November 27. 2023: Written by: Kent L. Schwarz, Esq. and Maria Matkou, Esq. Becker LLC
Effective January 1, 2024, many small businesses must begin disclosing information about their owners, officers, and controlling persons to the Financial Crimes Enforcement Network (FinCEN) pursuant to the recently enacted Corporate Transparency Act (the “CTA”). While the rules are designed to help law enforcement fight terrorism, money laundering, tax evasion and other criminal activity, they disproportionately impact small business.
Who must disclose?
Companies required to report under the CTA include a domestic corporation, limited liability company, or other business entity created by filing a document with the secretary of state of any state or any private entity formed under the laws of a foreign country that is registered to do business in the U.S.
The CTA exempts many entities that are covered by other reporting regimes, including SEC-reporting companies, credit unions, depository institutions, money services business, securities brokers and dealers, exchanges and clearing agencies, investment companies or advisors, venture capital fund advisors, insurance companies, commodity exchange registered entities, accounting firms, public utilities, financial market utilities, pooled investment vehicles if advised by another exempt entity, tax-exempt entities, entities assisting exempt entities, and inactive entities.
For most privately held companies, the most important exemption is a “large operating company” exemption. A company meets this exemption if it employs more than 20 full time employees in the United States; has a physical office within the US, and filed a Federal income tax or information return for the previous year demonstrating more than $5,000,000 in domestic gross receipts or sales (net of returns and allowances). This exemption is determined on an annual basis, so a company’s reporting status may change. Newly formed entities obviously cannot meet this exemption.
Who is a beneficial owner?
A beneficial owner is an individual who, directly or indirectly, either (1) owns or controls at least 25 percent of the ownership interests or (2) “exercises “substantial control” over a reporting company. An individual exercises “substantial control” if they satisfy any of the following factors:
· they serve as a senior officer of the company;
· they have authority over the senior officers or majority of the board of a company;
· they have substantial influence over the company’s important decisions, or
· they have any other type of substantial control over the company.
What is required to be disclosed?
For a reporting company: its full name, DBA, address, jurisdiction of formation or registration, and federal TIN (EIN).
For beneficial owners: their full name, DOB, address, photo ID (passport or driver’s license) with ID number shown.
When do non-exempt Companies have to file?
Companies formed prior to January 1, 2024 have one year to report under the CTA.
Companies formed January 1, 2024 or after must report within thirty (30) days of formation.
What if a Company does not comply?
Failing to report or knowingly filing false information may result in civil penalties of up to $500 per day, and criminal penalties of up to $10,000, imprisonment of up to two years, or both.
Is the information reported publicly available?
No, and it is not subject to Freedom of Information Act requests, but various federal, state and local law enforcement agencies, including the Department of Treasury will have access to the information.