2024 must file their initial report within 30 days after receiving notice from the Secretary of State. Companies must also periodically update the information on file with FinCEN whenever there is a change to the previously-reported information about the company or beneficial owners. Corrected reports are required if previously-reported information was inaccurate when filed. The updated or corrected report must be filed within 30 days of the change or discovery of the inaccuracy. 31 C.F.R. §1010.380(a).

How is the report filed? All reports must be filed electronically using FinCEN’s online filing system. There is no fee for the filing.

Will the disclosures be publicly available for viewing? No. FinCEN is only authorized to share the information disclosed with authorized users for purposes specified by law. Such permitted uses include: (i) federal agencies engaged in national security, intelligence, and law enforcement activities, (ii) state, local, and similar law enforcement agencies with court authorization, (iii) the U.S. Department of the Treasury, (iv) financial institutions using beneficial ownership information to conduct legally required customer due diligence, with customer consent, (v) federal and state regulators overseeing financial institution compliance with its due diligence obligations, and (vi) federal law enforcement agencies and authorities. 31 U.S.C. §5336(c).

What happens if I miss the filing deadline or report incorrect information?  It is a crime to “willfully”: (i) fail to report complete and accurate information on the report; (ii) fail to timely update the report with changes in beneficial ownership information; (iii) provide false or fraudulent beneficial ownership information; or (iv) provide a false or fraudulent photo identification required to be included with the report. Penalties include both criminal and civil monetary penalties and possible prison time, generally $500 per day the violation continues, up to $10,000, and/or imprisonment for up to two (2) years. 31 U.S.C. §5336(h). Thankfully, the CTA contains a “safe harbor” for persons who do not have any knowledge that the report contained inaccurate information and the person voluntarily files a corrected report within 90 days after the original report was filed. 31 U.S.C. §5336(h)(3)(C). However, the safe harbor will not provide any relief to a person who filed an inaccurate report with knowledge of the inaccuracy or for the purpose of evading the reporting requirements.

The Corporate Transparency Act stands to be a pitfall for the unwary and creates a new obligation for most small and large businesses alike. Attorneys at Gensburg Calandriello & Kanter, P.C. are ready and able to assist you and your business with meeting your corporate compliance obligations. Please contact us to assist you with any aspect of registering your business, filing annual reports, filing FinCEN disclosure reports, preparing company minutes and consents, reviewing contracts and leases, and any other business-related legal needs.

Sandra Mertens
[email protected]