The Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued final regulations to implement the reporting requirements under the federal Corporate Transparency Act (CTA). The CTA aims to further combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity by requiring non-exempt entities to report personal identifying information about their “beneficial owners” and “company applicants.”

This Parker Poe alert is an overview of the key aspects of the final regulations. While no reports are required under the regulations until after January 1, 2024 (Effective Date), all entities doing business in the U.S. should be considering whether they or any of their affiliates will be required to file reports and, if so, how to gather the required personal information.

1. What business entities must file a report?

Any domestic or foreign entity that meets the definition of a “reporting company” must file a report with FinCEN. A reporting company includes any non-exempt (i) corporation, limited liability company, or other entity created by filing a document with a Secretary of State or similar office under the law of a U.S. state or Indian tribe, or (ii) corporation, limited liability company or other entity formed under the laws of a foreign country and registered to do business in any U.S. state or tribal jurisdiction by filing a document with a Secretary of State or similar office.

There are 23 categories of entities that are exempted from the definition of a “reporting company,” including:

• Regulated Entities. Most of the exempt categories pertain to otherwise substantially regulated businesses, including, but not limited to, governmental authorities, banks, credit unions, money servicing businesses, investment companies, and investment advisors, securities brokers, securities dealers, tax-exempt entities, insurance companies, public utilities, accounting firms registered under the Sarbanes-Oxley Act, and publicly traded companies that are issuers of securities registered under Section 12 of the Securities Exchange Act of 1934 or are otherwise required to file supplementary and periodic information under Section 15(d) of the Securities Exchange Act of 1934.
   
• Large Operating Companies. This exemption is available to any entity that meets all three of the following criteria:

1. employs more than 20 full-time employees within the U.S.,
2. has an operating presence at a physical location within the U.S., and
3. filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5 million in gross receipts or sales on the entity’s IRS Form 1120, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the U.S. The gross receipts/sales of an entity that is included in a consolidated return will be deemed to be those of the consolidated group.

However, the large operating company exemption does not include holding companies or other parent entities of an exempt large operating company unless they independently meet all three criteria.

• Inactive Entities. To be considered an exempt “inactive entity,” the entity must (1) have been in existence on or prior to January 1, 2020, (2) not be engaged in active business, (3) not have any direct or indirect foreign ownership, (4) not have experienced any changes in ownership in the preceding 12 months, (5) not have sent or received any funds aggregating more than $1,000 in the preceding 12 months, and (6) not hold any kind of tangible or intangible assets. Due to these requirements, the “inactive entity” exemption is narrow and may not include many administratively dissolved or otherwise dormant entities.
   
• Subsidiaries. Subsidiaries of large operating companies and most other exempt entities will also qualify for the exemption if the subsidiary is wholly controlled or wholly-owned by such exempt entities.

2. When after the Effective Date is the initial report required to be filed?

• New Entities. Any domestic reporting company created on or after January 1, 2024, and any foreign reporting company registered to do business on or after such date must file a report within 30 calendar days after the earlier of (1) receiving notice that its creation is effective (or in the case of a foreign reporting company that its registration to do business is effective) or (2) the Secretary of State or similar office providing public notice of creation (or in the case of a foreign reporting company, its registration to do business is effective).
   
• Existing Entities. Any domestic reporting company created before January 1, 2024, and any business entity that became a foreign reporting company prior to January 1, 2024, must file the report before January 1, 2025.

3. What information is required in the initial report?

The reporting company must submit the required information and supporting documents to FinCEN with respect to the reporting company, all of its beneficial owners, and, for entities created or registered after January 1, 2024, all of its company applicants. The required information includes:

• For the Reporting Company:

1. Full legal name,
2. Any trade or “doing business as” names, whether registered or not,
3. Complete current address consisting of: (A) in the case of a reporting company with a principal place of business in the U.S., the street address of the principal place of business, and (B) in all other cases, the street address of the primary location in the U.S. where the reporting company conducts business,
4. State, tribal or foreign jurisdiction of formation,
5. For a foreign reporting company, the state or tribal jurisdiction where the company first registers, and
6. The IRS Taxpayer Identification Number (TIN) (including an Employer Identification Number) or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction, and the name of that jurisdiction.

• For Each Beneficial Owner and Company Applicant:

1. Full legal name,
2. Date of birth,
3. Complete current address consisting of: (A) in the case of a company applicant who forms or registers an entity in the course of the company applicant’s business, the street address of the business, or (B) in any other case, the individual’s residential street address,
4. Unique identifying number and the issuing jurisdiction from one of the following documents: (A) a non-expired passport issued to the individual by the U.S. government, (B) a non-expired identification document issued to the individual by a State, local government, or Indian tribe for the purpose of identifying the individual, (C) a non-expired driver’s license issued to the individual by a State, or (D) a non-expired passport issued by a foreign government to the individual, if the individual does not possess any of the other documents described, and
5. Image of the document from which the unique identifying number was obtained.

