A new reporting requirement is coming soon for most business owners. January 1, 2024, marks the effective date of a new reporting regulation that requires disclosure of ownership of an entity to the federal government. Right off the bat, I’d like to make it clear that non-compliance with this act can cost you $500 a day in fines for every day you fail to do the necessary and, in some cases, could result in jail time. I wanted to lead with that so that you would hopefully tune in to the rest of this article.
The Corporate Transparency Act (CTA) is a federal law that requires certain businesses to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The CTA was enacted in 2020 as part of the Anti-Money Laundering Act of 2020. So, while the CTA was enacted in 2020 the first registration will not begin until January of 2024.
Starting January 1, 2024, any new entity that is created must file a report with FinCEN within a set time.
Not every business is subject to the CTA. Generally, those exempt organizations are organizations that have other stringent reporting requirements like banks, insurance providers, securities dealers, and tax-exempt organizations to name a few. Here is the list of exempt entities taken from the fincen.gov website.
1 Securities reporting issuer
2 Governmental authority
4 Credit union
5 Depository institution holding company
6 Money services business
7 Broker or dealer in securities
8 Securities exchange or clearing agency
9 Other Exchange Act registered entity
10 Investment company or investment adviser
11 Venture capital fund adviser
12 Insurance company
13 State-licensed insurance producer
14 Commodity Exchange Act registered entity
15 Accounting firm
16 Public utility
17 Financial market utility
18 Pooled investment vehicle
19 Tax-exempt entity
20 Entity assisting a tax-exempt entity
21 Large operating company
22 Subsidiary of certain exempt entities
23 Inactive entity
Businesses not on that list are subject to the CTA and must file a beneficial ownership report with FinCEN. As of today, the report must include the following information about each beneficial owner:
Date of birth
Unique Identifier i.e. driver’s license, passport ID, social security number, or other taxpayer identification number
Businesses formed or created on or after January 1, 2024, must file the beneficial ownership report within 30 days of forming the business or acquiring the ownership interest that makes them subject to the CTA. They are additionally required to report the company applicants as well. Businesses must also update the report within 30 days of any changes to the information about their beneficial owners. This timeline applies to all businesses created on or after January 1, 2024. The good news is that existing businesses have until January 1, 2025, to comply with the CTA reporting rule and are not required to report their company applicants.
What is a beneficial owner you may ask? A beneficial owner is any individual who directly or indirectly exercises substantial control over a reporting company. This individual can be a beneficial owner through ownership, control, or both. There can be many beneficial owners but it is important to note that these include but are not limited to senior officers of an organization who make important decisions like the President, C-level officers, etc. If a trust owns the organization the trust beneficiary of the trust and or trust controller may be considered as a beneficial owner as well.
Example 3: The reporting company is a corporation owned by four individuals who each own 25 percent of the company’s ownership interests (e.g., shares of stock). Four other individuals serve as the reporting company’s CEO, CFO, COO, and general counsel, respectively, none of whom hold any of the company’s ownership interests.
In this example, there are eight beneficial owners. All four of the individuals who each own 25 percent of the company’s ownership interests are beneficial owners of the company by virtue of their holdings in it, even if they exercise no substantial control over it. The CEO, CFO, COO, and general counsel are all senior officers and therefore exercise substantial control over the reporting company, making them beneficial owners as well.
This may seem like a lot but thankfully the Fin Cen arm of the treasury department has provided a very in-depth guide to all of this available here. Also, like my client who raised this question, please check with trusted counsel if you need assistance as requirements and timelines may change.
As an attorney, I am often asked interesting questions from clients. Many of the answers to these questions end up as video responses on my YouTube channel. If you haven’t already given a follow please check out @abrowne.esq. Also, let me say I recognize the usefulness of social media and do learn very many facts that I didn’t know on platforms. Specifically, as a music lover, I find many new and exciting artists to enjoy by being present on social media. Why am I sharing this information you may ask? Because, when my client saw a video earlier this year on TikTok from an “expert” in establishing trusts which in my opinion was very misleading, she was just about ready to make a significant business decision. The gentleman was on his platform as a business expert advising his viewers that entrepreneurs must immediately create a trust and make it the owner of the business as a way to avoid the disclosure that the CTA requires. The expert was neither an attorney nor an accountant nor any other licensed professional qualified to discuss the benefits and disadvantages of creating a trust. While we can learn much from the world around us, we should always be careful when we hear expert advice from non-licensed experts to take them with a grain, if not a whole bag, of salt. If you are unsure what is really the law always connect with reputable counsel and let them assist you. We are here for a consultation, when you need us where you are®.
As always, I do hope this is useful and helpful.
A. Browne, Esq. © 2023 All rights reserved.