On January 1, 2024, the new federal Corporate Transparency Act will require the vast majority of small U.S. entities to start filing an online report with the Financial Crimes Enforcement Network (FinCEN) and report beneficial ownership. Existing entities will have until January 1, 2025 to file this report, but entities formed in the new year will need to file within 30 days of formation. Reports with FinCEN are already required for, among other things, foreign accounts, which I discussed in a previous post. However, the CTA is a big deal and represents a complete upheaval of current entity formation and maintenance practice. A number of exceptions to the reporting requirements apply, but generally only include large entities or entities that are otherwise subject to an existing regulatory regime, such as financial institutions. In other words, it is small entities that are being targeted by the CTA, and ultimate individual beneficial ownership is the primary reporting objective.
The reporting requirement is imposed upon the "reporting company" itself, which is any entity formed by filing a document with a state agency. This means that most trusts will not themselves be reporting companies but will likely have complex requirements to provide information about various trust participants if the trust owns a reporting company interest. "Senior officers" of a reporting company are liable for penalties of up to $500 for each day that the violation continues, imprisonment for up to two years, and/or a fine of up to $10,000. Beneficial owners of a reporting company that provide false information or refuse to provide information to the reporting company can also face penalties. A beneficial owner is any individual who exercises "substantial control" over a reporting company or owns or controls at least 25 percent of the ownership interests of the reporting company.
The key pieces of information required of beneficial owners include full legal name, date of birth, physical home address (P.O. Boxes are not allowed), and a copy of the individual's driver's license or passport. If any of this information changes, the reporting company must file a change report. Much of the burden of reporting and keeping track of a beneficial owner's change of information appears to be relieved in large part if the beneficial owner obtains his or her own FinCEN identification number and the reporting company reports that number. Given the detailed personal information that is required to be disclosed and the substantial penalties for noncompliance, we will be hearing much more about the CTA at the start of the new year.
The reporting requirement is imposed upon the "reporting company" itself, which is any entity formed by filing a document with a state agency. This means that most trusts will not themselves be reporting companies but will likely have complex requirements to provide information about various trust participants if the trust owns a reporting company interest. "Senior officers" of a reporting company are liable for penalties of up to $500 for each day that the violation continues, imprisonment for up to two years, and/or a fine of up to $10,000. Beneficial owners of a reporting company that provide false information or refuse to provide information to the reporting company can also face penalties. A beneficial owner is any individual who exercises "substantial control" over a reporting company or owns or controls at least 25 percent of the ownership interests of the reporting company.
The key pieces of information required of beneficial owners include full legal name, date of birth, physical home address (P.O. Boxes are not allowed), and a copy of the individual's driver's license or passport. If any of this information changes, the reporting company must file a change report. Much of the burden of reporting and keeping track of a beneficial owner's change of information appears to be relieved in large part if the beneficial owner obtains his or her own FinCEN identification number and the reporting company reports that number. Given the detailed personal information that is required to be disclosed and the substantial penalties for noncompliance, we will be hearing much more about the CTA at the start of the new year.
