Starting January 1, 2024, many companies operating in the U.S. will be required to gather and report ownership and control information to the Department of Treasury's Financial Crimes Enforcement Network (FinCEN). 

The federal Corporate Transparency Act (CTA) was enacted by Congress in 2021 to combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity. The law requires non-exempt entities to report information to FinCEN, including personal identifying information (PII) of the individuals who directly or indirectly have a substantial ownership interest in, or otherwise exercise substantial control over, the reporting company.

All corporations, LLCs, limited partnerships, and other entities formed or registered to do business in the U.S. by means of a filing with a secretary of state office are subject to the CTA’s reporting requirements, unless they qualify for a specific exemption. The exemptions include:

• Companies that are already subject to reporting and regulatory oversight, such as banks, SEC reporting companies, and tax-exempt entities.
   
• Larger operating companies with more than 20 employees in the U.S., a physical operating presence in the U.S., and reported annual revenues of more than $5 million on its most recent federal tax return.
   
• Wholly owned subsidiaries of most exempt entities.
   
• Inactive entities that meet certain requirements, including having no assets, no foreign ownership, and no funds transfers or ownership changes in the past year.

See our November alert, which provides a more detailed overview of the CTA’s requirements, the exemptions, the due dates for reports, and the penalties for noncompliance. 

Recent CTA Developments 

In September, FinCEN issued a Small Entity Compliance Guide. The 56-page document is essentially a road map companies can use to evaluate what their obligations may be under the CTA, including whether they're exempt. 

In another update in late September, FinCEN proposed to give new companies formed in 2024 more time to file the required information with the government. The law currently requires all non-exempt entities formed on or after January 1, 2024 to file within 30 days. Under the proposal, new companies formed during 2024 would have 90 days from their formation date to submit the required report.

There remain unanswered questions related to certain exemptions, and FinCEN continues to work on the electronic portal through which all filings will be made. So be on the lookout for future updates in the coming weeks.

Preparing for the CTA

With the CTA's January 1, 2024 effective date right around the corner, all businesses operating in the U.S. should be preparing right now. Here are some steps businesses can take:

• Conduct an inventory to identify all entities in which the business has an ownership interest or over which it may have substantial control, including joint ventures, holding companies, and other special purpose entities.
   
• Assess whether each entity qualifies for an exemption from the CTA’s reporting requirements. FinCEN's Small Entity Compliance Guide has some helpful information for this question, but attorneys or accountants should be consulted on any close questions.
   
• For each entity that is a reporting company, identify the individuals who, directly or indirectly, may have ownership or control positions that make them “beneficial owners” of the entity as defined by the CTA. This analysis must go up the chain of ownership and control to the ultimate individuals who meet the criteria. Again, this analysis can be quite complex, so consider seeking assistance from outside advisors.
   
• Set up ongoing CTA record keeping and compliance processes, including for:
   
  • Obtaining, properly storing, and reporting the PII of beneficial owners. The same third-party providers that serve as registered agents and provide other corporate filing services are developing offerings for CTA filings which should be considered. 
     
  • Monitoring the continued accuracy of the reported information so that any changes (such as a new residential address for a beneficial owner) can be promptly identified and an update filed with FinCEN within the 30-day window for submitting updates.
     
  • Forming entities in the future, to ensure that the new entity will have access to the information needed to timely file any required reports.
     
  • Reviewing and revising entity documents (including shareholders, LLC operating, and executive employment agreements) as necessary to enable the entity to obtain from beneficial owners the required PII in an accurate and timely fashion.
     
  • Identifying an individual or group with responsibility for overseeing CTA compliance.

Compliance is Key

The Corporate Transparency Act will impact a large number of companies and will require ongoing compliance efforts. Consider utilizing outside counsel or other advisors, particularly when it comes to questions related to exemptions and beneficial ownership. 

For more information, please contact us or your regular Parker Poe contact. You can also subscribe to our latest alerts and insights here.