THE FEDERAL CORPORATE TRANSPARENCY ACT REQUIRES NEW REPORTING FOR SOME SMALL BUSINESSES
Published October 15, 2024
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A federal law requires some companies (mostly small businesses) to report information about their ownership to an arm of the U.S. Department of Treasury by January 1, 2025 (and sooner if they were incorporated in 2024). This article has information about these reporting requirements.
Background
The bipartisan Corporate Transparency Act was enacted in 2021 to curb illicit financing. The law requires certain companies to file beneficial ownership information reports with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The reports must disclose information about the individuals who ultimately own or control the companies. The primary purpose of the law is to curb money laundering.
Which Organizations Must Report
Corporations, limited liability companies, and certain other organization must generally report their ownership information unless they fall within an exemption. Organizations may be exempt from reporting based on the type of organization they are, their number of employees and revenue, or their industry.
Large Operating Company Exemption. Because larger organizations are generally exempt from reporting, the regulation mostly impacts small businesses. Organizations that meet the definition of a “large operating company” are exempt from registration. The regulation generally defines a “large operating company” as a company with a physical presence in the U.S. that employees more than 20 full-time employees in the U.S. and reported more than $5 million in gross domestic receipts or sales on its previous year’s federal tax return. If “large operating companies” meet the criteria in the regulation, they are exempt from reporting.
Regulated Industry Exemptions. Companies in a number of regulated industries are exempt from reporting, if they meet all the exemption criteria. Industries where there may be an exemption include:
Insurance company
State-licensed insurance producer
Accounting firm
Bank
Credit unions
Broker or dealer in securities
Securities reporting issuer
Depository institution holding company
Money services business
Securities exchange or clearing agency
Other Exchange Act registered entity
Investment company or investment advisor
Venture capital fund advisor
Commodity Exchange Act registered entity
Public utility
Financial market utility
Pooled investment vehicle
Exemption for Tax-Exempt Entities. 501(c)(3) organizations that are exempt from taxation under 501(a) of the Internal Revenue Code are generally exempt from reporting if they meet the exemption criteria. In some cases, entities that operate exclusively to provide financial assistance to a tax-exempt entity may also be exempt.
Other Exemptions. An entity may also qualify for an exemption if its ownership interests are controlled or wholly owned by an exempt entity. Entities created before 2020 that are not engaged in active business operations may also be exempt from reporting if they meet several criteria.
FinCEN has prepared a useful guide to help companies determine if they must report and what information they must report. Companies that intend to rely on an exemption should carefully review the guide and other information published by FinCEN to make sure they meet all exemption criteria.
What Information Must Be Reported
Reporting companies must provide four pieces of information about each beneficial owner:
name;
date of birth;
address;
the identifying number and issuer from either a non-expired U.S. driver’s license, a non-expired U.S. passport, or a non-expired identification document issued by a State (including a U.S. territory or possession), local government, or Indian tribe.
According to FinCEN, a beneficial owner is an individual who directly or indirectly exercises “substantial control” over a reporting entity or owns or controls at least 25 percent of the ownership interests of a reporting entity. FinCEN states that an individual exercises “substantial control” over a reporting entity if they meet any of these four general criteria:
Senior officer;
Person who has authority to appoint or remove certain officers or a majority of the directors;
“Important decision-maker”;
Other form of substantial control over the reporting entity.
The company must also submit certain information about itself, such as its name(s) and address. In addition, reporting companies created on or after January 1, 2024, are required to submit information about the individuals who formed the company (called “company applicants”).
The FinCEN guide can help companies determine who is a “beneficial owner” and what information to report. Companies should review these materials to make sure they are reporting the right information about the right people.
Reporting Deadlines
Companies that are not exempt from reporting must file their initial reports by the following deadlines:
Existing companies: Reporting companies created or registered to do business in the United States before January 1, 2024 must file by January 1, 2025.
Newly created or registered companies: Reporting companies created or registered to do business in the United States in 2024 have 90 calendar days to file after receiving actual or public notice that their company’s creation or registration is effective.
Companies created in 2025 or later: Reporting companies created or registered on or after January 1, 2025 will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial report.
There is no fee to report. Beneficial ownership reporting is not an annual requirement. A report needs to be submitted once, unless the filer needs to update or correct information. A failure to update ownership information changes or to report can result in harsh civil and criminal penalties.
Where to Report and Other Resources
Companies may file their report through the FinCEN website:
FinCEN has published an FAQ to address compliance and reporting questions. It also has a short video and quick reference guide on its website.
Litigation Could Impact Requirements
It is possible that pending or future litigation will impact companies’ reporting obligations. FinCEN has published the following information on its website: On March 1, 2024, in the case of National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), a federal district court entered a final declaratory judgment, concluding that the Corporate Transparency Act exceeds the Constitution’s limits on Congress’s power and enjoining the Department of the Treasury and FinCEN from enforcing the Corporate Transparency Act against the plaintiffs in the case. The Justice Department appealed the decision and the matter is currently pending in the Court of Appeals. Other than the companies named in the lawsuit, reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.
