Take charge of compliance: Ensure your business meets Federal Corporate Transparency Act reporting requirements

In 2021, Congress passed the Corporate Transparency Act (CTA) which will require many companies to report information about the company and its beneficial owner(s) to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Regulations implementing the CTA became effective Jan. 1, 2024.

Overview of CTA regulations

The regulations detail what kind of entities need to report, at least 23 exemptions from the reporting requirement, and what data must be included in the report. FinCEN has issued a 56-page compliance guide and a 38-page set of Frequently Asked Questions to help small businesses report their beneficial ownership information. Those guides are being updated frequently and are subject to change. The new online data collection process will affect millions of business entities and could have profound effects on the privacy of personal information.

Unless it qualifies for an exemption, any corporation, limited liability company, limited partnership, limited liability partnership, or other entity that is formed by a filing with any state, Secretary of State or other office is a “reporting company.” In addition, an entity formed under the law of a foreign country and registered to do business in any state is a reporting company.

Exemptions from reporting: Key exceptions and excluded entities

Many publicly-traded companies, tax-exempt organizations and regulated industries will be exempt from the reporting obligation. One of the most significant exemptions will be for “large operating companies” which employ 20 or more full-time employees, filed a federal tax return for the previous year disclosing over $5 million in gross receipts or sales, and have a physical operating presence in the U.S. However, all newly-filed entities and most existing small business entities will be swept up in the filing requirement. No business should assume it is exempt.

Reporting requirements for companies formed in 2024

The filing is due 90 days after formation. Companies should reach out to their legal counsel to prepare the necessary beneficial ownership reports for new entities. Legal counsel will require personal information about:

• Every senior officer and director (regardless of whether they have any equity ownership)
• Any owner of the company who holds, directly or indirectly, 25% or more of the voting power of the company
• Every person who “exercises substantial control” over the company

The information must include a birthday and residence address for each such person and a copy of that person’s driver’s license or passport (but not their Social Security Number). We will be requesting this information for all new companies that Porter Wright forms for our clients, effective immediately. The information filed is supposed to be kept confidential by FinCEN, but it will be available to law enforcement agencies for investigatory purposes.

Reporting to FinCEN: Subsequent changes and amendments

Any subsequent changes in the information submitted in the FinCEN process must be reported to the government within 30 days of such changes. Companies should inform their legal counsel of those changes if they want them to submit amendments to FinCEN.

For entities that were already in existence on Jan. 1, 2024, a FinCEN filing must be made no later than Jan. 1, 2025. The same exemptions may apply, plus certain “inactive entities” will not need to file. An “inactive entity” must meet six very limited criteria, and unfortunately that exemption will not apply to many passive companies.

Considerations and recommendations: Deferring FinCEN filing and preparing to file

Because litigation challenging the CTA is pending and certain filing procedures may be modified in the months ahead, Porter Wright is recommending that existing companies defer making any FinCEN filing until later this year. We will be sending out further information about that to our existing clients in the weeks ahead, and we can file reports for those who request it.

However, it is not too soon for companies to begin gathering the personal information needed to make the CTA filing. We expect that millions of entities formed in the past will be subject to the CTA filing requirement.

Failure to comply with the CTA can result in a fine of up to $10,000, up to two years in jail, and civil penalties up to $500 per day for both the entity and the individual registrants.

For more information, contact Jack Beeler, Sue Cliffel, Diana Jia or Jim Mattimoe