Note that the reporting information regulations include the following exceptions: (i) any reporting company created or registered prior to January 1, 2024, is not required to report information regarding company applicants; and (ii) if an exempt entity has an ownership interest in a reporting company and an individual is a beneficial owner of the reporting company solely because of his/her ownership interest in the exempt entity, the name of the exempt entity may be reported as a beneficial owner in lieu of the information that would be required with respect to the individual.

4. Who is a “beneficial owner”?

A beneficial owner is any individual who, directly or indirectly, owns at least 25% of the ownership interests of the reporting company or exercises substantial control over the reporting company.

• Ownership. There can be a variety of capital and ownership structures (e.g., equity, warrants, convertible instruments, profits interests, etc.) to take into account when evaluating whether an individual directly or indirectly owns at least 25% of the ownership interests of the reporting company. The regulations include examples reflecting FinCEN’s effort to strike a balance between clarity and flexibility for various structures.
   
• Control. An individual exercises substantial control over a reporting company if the individual (1) serves as a senior officer (defined as the President, CEO, COO, CFO, GC, or other officer performing similar functions) of the reporting company, (2) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of the reporting company, (3) directs, determines or has substantial influence over important matters of the reporting company, including, for example, the reorganization, dissolution or merger of the reporting company, the selection or termination of business lines or ventures of the reporting company and the amendment of any governance documents of the reporting company, or (4) has any other form of substantial control over the reporting company.
   
• Exclusions. The definition of beneficial owner excludes (1) minor children, (2) nominees, intermediaries, custodians, or agents, (3) employees acting solely as employees, (4) individuals whose interest in a reporting company is a future interest through a right of inheritance, and (5) individuals who meet the criteria for a beneficial owner solely as a result of their status as creditors of the reporting company.

5. Who is a “company applicant”?

A company applicant includes an individual (i) who directly files the document that creates the domestic reporting company or that first registers the foreign reporting company or (ii) who is primarily responsible for directing and controlling the filing of the documents. In many instances, the company applicant(s) may be an individual(s) in a business formation service company or a law firm, but in some cases, individuals associated with the reporting company or its formation may be company applicants. In any case, the reporting company must obtain the required information and documents from each company applicant so the reporting company can make timely filings with FinCEN.

6. When are updated reports required?

Updated reports must be filed within 30 calendar days after any change with respect to required information previously filed with FinCEN concerning a reporting company or its beneficial owners. Changes to information concerning company applicants are not required to be reported. Also, for beneficial owners, changes to the document image which was filed (e.g., when a passport or driver’s license is renewed) are not required to be reported unless the change involves the individual’s name, date of birth, address, or unique identifying number.

7. What happens if a company experiences a change in its exempt status under the CTA?

Any entity that was previously exempt but no longer meets exemption criteria must file a report within 30 calendar days after the date that it no longer meets the exemption criteria. If a reporting company meets exemption criteria after filing an initial report, the entity must file an updated report with such information.

8. What is a FinCEN identifier and what is its purpose?

A FinCEN identifier is a number issued by FinCEN to individuals and reporting companies. Individuals may submit an application for a FinCEN identifier, which application includes all of the information that otherwise has to be provided in the initial report for beneficial owners and company applicants. An individual with a FinCEN identifier may provide the identifier to the reporting company, which the reporting company would include in its report in lieu of the information required. Reporting companies may obtain a FinCEN identifier by submitting an application at or after the time the entity submits the initial report.

A FinCEN identifier should provide a streamlined method of reporting for reporting companies and individuals who are frequently required to provide their information and documents for CTA reporting purposes.

If there are any changes regarding the information provided in the FinCEN identifier application, the individual or the reporting company must file an updated application within 30 calendar days after the date on which the change occurs.

9. What Access is allowed to Reported Information?

The information contained in the FinCEN reports will be stored in a database with access limited to federal agencies, state agencies with a court order, and financial institutions with the consent of the company. The Internal Revenue Service will have limited access to the information.

10. What are the penalties for noncompliance?

Willful failure to comply with the FinCEN reporting requirements by the reporting company and the willful failure by any reporting company, beneficial owner, or company applicant to provide accurate information can lead to civil and criminal penalties, including a maximum civil penalty of $500 each day ‎the violation continues (up to $10,000), and imprisonment for up to two years.

We have a team of people at Parker Poe who are continuing to evaluate the CTA regulations, and we will provide updates as further guidance is issued by FinCEN. We also are available to assist entities over the coming months to analyze the application of the CTA to their particular structure and circumstance, to implement governance and internal reporting procedures to account for the CTA, and to make any required reporting to FinCEN.

For more information, please contact us or your regular Parker Poe contact.