Millions of entities across the United States must get ready to comply with the Corporate Transparency Act (CTA), a new federal law that goes into effect on January 1, 2024. Subject to a few limited exceptions, the CTA requires all new and currently existing entities to file reports with the federal government, identifying information about themselves, their “company applicants,” and their “beneficial owners.” The CTA also requires entities to update those reports as the identifying information changes. Failure to comply with the CTA risks thousands of dollars in fines and penalties.

Is my entity required to comply with the CTA?

Yes, unless your entity falls into one of the few narrow exceptions. The reporting requirement applies to “reporting companies,” which include LLCs, corporations, and most partnerships.

The purpose of the CTA is to provide the federal government with a centralized database of information about small entities or entities which are more likely to serve as vehicles for illicit activity. Thus, the entities exempted from reporting are primarily larger companies, which meet all of the following requirements: (1) the entity must have had at least $5 million in gross receipts reported on the prior year’s tax return, (2) the entity must directly employ more than 20 full-time employees, and (3) the entity must have a physical office or location in the United States. Few entities will meet an exemption; most LLCs, corporations, and partnerships must comply with the CTA’s reporting requirements.

The scope of the CTA is incredibly broad. “Reporting companies” include special-purpose entities, many entities that are formed for the purpose of raising capital from investors, small entities with 20 or fewer employees, and entities of any size which do not have a physical office presence. Individuals who decided to operate their businesses through a single-member LLC are also wrapped up within the CTA’s scope.

What are reporting companies required to report?

Reporting companies must report their name, any trade names, current street address, state of formation, and EIN.

Reporting companies must also report its beneficial owners’ full legal name, date of birth, residential street address, ID number from a U.S. passport, driver’s license, or other identification document, and a scanned image from which the ID number was obtained.

Entities formed in 2024 and beyond must also report information about their “company applicants.” This generally includes the individual who directed the law firm to form the entity, and the attorney forming the entity.

Who are “beneficial owners”?

As noted above, reporting companies must report certain identifying information their beneficial owners. “Beneficial owners” include individuals who (1) own or control at least 25% of the ownership interests of the reporting company, or (2) exercise substantial control over the reporting company.

Individuals exercising “substantial control” include senior officers, such as a President, CEO, CFO, COO, General Counsel, or similar functionary. Individuals who can exercise appoint or remove senior officers or members of the board of directors (or similar body) also exercise “substantial control.” In addition, individuals who direct, determine, or have substantial influence over important decisions have “substantial control.” This kind of control can be exercised within the authority structure of an entity, such as through board representation or ownership of a majority of the voting power, but it may also be exercised through rights granted in a contract. It is advisable that reporting company consult with their counsel to fully flesh out who has “substantial control” over the reporting company, for reporting purposes.

When do reporting companies have to file reports with the federal government?

Entities existing before January 1, 2024 must file an initial report no later than January 1, 2025. Entities formed in 2024 must file an initial report within 90 days after notice of formation. Entities formed in 2025 or beyond must file an initial report within 30 days after notice of formation.

If information provided was incorrect, a corrective report must be filed within 30 days of the reporting company becoming aware or having reason to know about the correction. However, a safe harbor from penalties only applies if the correction was filed within 90 days of the inaccurate report.

In addition, reporting companies must file updated reports whenever information about its beneficial owners change. For example, if a beneficial owner’s residential address changes, or if the beneficial owner changes his or her name, then that change must be reported within 30 days of the reporting company becoming aware or having reason to know about the change. This obligation to update information extends forever into the future.

If I am (or will be) a beneficial owner of many entities, do I have to supply my information for each entity? Do I have to update my information with each entity if it changes?

Not necessarily. Individuals will be able to obtain a unique FinCEN number, which can be used on beneficial ownership reports, in lieu of providing the information directly. If the individual has a FinCEN number, the individual can update his or her information as it changes, by updating the information associated with the FinCEN number.

Who can access the reported information about beneficial owners?

The information will be available to federal, state, and local law enforcement agencies. With the consent of the reporting company, financial institutions will also have access to the beneficial ownership information.

Under current CTA regulations, information reported under the CTA will not be subject to Freedom of Information Act (FOIA) requests, and will not be publicly accessible.

What if a reporting company fails to comply?

The CTA’s reporting requirements are mandatory. A reporting company cannot simply choose not to submit CTA reports. If a reporting company fails to report complete or update beneficial ownership information, or willfully provides false or fraudulent information, the reporting company could be liable for civil penalties of $500 per day, criminal fines of up to $10,000, and imprisonment for up to two years. Penalties can also be assessed on individuals who cause a reporting company not to report, or individuals who are senior officers at the time of its failure to report or update beneficial ownership information.

What should I do now?

To prepare for CTA compliance, reporting companies should gather the required identifying information about its beneficial owners, so that it can timely file its initial report in 2024. Reporting companies should also consider amending their organizational documents to require beneficial owners to provide information necessary for the CTA reports, to update the entity as the information changes, and to indemnify the reporting company for any failure to provide or update the information or inaccuracies in the information. Reporting companies should also seek the advice of their legal counsel, to determine who is a beneficial owner because of their “substantial control.”

The attorneys at RMWBH are ready to help analyze these issues and advise about reporting requirements under the CTA.