As of January 1, 2024, the federal Corporate Transparency Act of 2024 (“CTA”) requires many small and medium-sized businesses to file a report with the United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The report must contain general information about the company and its formation, plus personally identifiable beneficial owner information (“BOI”). A “beneficial owner” is someone who either directly or indirectly has substantial control of the company or directly or indirectly owns or controls 25% or more of the company. This is a very broad definition and could include, for example, a non-owner officer, a non-owner director, or someone who owns options or warrants. It could also include trustees of trusts that hold ownership interests in an entity.
The purpose of the CTA is to make it harder to use an entity to launder money or otherwise hide or protect assets that were acquired unlawfully and/or will be used for unlawful purposes (e.g., funding terrorism or tax evasion). In line with this, the exemptions from having to report are reserved for those companies in industries that are already highly regulated, such as securities firms, banks, credit unions, insurance companies, investment and venture capital related entities, not-for-profits, and certain companies that are broker-dealers or issuers of securities under the Securities Exchange Act.
One key exemption exists for “large operating companies,” defined as companies with more than 20 full-time employees, a location in the United States, and gross receipts or sales derived within the United States in excess of $5 million. Certain subsidiaries of exempt companies (including “large operating companies”) are also exempt if they “are controlled or wholly owned, directly or indirectly, by one or more” other exempt entities. Notably, this does not appear to encompass entities that are part of the same “family” (e.g., parent/subsidiary structures) and share the same owners (unless those owners are themselves exempt entities). Because of that, each entity in a multi-layered structure must be examined carefully on its own merits to determine if it is exempt either on its own or as a subsidiary of an exempt entity.
In terms of when a company must report, all companies formed before January 1, 2024 will have to file their reports to FinCEN no later than January 1, 2025. However, if you are planning on forming a company in 2024, then you will have 30 days to file with FinCEN. The information a company supplies to FinCEN will not be publicly available through, e.g., a Freedom of Information Act request. Not surprisingly, most of the circumstances that allow disclosure of the information relate to aiding law enforcement and government agencies to investigate and prosecute financial crimes.
Finally, the mandate to file the report and to report full and accurate information is not optional and cannot be ignored. There are stiff penalties and fines for willfully failing to report complete and updated company information and BOI, and for willfully providing false or fraudulent information. These include a civil penalty of up to $500 per day for each day the violation continues, and a fine of up to $10,000 or imprisonment of up to 2 years, or both.
If you have any questions or plan on forming any new entities in 2024, then please reach out to us.