The law firm of Swanson Hatch, P.A. represents businesses in commerce, health care, and insurance in a wide array of regulatory, compliance, corporate, litigation, and other matters. Prior to her service as Attorney General of the State of Minnesota, Lori Swanson served as Solicitor General and Deputy Attorney General of the State of Minnesota and was the Chair of the Federal Reserve Board’s Consumer Advisory Council. Before he became Attorney General, Mike Hatch previously served as Commissioner of the Minnesota Department of Commerce for eight years, where he regulated the insurance, real estate, financial, and other industries. The firm’s website is www.swansonhatch.com and its phone number is 612-315-3037.
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www.swansonhatch.com
431 S Seventh Street, Suite 2545
Minneapolis, MN 55415 612-315-3037
The materials in this article are for informational purposes and do not constitute legal advice, nor does your unsolicited transmission of information to us create a lawyer-client relationship. Sending us an email will not make you a client of our firm. Until we have agreed to represent you, nothing you send us will be confidential or privileged. Readers should not act on information contained in this article without seeking professional counsel. The best way for you to inquire about possible representation is to contact an attorney of the firm. Actual results depend on the specific factual and legal circumstances of each client’s case. Past results do not guarantee future results in any matter.
A federal law requires some companies (mostly small businesses) to report information about their ownership to an arm of the U.S. Department of Treasury by January 1, 2025 (and sooner if they were incorporated in 2024). This article has information about these reporting requirements.
Background
The bipartisan Corporate Transparency Act was enacted in 2021 to curb illicit financing. The law requires certain companies to file beneficial ownership information reports with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The reports must disclose information about the individuals who ultimately own or control the companies. The primary purpose of the law is to curb money laundering.
Which Organizations Must Report
Corporations, limited liability companies, and certain other organization must generally report their ownership information unless they fall within an exemption. Organizations may be exempt from reporting based on the type of organization they are, their number of employees and revenue, or their industry.
Large Operating Company Exemption. Because larger organizations are generally exempt from reporting, the regulation mostly impacts small businesses. Organizations that meet the definition of a “large operating company” are exempt from registration. The regulation generally defines a “large operating company” as a company with a physical presence in the U.S. that employees more than 20 full-time employees in the U.S. and reported more than $5 million in gross domestic receipts or sales on its previous year’s federal tax return. If “large operating companies” meet the criteria in the regulation, they are exempt from reporting.
Regulated Industry Exemptions. Companies in a number of regulated industries are exempt from reporting, if they meet all the exemption criteria. Industries where there may be an exemption include:
Exemption for Tax-Exempt Entities. 501(c)(3) organizations that are exempt from taxation under 501(a) of the Internal Revenue Code are generally exempt from reporting if they meet the exemption criteria. In some cases, entities that operate exclusively to provide financial assistance to a tax-exempt entity may also be exempt.
Other Exemptions. An entity may also qualify for an exemption if its ownership interests are controlled or wholly owned by an exempt entity. Entities created before 2020 that are not engaged in active business operations may also be exempt from reporting if they meet several criteria.
FinCEN has prepared a useful guide to help companies determine if they must report and what information they must report. Companies that intend to rely on an exemption should carefully review the guide and other information published by FinCEN to make sure they meet all exemption criteria.
What Information Must Be Reported
Reporting companies must provide four pieces of information about each beneficial owner:
According to FinCEN, a beneficial owner is an individual who directly or indirectly exercises “substantial control” over a reporting entity or owns or controls at least 25 percent of the ownership interests of a reporting entity. FinCEN states that an individual exercises “substantial control” over a reporting entity if they meet any of these four general criteria:
The company must also submit certain information about itself, such as its name(s) and address. In addition, reporting companies created on or after January 1, 2024, are required to submit information about the individuals who formed the company (called “company applicants”).
The FinCEN guide can help companies determine who is a “beneficial owner” and what information to report. Companies should review these materials to make sure they are reporting the right information about the right people.
Reporting Deadlines
Companies that are not exempt from reporting must file their initial reports by the following deadlines:
There is no fee to report. Beneficial ownership reporting is not an annual requirement. A report needs to be submitted once, unless the filer needs to update or correct information. A failure to update ownership information changes or to report can result in harsh civil and criminal penalties.
Where to Report and Other Resources
Companies may file their report through the FinCEN website:
FinCEN has published an FAQ to address compliance and reporting questions. It also has a short video and quick reference guide on its website.
Litigation Could Impact Requirements
It is possible that pending or future litigation will impact companies’ reporting obligations. FinCEN has published the following information on its website: On March 1, 2024, in the case of National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), a federal district court entered a final declaratory judgment, concluding that the Corporate Transparency Act exceeds the Constitution’s limits on Congress’s power and enjoining the Department of the Treasury and FinCEN from enforcing the Corporate Transparency Act against the plaintiffs in the case. The Justice Department appealed the decision and the matter is currently pending in the Court of Appeals. Other than the companies named in the lawsuit, reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.
www.swansonhatch.com
431 S Seventh Street, Suite 2545
Minneapolis, MN 55415
612-315-3037
The materials in this article are for informational purposes and do not constitute legal advice, nor does your unsolicited transmission of information to us create a lawyer-client relationship. Sending us an email will not make you a client of our firm. Until we have agreed to represent you, nothing you send us will be confidential or privileged. Readers should not act on information contained in this article without seeking professional counsel. The best way for you to inquire about possible representation is to contact an attorney of the firm. Actual results depend on the specific factual and legal circumstances of each client’s case. Past results do not guarantee future results in any matter.