By: J. P. “Rusty” Carolan, Esquire and Michael C. Caborn, Esquire
Beginning January 1, 2024, the Federal Corporate Transparency Act (the “Act”) will impose significant new reporting requirements on certain companies and require registration with the Federal Financial Crimes Enforcement Network (“FinCen”) unless the entity falls within limited exceptions. “Beneficial owners” of a reporting company, which includes those who own or control 25% or more of the ownership of a reporting company, and those who are deemed to exercise substantial control over the reporting company regardless of ownership, are also required to register with FinCen. Thus, the Act involves a very broad scope.
While the new law initially only applies to reporting companies formed after January 1, 2024, after January 1, 2025 it will apply to all non-exempt “Reporting Companies.”
1. What is a domestic Reporting Company? Essentially, a domestic Reporting Company is any entity created by a filing with a secretary of state or similar office including, but not limited to, limited liability companies, limited partnerships, and corporations. It is not just corporations.
2. Who are considered Beneficial Owners? The term “Beneficial Owners” includes those individuals owning or controlling 25% or more of a domestic Reporting Company but its coverage is much broader than that and includes those in direct or indirect control including a president, CEO, CFO, COO, general counsel, or other officer performing similar functions or having substantial influence over important decisions of the reporting company.
3. What entities are exempt? Generally large entities, some regulated industries and some charitable institutions are exempt from reporting pursuant to the Act. To be considered a large entity, the entity must meet several criteria including, but not limited to, having $5 million in gross receipts or sales from U.S. sources on the prior year’s tax return, having at least 20 full time employees, and having a physical location owned or leased by such entity physically distinct from the place of business of any unaffiliated entities, or be subsidiaries wholly owned or controlled by such large entity. It does not work the other way, however, so if a holding company of a large entity does not meet that criteria, it must register.
4. Who else is required to register? The individual who filed to create the entity and the person directing the filing of the documents to create the entity must register. Thus, for example, if a lawyer instructs a paralegal to file the documents, both must register (though there is to be a procedure to get a FinCen Identifier in lieu of filing detailed information each time).
5. What are penalties for lack of compliance? There are substantial penalties for the lack of compliance, including civil fines of up to $500 per day plus potential criminal penalties.
6. What type of information must be filed with FinCen? Information includes, for example, full legal name, date of birth, residential street address, indemnifying number from a driver’s license or passport, and an image of the document containing the identifying number with the individual’s photograph. There is also additional information required from the reporting company.
7. Are there other issues? Of course. For example, anytime any of the information previously filed changes, there is a requirement to update the information with FinCen within 30 days or be in violation. Thus change in officers or change in residence or business location would require updated filing.
The foregoing is a general overview. The commentary and regulations implementing the Corporate Transparency Act are approximately 100 pages and contain many other provisions and special rules. Entities must be alert as to what will be required in the future and consider what registration will be required. On March 24, 2023, FinCen issued additional guidance materials to assist in compliance with the registration requirements.
The required forms and filing and registrations procedures have not yet been implemented to allow compliance with this new Act. Once that occurs, please contact Winderweedle Haines Ward and Woodman, P.A. to assist with FinCen filings.
Financial Crimes Enforcement Network website: https://www.fincen.gov/beneficial-ownership-information-reporting