Beware! The Corporate Transparency Act is Upon Us

By Brandon K. Jones, Carruthers & Roth, P.A. Reprinted with permission.

Beginning January 1, 2024, the Corporate Transparency Act (“CTA”) goes into effect and will impose stringent Federal reporting requirements on many small businesses. The CTA was passed by Congress to enhance transparency in entity structures and ownership in an effort to help the government combat money laundering, foreign interference, fraud, and other illegal activities.

If you own an interest in or otherwise manage or control a corporation, limited liability company, or any other business entity formed by a filing with a secretary of state (whether in North Carolina or any other state), please review this alert carefully and in its entirety.

The CTA, codified at 31 U.S.C. § 5336, et seq., and regulations promulgated by the U.S. Department of the Treasury, will require nearly all small businesses in the United States to file reports with the Financial Crimes Enforcement Network (“FinCEN”). Although the reporting requirements do not go into effect until January 1, 2024, all business entities formed at any time (including before January 1, 2024) are potentially subject to the CTA and will be required to file and update reports with FinCEN beginning on January 1, 2024.

Specifically, all applicable small businesses (referred to as “Reporting Companies”) will be required to report various information to FinCEN about both the Reporting Company itself, and also about the Reporting Company’s “Beneficial Owners.” In addition, Reporting Companies formed after January 1, 2024, will be required to provide information about the person or persons who participated in filing the Reporting Company’s formation documents with the secretary of state (called the “Company Applicant”).

Although there are exceptions to the reporting requirements for some types of businesses, these exceptions are generally limited to very large companies, and to companies in industries that are already highly regulated by the Federal government. No business should assume that it is exempt from CTA reporting requirements, as the overwhelming majority of small businesses will be required to report.

Information that must be reported about each Reporting Company includes:

1) Full legal name of the company
2) All trade names and “DBA’s”
3) Street address of the principal place of business
4) EIN

Information that must be reported about each Beneficial Owner and (when applicable) Company Applicant includes:

1)   Full legal name
2)  Date of birth
3)  Residential address (or, in some cases, the business address for a Company Applicant)
4) ID number from a nonexpired passport, driver’s license, or state identification (and a copy of the passport/driver’s license/state ID must also be provided)

Beneficial Owners and Company Applicants will also have the opportunity to submit all of the above information once directly to FinCEN beginning on January 1, 2024. FinCEN will then issue the Beneficial Owner or Company Applicant a unique identification number called a “FinCEN Identifier.” Each Beneficial Owner and Company Applicant can then submit his or her FinCEN Identifier to each applicable Reporting Company in lieu of submitting all of the above information to each company.

The use of FinCEN Identifiers should help streamline compliance and lessen the burden on Reporting Companies. It should be noted, however, that a Beneficial Owner or Company Applicant who receives a FinCEN Identifier is required to make updates to his or her information (such as due to a change of address or issuance of a new driver’s license) with FinCEN within thirty days of each change.

The definition of who is a “Beneficial Owner” of a Reporting Company is nuanced and complex, and a full and detailed discussion is outside the scope of this Client Alert. Each Reporting Company must determine who its Beneficial Owners are on a case-by-case basis. Generally, a Beneficial Owner is any individual who, directly or indirectly:

1)  Owns 25% or more of the interests in the Reporting Company; OR
2)  Exercises “substantial control” over the Reporting Company (this includes managers of an LLC, senior officers, members of a board of directors, etc., whether or not such individuals are also owners).

Again, however, the rules and regulations regarding who constitutes a Beneficial Owner are much more complicated and must be analyzed carefully.

There are strict reporting deadlines that each Reporting Company must comply with, as follows:

For Reporting Companies formed before January 1, 2024, each such existing Reporting Company must file its initial report with FinCEN within one (1) year – i.e., before January 1, 2025.

For Reporting Companies formed on or after January 1, 2024 but before January 1, 2025, each such new Reporting Company must file its initial report with FinCEN within ninety (90) days following the company’s formation.

For Reporting Companies formed on or after January 1, 2025, each such new Reporting Company must file its initial report with FinCEN within thirty (30) days following the company’s formation

For all Reporting Companies, if there is any change in the information previously reported by the Reporting Company, an updated report must be filed within thirty (30) days of the change. Changes that must be reported include changes to the Reporting Company’s information (name, DBA’s, address, etc.); changes of the identities of the Beneficial Owners (for example, due to ownership changes or appointment of new officers/directors/etc.); and changes to any of the information about a Beneficial Owner that was previously submitted (such as name changes, changes of residential address, driver’s license, etc.). However, if a Reporting Company has utilized and submitted a FinCEN Identifier for a Beneficial Owner, it becomes the responsibility of the Beneficial Owner, rather than the Reporting Company, to timely provide FinCEN with updates to the Beneficial Owner’s information.

The willful failure by a Reporting Company, its senior officers, and/or a Beneficial Owner to comply with the CTA’s requirements and timely provide accurate information to FinCEN can result in both civil penalties (fine of $500 per day that a violation continues, up to a maximum of $10,000) and criminal prosecution (fine of up to $10,000 and/or imprisonment of up to 2 years).

It is therefore very important that all small businesses take these reporting requirements seriously and ensure that they are and remain in compliance.

This Client Alert contains only a basic overview of the CTA and its reporting requirements. More detailed information on the CTA and compliance can be found at the following links:

1)     FinCEN’s general webpage for the CTA – https://www.fincen.gov/boi/small-business-resources

2)     FinCEN’s Small Entity Compliance Guide – https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf

3)     FAQ prepared by FinCEN – https://www.fincen.gov/boi-faqs

For clients of the firm that are or own/manage small businesses, upon specific request by those clients, Carruthers & Roth may be able to assist in determining whether any exceptions to the CTA reporting requirements apply, and if necessary, who those companies’ Beneficial Owners are. However, please note that our firm will not be in a position to undertake the actual preparation and filing of FinCEN reports on behalf of clients.

Brandon Jones focuses his practice on helping individuals and business owners in a number of capacities. In addition to his trust and estates work, a significant portion of Brandon’s practice also consists of assisting small business owners and entrepreneurs with all aspects of ownership and operation, including business formation, management, contract drafting and negotiation, business succession planning, and mergers and acquisitions. If you have any questions about these topics or other business law matters, please feel free to contact Brandon (336-478-1160, bkj@crlaw.com) or another member of Carruthers & Roth’s Business team.