Beginning in January 2024, most privately-owned companies formed or registered in the United States must start reporting the names of their “Beneficial Owners” to the U.S. Treasury Department. This reporting requirement is imposed by the Corporate Transparency Act (“CTA”), a 2020 federal law, and the Treasury Department expects it to apply to more than 32 million U.S. companies in its first year.[1] The CTA is part of the federal government’s fight against money laundering, which often entails the rapid formation of U.S. shell companies and the transfer of illegal funds between them.
This article summarizes what the CTA means for private U.S. companies. If your company is subject to the CTA, it is critical to prepare for compliance. If a company fails to make a report when required, or reports incorrect information, then the company itself can be liable for civil penalties of $500 per day of noncompliance. In egregious cases, a noncompliant company’s principals can see criminal fines or even imprisonment.
What Companies are Subject to the Corporate Transparency Act’s Reporting Obligations?
Companies that must begin reporting to the Treasury Department (“Reporting Companies”) are privately-owned companies that (a) are either formed by filing documents with a U.S. state or Indian Tribe or formed in a foreign country and registered to do business in the U.S., and (b) do not qualify within one of the defined reporting exemptions.
The CTA has twenty-three exemptions. The ones applicable to most companies are those for:
- Large domestic operating companies. These are companies that have an operating presence at a physical office in the U.S., have more than 20 employees in the U.S., and have reported more than $5 million in annual gross receipts or sales.
- Dormant domestic companies. To qualify for this exemption, a company (a) must have existed for more than one year and not be engaged in active business, (b) must not have any direct or indirect foreign owners, (c) must not in the past year have had a change in ownership or sent or received funds in an amount more than $1,000, and (d) must hold no assets of any type (including ownership interests in any company).
The other exemptions generally apply to companies that are already subject to higher-than-normal regulatory scrutiny. These include financial services companies (banks, credit unions, money transmitting businesses and others), certain tax-exempt entities, and quasi-governmental companies.
Put differently: the companies not exempt from reporting are mainly small businesses, from bodegas and yoga studios to software design firms and small manufacturers.
What are the New Reporting Requirements?
A Reporting Company must provide the U.S. Treasury Department with information that includes:
- Information about the Reporting Company itself, including its legal name and “doing business as” names, its business address, and its jurisdiction of formation.
- Information about the Reporting Company’s “Beneficial Owners.” Beneficial Owners are defined in more detail below. The reportable information about them includes their full legal names, birth dates, addresses, and unique government identification numbers (g., those found in passports or driver’s licenses) as well as actual scanned copies of the government-issued documents containing those numbers.
- In the case of Reporting Companies formed after January 1, 2024 only, information about individuals involved in the Reporting Company’s formation.
Identifying the Beneficial Owners
The CTA defines a Beneficial Owner as any individual, whether or not located in the U.S., who passes either an “ownership test” or a “control test” regarding a Reporting Company.
The ownership test applies to persons holding or controlling 25% or more of a Reporting Company’s ownership interest or certain related rights. This test applies to those who currently hold that ownership interest as well as those who hold contractual rights that can convert to that amount or more — for example, an investor holding a convertible note or a Simple Agreement for Future Equity (SAFE).
The control test includes the individuals who exercise “substantial control over” the Reporting Company. This test includes a broad variety of individuals, including:
- Directors of a corporation and managers of an LLC.
- Chief Executive Officer, Chief Financial Officers and other senior executives.
- Employees with “substantial influence” over certain company actions. These include employees who can bind the company to large contracts, among other things.
When Companies Must Make Reports
Reporting Companies already in existence or registered in the U.S. on January 1, 2024 must file their initial reports by January 1, 2025. Reporting Companies formed or registered in the U.S. after January 1, 2024 will need to make their first reports within 30 days after formation.
In all cases, Reporting Companies must update their Treasury reports whenever their reportable information changes. Examples of scenarios that may require new reports include:
- The addition or removal of shareholders or LLC members from a Reporting Company.
- A Reporting Company’s promotion of an employee from a mid-level role to Chief Operating Officer.
- A change in the legal name of an existing Beneficial Owner.
- A Reporting Company’s issuance of a convertible note to an outside investor.
What Companies Can Do Now to Prepare for the CTA
Companies should not wait until January 2024 to prepare for the CTA. It will take most companies time to determine whether they are exempt from reporting, and if not exempt, who their Beneficial Owners are. Companies may wish to secure consent from Beneficial Owners now to begin reporting their information to the Treasury Department in the future. (Depending on state privacy laws, companies may even be required to secure this consent before they report their information to the federal government).
Companies may also wish to begin updating their various form legal documents. For example, internal shareholder agreements or LLC operating agreements may warrant updates to clarify which of a company’s owners or management will ensure the compliance of the company itself. Given the complexity of the CTA and its potentially serious consequences for noncompliance, companies should consult their legal advisors as they prepare for the new law to take effect.
[1] Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498, 59549 (Sept. 30, 2022).
Perkins Thompson, P.A.’s Business and Corporate Law Practice Group advises clients on the application of the Corporate Transparency Act.
Related Content:
