News & Insights

Millions of corporations, limited liability companies and other legal entities are formed within the United States annually. According to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), while most of these entities play a viable and legitimate role in the U.S., unfortunately many are also used to facilitate illicit activities — enabling those who threaten national security to access and transact in the U.S. economy.

Cracking down on such illegal activities — among them money laundering, tax fraud and terrorism financing — the Corporate Transparency Act (CTA) was passed in 2021 and takes effect on Jan., 1 2024. CTA’s ultimate goal is to protect the U.S. financial system from illicit use and prevent bad actors from abusing legal entities to create shell companies and conceal the proceeds of corrupt and criminal acts. According to FinCEN, such abuses undermine U.S. national security, economic fairness, and the integrity of the U.S. financial system.

As part of the Anti-Money Laundering Act of 2020, the CTA established beneficial ownership information (BOI) reporting requirements for certain types of corporations, limited liability companies, and other entities created in or registered to do business in the United States. The law requires, for the first time, that certain U.S. legal entities and foreign entities registered to do business in this country disclose information regarding their beneficial owners and persons who register or form them to FinCEN.

By requiring entities to report beneficial ownership information to FinCEN, the CTA can help capture more information about the ownership of specific entities operating in or accessing the U.S. market.

Deadline looms for the enactment of the CTA

The CTA is in the spotlight again as it takes effect on Jan. 1, 2024, and many business owners are wondering about its implications and next steps.

The key takeaway is this: on Jan. 1, 2024, unless exempted by the CTA, companies registered to do business in the United States must report BOI to FinCEN a bureau of the U.S. Department of the Treasury. BOI is personally identifiable information on the individuals that ultimately own or control the company.

The following is a brief summary of what companies should know about the legislation. Compliance is mandatory and that there are steep, escalating fines and potential jail time for noncompliance with the CTA’s requirements.

Which entities must file with FinCEN?

All corporations, limited liability companies, or other similar entities that are either:

1. created by the filing of a document with a secretary of state or a similar office under the law of a state or an Indian tribe or;
2. formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a State or Indian tribe.

Entities formed under the above section 1 are domestic reporting companies, entities formed under the above section 2 are foreign reporting companies.

Exemptions to the CTA

There are 23 exemptions to the reporting requirements under the CTA. In summary corporations, limited liability companies, and other similar entities that are highly regulated or subject to disclosure requirements are exempt.

Furthermore, the exemptions also include: entities that issue securities or are required to periodically report under the Securities Exchange Act of 1934 — including banks, credit unions, depository institution holding companies, money services businesses, broker or dealer in securities, insurance companies, venture capital fund advisors, accounting firms, public utilities, financial market utilities, pooled investment vehicles, inactive entities or tax exempt entities.

Additionally, there is a large operating company exemption which defines a large operating company as one that: 1) Employs more than 20 full-time employees in the United States; 2) has a physical operating presence at a physical location in the United States; and 3) Filed a federal income tax or information return in the previous year demonstrating more than $5 million in gross receipts or sales (net of returns and allowances) on an IRS Form 1120, consolidated 1120, 1120-S, 1065 or other applicable IRS form.

Who is and is not a beneficial owner

A beneficial owner under the CTA is an ultimate owner and cannot be another entity unless the ultimate owner is a trust. Specifically, the beneficial owner is: 1) An individual that owns 25% or more over the company, or 2) Exerts substantial control over the decision making over the company.

For entities that are owned by a trust, any individual that has the ability to demand distributions or withdraw assets held in the trust must be reported as a beneficial owner.

What are the reporting deadlines?

New entities: Any newly formed domestic or foreign reporting company formed on or after Jan. 1, 2024 but before Jan. 1, 2025, must file a report within 90 calendar days of the earlier of either 1) the date on which it receives actual notice that its creation has become effective, or 2) the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the domestic reporting company has been created or has been registered to do business. Newly created or registered entities on or after Jan. 1, 2025 must file beneficial ownership information within 30 calendar days.

Existing entities: Any domestic or foreign reporting company created before Jan. 1 2024 must file beneficial ownership information no later than Jan. 1, 2025.

Exempt entities that lose exemption status: Entities that no longer meet the criteria for an exemption discussed above must file a report within 30 days after the date that it no longer meets the criteria for any exemption.

Penalties

The CTA provides for both civil (up to $10,000 in fines) and criminal (two years imprisonment) penalties for willfully providing false information, failing to provide complete information or failure to update outdated information.

What to do next?

There are four key steps:

1. Shareholders of corporations, members of limited liability companies and partners or limited partnerships, as well as trustees of trusts should assess whether their entity qualifies for an exception or whether they are a domestic or foreign reporting company. If their entity does not qualify for an exemption, they should proceed to step two.
2. Domestic and foreign reporting companies should consolidate information on their beneficial owners so that it is a simple process to upload and provide FinCen with such information.
3. If desired, beneficial owners may request a FinCen ID so that the reporting company may report in the place of that individual’s otherwise required personal information on a beneficial ownership information report.
4. On or after Jan. 1, 2024, log onto the FinCen website to submit the previously collected beneficial ownership information.

Conclusion

In conclusion, the CTA stands as a pivotal measure aimed at safeguarding the integrity of the U.S. financial system and protecting national security. With millions of legal entities formed annually in the United States, the CTA addresses the dual role these entities play — serving as legitimate contributors to the U.S. economy while also being exploited for illicit activities such as money laundering, tax fraud, and terrorism financing.

As the deadline approaches, businesses must diligently assess their status, determine eligibility for exemptions, and compile information on beneficial ownership. The CTA underscores a paradigm shift, demanding a proactive approach from entities to ensure compliance and contribute to the overarching goals of protecting national security, promoting economic fairness, and fortifying the U.S. financial system against illicit activities. In navigating these new regulatory waters, businesses play a crucial role in upholding the transparency essential for a resilient and secure financial landscape.

Phil Jelsma is a partner and chair of the entity formation and tax practice group, and Ulrick Matsunaga is an associate attorney in the entity formation and tax practice group. The article was published in The Daily Journal and The Daily Transcript.