The Corporate Transparency Act & Some Unfortunate New Reporting You Probably Need to Do
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There’s nothing like new compliance requirements to start off a new year. We all love, love, love, paperwork, especially when the failure to complete it may be subject to penalties of $500 a day.
But, government does government, and our job is to help you know when you need to do government too. So we’re doing our job and sending you this “client memorandum,” a title I’ve always felt is synonymous with “kill me now.”
I promise to do my best not to kill you with legalese.
Before we get to the meat, I need to tell you that this is of course not legal advice. True, that is what lawyers always say when they are giving you legal advice but not taking responsibility for it. But more importantly, if it were legal advice, we’d charge you an arm and two legs for it, and this is landing in your email for freeeee.
The Corporate Transparency Act
The Corporate Transparency Act is a new law that requires companies to report information about their owners and management to the Financial Crimes Enforcement Unit (FinCEN) of the Department of Treasury.
In other words, Treasury and its minions don’t like the fact that smallish entities don’t need to share very much about who owns them. They’re afraid that allows you to get away with financial crimes (which sometimes it probably does), and so they want your companies to tell them all about you so that they can catch you if you engage in illicit behavior (which I don’t recommend).
Do You Need to Report or Can You Stop Reading?
If you’re not a larger business, you probably do. The basic idea is that if you’re an entity created by filing a document with a US secretary of state or similar office, you win the reporting lottery, unless you’re in one of 23 exempt categories, which you’re probably not unless you’re in a larger or very regulated company.
Is My Company Exempt?
The Big Company Exemption
The most likely exemption for our readers (all bets off if this goes viral) is the “large operating company” exemption. If you have a big company, you’re out (because you already provide the government lots of info).
But what’s a big company, huh?
A big company is one that:
Has 20 full-time, direct employees in the US (full time is 30 hours per week or 130 hours a month);
Has an operating presence at a physical US office not shared with non-affiliates; and
Reports more than $5 million in revenue from US sources on its tax return.
Subsidiaries of big companies are also exempt (and the same is largely true for subs of the other exempt companies below).
Already Regulated Entities
This group covers most of the other types of exempt entities. Basically, if you’re already a regulated entity that needs to do tons of paperwork — think public companies, banks, investment companies/advisors, insurance companies, registered accounting firms, utilities, money transmitters, venture capital fund advisers, brokers or dealers, and a few similar others — you’re out because Uncle Sam knows all about you and your illicit behavior already.
If you think you might be one of these, you probably have a big firm on retainer, so ask them. I charge about half what they do though, just saying.
Non-profits/Tax-exempts and Inactive Entities
Yep, non-profits and other tax escapees like charitable trusts and political organizations are out (and no, political organization is a technical term, so despite you’re deep political convictions, that’s probably not you).
Lastly, inactive entities are exempt, but to be inactive your entity needs to 1) have been formed before January 2, 2020, 2) not be engaged in active business, 3) not have sent more than $1,000 or changed ownership in the past 12 months, and 4) not hold any assets (including interests in other entities).
So You’re Not Exempt, What now?
Okay, so you’re not a big company, you’re not a penny stock, and you have no intention of stopping your greedy pursuit of profit. Bummer.
You will need to report some basic information to FinCEN about your company and its “beneficial owners” and update the report within 30 days if the required information changes.
For each beneficial owner, the company must provide their legal name, birthdate, residential address, ID number of their passport or driver’s license, and a picture of the ID.
The company must also provide its name, any trade names (DBAs) its primary address (no PO boxes), its formation jurisdiction, and its EIN.
For companies formed after 2023, you also need to provide the same required information on the “company applicants” which are basically the person who actually formed the company (e.g., the actual person at the formation service company that formed your entity) and potentially whoever directed them (e.g., you or the lawyer or other person that oversaw formation). Don’t ask me why, I didn’t make the rules.
Who Are Beneficial Owners?
You would think beneficial owners just means the real people who actually have ownership, but here’s where it gets a bit ugly. You’re definitely a beneficial owner if you are a real person who owns or controls 25% of the company, directly or indirectly (so chains of entities don’t help). Ownership is broadly defined to include all the things you’re hoping it doesn’t include like profits interests, convertible notes, options, or most other contractual rights akin to or enabling ownership.
But beneficial owners also include anyone who has “substantial control” over the entity. This includes any senior officer of the company, such as its president, CEO, CFO, COO, general counsel (at least they respect us lawyers), and any other officer, regardless of title, performing a similar function. In other words, a managing member of an LLC would be included as would anyone actually running the business even if you give them the title “Secretary.”
Substantial control also includes having authority to appoint or remove a senior officer or a majority of the company’s directors. It also includes anyone who directs or has substantial influence over major decisions such as the nature of the company’s business, sale of its main assets, major investments, equity issuances or significant borrowing, and similar important business decisions. Depending on the facts, being on a company’s board or having similar oversight rights can be substantial control. A trustee or grantor with authority over a trust, and in some cases a beneficiary of a trust, may also have substantial control.
If it’s ambiguous if someone has substantial control, it’s probably safer to just report their information.
This all means that you need to get and report identifying information for all people with 25% ownership, all senior officers, and anyone else who plays an important role in managing the company.
