By Christopher J. Kolber, Esq.
The federal Corporate Transparency Act went into effect on January 1, 2024. In short, the Corporate Transparency Act requires an entity that qualifies as a reporting company to report who the beneficial owners of the company are to FinCEN.
A “reporting company” is a company that was created by the filing of a document with a secretary of state or similar office, such as a business corporation or an LLC, that is not subject to one of the twenty-three specific exemptions set forth in the Act. Among the twenty-three exemptions are: tax-exempt entities, banks, credit unions, accounting firms, governmental authorities, and certain large operating companies.
Reporting companies that were created or registered to do business in the United States on or after January 1, 2024 will have to report the required information to FinCEN within 90 calendar days of formation. Existing reporting companies that were created or registered to do business in the United States before January 1, 2024 have until the end of 2024 to file the required information. Reporting companies that will be formed on or after January 1, 2025 will have 30 days to report.
The term beneficial owner is more nuanced than the plain language may suggest. A “beneficial owner” is defined as someone who owns or controls at least 25% of the ownership interest of a reporting company or someone who exercises substantial control over a reporting company. A reporting company may have multiple beneficial owners, and they all must be reported.
“Substantial control” is defined broadly and the Small Entity Compliance Guide states that “FinCEN expects that every reporting company will be substantially controlled by one or more individuals, and therefore that every reporting company will be able to identify and report at least one beneficial owner to FinCEN.”[1]
The determination of who exercises substantial control looks to four factors: (1) the individual is a senior officer or performs a function similar to a senior officer; (2) the individual has appointment or removal power; (3) the individual is an important decision maker; or (4) the individual has any other form of substantial control over the reporting company. The Small Entity Compliance Guide provided by FinCEN breaks these down in more depth.[2]
A “senior officer” is anyone who holds the position or exercises the power of a president, CFO, CEO, any other officer, or someone who acts as an officer, regardless of title. An individual with appointment or removal power is one who has the authority to appoint or remove any senior officer or a majority of the governing board. An individual is an important decision maker when they can direct, determine, or substantially influence decisions regarding business, finances, and the structure of a company. Finally, as a catch all provision, the guide states that “control exercised in new and unique ways can still be substantial.”[3]
If there is any change to the required information about the reporting company or the beneficial owners, the company must file an updated report within 30 days of when the change occurred.
In addition to reporting the beneficial ownership information, companies formed on or after January 1, 2024 must report any company applicants. A “company applicant” is an individual who directly filed the documents that created or first registered a company or an individual who was primarily responsible for directing or controlling the filing of the creation or first registration document. For example, if someone is the incorporator of a company, that person is a company applicant.
There may be stiff penalties for willful non-compliance with the Corporate Transparency Act. The willful failure to report complete or updated information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in civil penalties of up to $500 per day as the violation continues and criminal penalties of up to $10,000 and up to two years in prison.
If you have questions about how the Corporate Transparency Act may apply to your business, please contact the Business Services attorneys at Hurwitz Fine.
