New-Reporting-requirements

New Reporting Requirements for Privately Held Corporations and LLCs under the Corporate Transparency Act

January 2024
Author: Andrew (Drew) Piunti
DPA Law PC
drew@dpalawyers.com

Under the CTA (the Corporate Transparency Act) which became effective January 1, 2024, certain privately held and largely unregulated corporations, limited liability companies, and limited partnerships defined as “reporting companies” must report specified identifying information about themselves their beneficial owners to FinCEN (the U.S. Dept. of the Treasury’s Financial Crimes Enforcement Network) within a certain prescribed time period.

The CTA’s stated purpose is to combat the exploitation of smaller, unregulated entities for money laundering, financing of terrorism, and other illegal activities by providing law enforcement with conditional access to the information provided in the beneficial ownership reports. The identifying information reported is to be maintained by FinCEN in a secure nonpublic database.

A Covered Reporting Company

A “reporting company” is any entity that is (a) created by the filing of a document with the secretary of state or a similar office under the law of a state or (b) formed under the laws of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or a similar office under the laws of a state, and (c) not otherwise exempt.  Unless an exemption applies, the CTA imposes reporting requirements on most small businesses organized as LLCs, corporations, or limited partnerships. This includes startups organized as corporations, and LLCs organized solely to hold real estate.

The CTA includes 23 exemptions from the definition of reporting company, including, but not limited to, large operating companies, certain tax-exempt entities, publicly traded companies, banks, credit unions, securities brokers or dealers, money services businesses, investment companies, investment advisers, insurance companies, state licensed insurance producers, accounting firms, public utilities, pooled investment vehicles, a subsidiary of certain exempt entities, and inactive entities.  Of these, the “large operating company” exemption is that most likely to apply to a technology startup or other privately held business operated through an entity.

Large Operating Company Exemption

An exempt “large operating company” is any entity that (1) directly employs more than 20 employees on a full-time basis in the U.S.; (2) filed in the previous year a federal income tax or information return in the U.S. demonstrating more than $5 million in gross receipts or sales; and (3) has an operating presence at a physical office within the U.S.  This means that if your LLC, limited partnership, or corporation satisfies all of these criteria, the entity is exempt from the CTA’s reporting requirements.  Conversely, if your company fails to meet any of these criteria it does not qualify for the “large operating company” exemption, and the CTA and its reporting requirements apply (unless another exemption applies). Note that entities formed in 2024 (other than through statutory conversion) appear to qualify for this exemption as they lack a filed a federal tax return reflecting prior year gross receipts.

An entity initially exempt as a large operating company loses its exemption if at any later date it no longer satisfies one of the three qualifying criteria. For example, if an entity with more than $5 million of annual gross receipts/sales and 20 or more full-time US employees subsequently files a tax return reflecting less than $5 million in gross receipts/sales, or, subsequently reduces its force to fewer than 20 full-time US employees, the exemption no longer applies. In this circumstance the entity must file an initial report with FinCen within 30 calendar days of exemption’s loss.

Reporting Deadlines

Reporting companies formed or registered before January 1, 2024, will be required to submit beneficial ownership information to FinCEN no later than December 31, 2024.

Reporting companies formed or registered on or after January 1, 2024, and before January 1, 2025, will be required to submit beneficial ownership information and “company applicant” information to FinCEN within 90 days of receipt of notice from the applicable secretary of state confirming the entity’s formation.

Reporting companies created or registered on or after January 1, 2025, will be required to submit beneficial ownership information and “company applicant” information to FinCEN within 30 calendar days from receipt of notice from the applicable secretary of state confirming the entity’s formation.

Information Reported

A reporting company must report its

  • full legal name;
  • any trade names or “doing business as” names;
  • principal place of business if located in the U.S., otherwise the primary business location in the U.S.;
  • jurisdiction of formation; and
  • the company’s taxpayer identification number.

The reporting company also reports the following information regarding its “beneficial owners” and, for entities formed or registered on or after January 1, 2024, its “company applicants”:

  • full legal name;
  • date of birth;
  • current address
  • a unique identifying number for such individual from an unexpired driver’s license, U.S. passport, or other specified documents; and
  • a copy of the document from which such unique identification number was obtained.

Beneficial Owners

A “beneficial owner” is an individual who directly or indirectly owns 25% or more of the entity or who exercises “substantial control” over the entity. For tiered ownership structures, beneficial owner includes individuals having “substantial control” over entities that have “substantial control” over the reporting company.

