Revised April 15, 2024
Big Brother is watching you . . .
Any individual who owns a minimum 25% interest in or who exercises “substantial control” over a small- or medium-sized business is required to file reports with the federal government containing personal information (unless an exception applies). That information includes, among things, a photo image of a qualifying ID, and a residential address. This information will be stored in a centralized federal database. It cannot be accessed or disclosed except under very limited circumstances for government purposes. The information will not be open to the public and there are criminal penalties for unauthorized access or disclosure of the information.
Codified at 31 USC 5336 and 31 CFR 1010.380, the law took effect on January 1, 2024. Failure to timely file an initial or updated report may result in civil and/or criminal penalties.
Despite its name, the “Corporate Transparency Act” applies to most types of LLCs, partnerships, corporations, PCs, and other entities that are formed by filing a document with a state secretary of state or similar office.
Entities required to report are called “reporting companies.” The general rule is that the obligation to report applies to all companies unless an exception applies. Some of the exceptions include nonprofits, financial institutions, publicly traded companies, and large businesses. Such large businesses must have a physical office in the United States, reported gross income exceeding $5,000,000 as reported to the IRS for the previous tax year, and more than 20 full time employees. The exceptions generally apply to highly regulated organizations and industry sectors.
Reports must be filed with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Beneficial owners who are required to report are (1) anyone with at least 25% ownership of the reporting company; (2) a person who exercise substantial control over a reporting company, such as a President, CEO, or CFO. The “substantial control” test is broad and may apply to company employees, or even third parties, who exercise “substantial control” even if they are not designated as an officer of the reporting company.
The good news is that reporting companies that existed prior to 2024 will have until January 1, 2025, to file an initial report. For reporting companies that are formed in 2024, initial reports are due within 90 days of business formation. New reporting companies formed in 2025 must file initial reports within 30 days of formation.
After filing an initial report, reporting companies must file updated reports when previously reported information changes within 30 days of the change.
Additionally, individuals who form a new entity in 2024 and beyond must submit information about themselves. A person forming a new reporting company is referred to as a “company applicant.” For any new reporting company, there may be up to 2 people who qualify as a “company applicant”: (1) a person who directs the process of forming a reporting company (such as a lawyer on behalf of a company or the company’s CEO); and (2) the person who actually files the paperwork (electronically or otherwise) with the secretary of state or similar office.
Any person may apply for a FinCEN identification number to avoid having to repeatedly provide the same information if they are involved in the formation of multiple reporting companies, or if they are a beneficial owner of more than one reporting company.
Numerous nuances and exceptions exist. It is the responsibility of beneficial owners of a reporting company (including those who do not own the reporting company but exercise substantial control) to timely file an initial report and updated reports.
If you would like assistance in understanding whether the new rules apply to your organization, who within your organization is required to report, what information needs to be reported, and how to otherwise comply with the law, do not hesitate to reach out to us.
Anderson Beals and Steve Elzinga are attorneys at Sherman, Sherman, Johnnie & Hoyt LLP https://shermlaw.com/