Sorry. I’m just the messenger.
Exemption for Creditors
There are few exemptions from the definition of beneficial owners but the only one worth noting is that creditors who only have control over a company because of loan covenants for ordinary loans are not treated as beneficial owners.
When Do I Need To Report?
If your company was formed before 2024, you have until January 1, 2025 to file your initial report. If it was formed after that, but before 2025, you have 90 days to file. Entities formed in 2025 and on will have 30 days from formation to file.
You also need to update the report within 30 days of any changes to the required information. Unfortunately, this means that if you have any changes in “beneficial owners,” which remember includes something as little as hiring a new senior officer, you need to file an update.
How do I report?
You can file your own reports at https://boiefiling.fincen.gov/fileboir or you can use a filing service (like your registered agent), or your lawyer or accountant.
What Happens if I Don’t Report or Give False Information?
If you intentionally cause the failure to report complete information, or if you’re a senior officer and intentionally don’t report, you could be subject to civil penalties of up to $500 per day that the violation continues. You could also be criminally fined up to $10,000 or imprisoned for up to two years.
Note, causing a failure to report, includes even something like refusing to give a company your information. If you don’t provide it, you have caused the failure to report complete information and could be subject to these penalties.
Who Can See the Reports?
Financial institutions subject to customer due diligence requirements will be able to access the company’s information with the consent of the company for compliance purposes. I’d hazard a guess that banks will start asking for consent as a standard part of opening a new account.
Otherwise, for the most part, access to reported information will be limited to federal agencies engaged in national security or law enforcement, and to state law enforcement with court authorization as part of an investigation.
One Way to Make Your Life Easier: Get a FinCEN Identifier
Our governmental overlords through us one bone here, which basically allows you to just provide your information directly to FinCEN and get a FinCEN ID. You can then just provide your FinCEN ID number to any company that needs it for reporting without needing to give them the rest of your life story. The company then just includes your ID number on its report.
I highly recommend doing this especially if you own or manage multiple entities. It takes less than five minutes and you can do it yourself at https://fincenid.fincen.gov/landing, creating an account and giving some basic information. Once you have one, you can just give anyone who asks your ID number.
Closing Suggestions
There are really three elements to compliance with the beneficial ownership reporting rules.
The one-time burden of reporting information for entities that already exist.
Ensuring to report on new entities when they are formed.
Having a process for updating reports when ownership or substantial control changes.
Catch-up reporting on existing entities will be a hassle, but just needs to be done once. I suggest encouraging everyone you need to report on to just get a FinCEN ID and provide that to you so you don’t have to collect their information.
When you form new entities, you will need to make sure to obtain the reporting information or more likely, the FinCEN ID, for the Company Applicant (i.e., the person forming it for you and the primary person directing them, which may be you or your attorney or accountant). I assume the process of reporting will just become an additional service offered by formation services.
Finally, you will need to have a process for catching changes in reported information. When senior people are hired (or fired), ownership changes, or other basic information about the Company or its owners changes, you’ll need to update the report within 30 days.
At minimum, it’s probably a good idea to have an annual informal audit that your lawyer or accountant handles alongside tax filings to see if required information has changed for your entities.
If you have questions regarding the Corporate Transparency Act or need help with the filings, feel free to reach out to Joseph at jgerstel@landklegal.com.
Corporate Transparency Act — Summary Fact Sheet
1. What is the Corporate Transparency Act?
It’s a new law that requires owners of smaller businesses to report ownership and control information to the Department of Treasury’s Financial Crimes Enforcement Unit (FinCEN).
2. Who needs to report?
Entities that don’t have at least twenty full-time employees and $5 million in US-source revenue, unless they qualify for an exemption.
3. Are there any exemptions?
Exemptions are largely limited to companies that already have other filing obligations (e.g., public companies, investment advisers, banks), non-profits, and certain inactive entities.
4. What do I need to report?
(a) The company name, DBAs, EIN, address, and formation jurisdiction.
(b) For each beneficial owner and company applicant, their legal name, birthday, address, ID number of passport or driver’s license, and a picture of the ID.
5. Who is a beneficial owner? Who is a company applicant?
A beneficial owner is any real person who directly or indirectly owns 25% of the entity and anyone with substantial control over the entity.
A company applicant is the person who actually formed the company and potentially whoever directed them (e.g., you or the lawyer or other person that oversaw formation).
6. Who has substantial control?
All senior officers (e.g., CEO, CFO, COO, GC) and anyone with significant managerial authority.
7. When Do I Need To Report?
Entities formed before 2024, have until January 1, 2025 to file an initial report. Entities formed after 2023, but before 2025, have 90 days to file. Entities formed in 2025 and on have 30 days. You also need to update the report within 30 days of any changes to the required information.
8. How do I report?
You can file your own reports at here or use a filing service or your lawyer or accountant.
9. What Happens if I Don’t Report or Give False Information?
You could be subject to civil penalties of up to $500 per day, and criminally fined up to $10,000 or imprisoned for up to two years.
10. Who Can See the Reports?
Banks and certain governmental agencies with appropriate authorization.
If you have questions regarding the Corporate Transparency Act or need help with the filings, feel free to reach out to Joseph at jgerstel@landklegal.com.