An individual is said to exercise substantial control over a reporting company if he or she:

  • serves as a senior officer (i.e., holds the position or exercises the authority of a CEO, President, CFO, General Counsel, COO or any other officer, regardless of official title, who performs a similar function);
  • has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of the reporting company;
  • directs, determines, or has substantial influence over important decisions made by such reporting company; or,
  • has any other form of substantial control over such reporting company.

If a Reporting Company is owned by a trust, the beneficial owners include the trustees, and, may include settlors or grantors if they maintain substantial control over the trust or its assets. This might occur in situations where the settlor or grantor has the power to revoke the trust, amend its terms, or has significant influence over the trust’s decisions. The beneficial owners can also include beneficiaries, but, as with the settlor or grantor, it depends on the specifics of the trust and the level of control or ownership interest the beneficiaries hold. In many cases, beneficiaries of a trust may not exercise control over the trust.

Company Applicants

For entities created after January 1, 2024, the same information a reporting company reports for its beneficial owner must also be reported for the “company applicant.” There are two types of company applicants: (a) an individual who directly files the document that creates the entity (if a domestic reporting company) or registers the entity to do business in the U.S. (if a foreign reporting company), and (b) an individual who is primarily responsible for directing or controlling such filing. A company applicant may include an attorney or paralegal at the law firm which assists with the formation by filing of the entity’s articles of incorporation or organization (or equivalent). FinCEN only requires the reporting company to report only up to two individuals as company applicants even if more than two individuals meet the definition.

Reporting Updates

To the extent a reporting company’s reported entity information or beneficial ownership information changes, or if the entity no longer qualifies for an exemption, it must file an updated report (or initial report, in the case of an entity that is no longer exempt) with FinCEN within 30 calendar days of the change/loss of exemption. Again, it is generally the responsibility of the reporting company, not its beneficial owners, to report its required information.

Reporting Mechanics

Reports and updates are filed online on FinCEN’s Beneficial Ownership Secure System at https://www.fincen.gov/boi.

Each reporting company and each individual about whom it provides information may input its relevant information and obtain a unique “FinCEN Identifier” or “FinCEN ID.”  The reporting company then refers to its FinCEN ID and those of its beneficial owners to report in lieu of providing the requisite information each time it files a report. It is in the reporting company’s interest to encourage its beneficial owners to directly report their required information to FinCEN and obtain an individual FinCEN ID, reducing the administrative burden on the reporting company.

Individuals may request a FinCEN identifier by completing an electronic web form at https://fincenid.fincen.gov/landing. Individuals will need to provide their full legal name, date of birth, address, unique identifying number and issuing jurisdiction from an acceptable identification document, and an image of the identification document. After an individual submits this information, they will immediately receive a unique FinCEN identifier. If any of the submitted information changes, it is incumbent upon the holder of the individual FinCEN ID to update his or her information within 30 days.

Reporting companies may request a FinCEN identifier by checking a box on the beneficial ownership information report upon submission. After the reporting company submits the report, the company will immediately receive its unique FinCEN identifier.

Penalties and Consequences

Under the CTA it is unlawful for any person to willfully provide (or attempt to provide) false or fraudulent beneficial ownership information or to willfully fail to report complete or updated beneficial ownership information. The CTA provides for civil and criminal penalties for such violations, including a civil penalty of up to $500 per day and, a fine of not more than $10,000 and/or imprisonment for up to two years.  Separately,  potential purchasers in a merger and acquisition and investors in venture financing rounds will, prospectively, as part of due diligence likely consider confirming whether the company is a reporting company and if the company is following the requirements set forth in the CTA.  It is the responsibility of the reporting company, not the beneficial owners, to determine if the entity is a reporting company and, if so, to report requisite information to FinCen.

We encourage startups and other privately held business entities to determine whether they meet the definition of a reporting company, and, if so, consult with a licensed professional to determine what must be done to comply with the CTA.

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Disclaimer: This summary is made available by DPA Law PC (the “firm”) for informational purposes only. It is not meant to convey the firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Accordingly, do not act upon this information without seeking counsel from a licensed attorney engaged to provide advice based on your specific circumstances. This article also is not intended to create, and receipt of it does not constitute, an attorney-client relationship. This article is published “as is” and is not guaranteed to be complete, accurate, or up to date.