THE CORPORATE TRANSPARENCY ACT: NEW OWNERSHIP REPORTING REQUIREMENTS FOR SMALL AND MID-SIZED BUSINESSES
by Andrew Hazen, Matthew Haan and Anne Marie Simoneaux
FH2 Corporate Practice Team
Updated February 1, 2024
On January 1, 2024, the requirements of the Corporate Transparency Act (“CTA”) will take effect. Under the CTA, many small and mid-sized businesses will be required to file reports disclosing information about their business and its ownership. Pre-existing entities have until January 1, 2025, to file all necessary reports, while entities created during the 2024 calendar year must file the reports within 90 days from creation. Thereafter, entities created after January 1, 2025, will have 30 days to file their initial reports.
Compliance with the CTA requires an entity to determine whether it is required to file a report and what information it must disclose, including who qualifies as the “beneficial owners” of the entity. Notably, compliance also requires filing updated reports any time there is a change to any information previously reported pursuant to the CTA.
What is the Corporate Transparency Act?
The CTA is federal legislation requiring reporting of entity information to support national security and law enforcement activities to counter money laundering, the financing of terrorism, and other illicit activity. The CTA introduces new requirements for certain businesses and other corporate entities, defined as “reporting companies”, to disclose information about the entity and its “beneficial owners” to the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”). 31 U.S.C. § 5336.
What is a reporting company?
Most small businesses will be required to report with FinCEN. The term reporting company is defined broadly in the CTA to include any corporation, limited liability company, or other entity that is created through filings with a secretary of state or similar office under the law of a state. It also includes entities that are formed under the laws of a foreign country and registered to do business with a state office.
What entities are exempt from reporting requirements (i.e., not a reporting company)?
There are 23 types of entities exempt from the reporting requirements. Notable exemptions include those for banks, insurance companies, tax-exempt entities, securities reporting issuers or certain other entities subject to regulatory oversight. Additionally, an entity that qualifies as a “large operating company” is exempt, meaning it (i) employs more than 20 full-time U.S. employees, (ii) filed a federal U.S. income tax return for the prior year showing more than $5 million of revenue, and (iii) operates in physical location in the U.S.
What must reporting companies disclose to FinCEN?
The report required by the CTA seeks information about the reporting company, including its full legal name, any trade or dba name, current U.S. address, jurisdiction of formation, and IRS TIN (EIN).
Additionally, for each beneficial owner, the reporting company must provide that person’s full legal name, date of birth, current address, a unique identifying number, and an image of an identifying document. Finally, for entities created on or after January 1, 2024, the report must also include this information about a reporting company’s company applicant.
Who are beneficial owners and company applicants?
The term beneficial owner is defined to include an individual who, directly or indirectly, either (1) exercises substantial control over an entity, or (2) owns or controls twenty-five percent (25%) or more of the ownership interests of an entity.
Ownership interests can mean any of the following: equity, stock, or voting rights; capital or profit interests; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership. An individual exercises substantial control over a reporting company if the individual meets any of four general criteria: (1) the individual is a senior officer; (2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company; (3) the individual is an important decision-maker; or (4) the individual has any other form of substantial control over the reporting company. For example, this could include an entity’s President, CFO, CEO, COO, general counsel, or other offices with similar functions.
The term company applicant is any individual who directly filed (or directed or controlled the filing of) the application to form the reporting company under state law.
A reporting company can have multiple beneficial owners, and FinCEN expects each reporting company to have at least one beneficial owner. Each reporting company must have at least one company applicant and at most two.
When must a reporting company file its report?
For reporting companies existing as of January 1, 2024, reports must be filed within one year, by January 1, 2025. Reporting companies formed after January 1, 2025, have 30 days after formation to file their reports. FinCEN extended the deadline for reporting companies formed in 2024. Reporting companies formed on or after January 1, 2024, and before January 1, 2025, have 90 days after formation to file their reports.
If there is any change in the information reported to FinCEN, the reporting company must file an updated report no later than 30 days after the date on which the change occurred. This includes reporting a change in beneficial owners, such as a new CEO or a sale that changes who meets the ownership interest threshold of 25%, and changes to a beneficial owner’s information, such as an address change.
How to file the report?
Starting on January 1, 2024, reports must be filed electronically using FinCEN’s secure filing system, available here. There is no filing fee.
What are the penalties for non-compliance with the CTA?
Failure to comply with the reporting requirements can result in civil and criminal penalties. These penalties can include civil penalties of up to $500 for each day that the violation continues, as well as criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.
How does FinCEN use the report once filed?
FinCEN will store reports in a database with security measures and only share this information with authorized users for purposes specified by law. This includes access by certain government agencies who request the information for purposes related to national security, intelligence, and law enforcement. FinCEN also allows limited access for financial institutions will also have access to beneficial ownership information in certain circumstances, with the consent of the reporting company.
Most prudent businesses today carry at least certain standard insurance coverages to protect against risks and liabilities arising out of the conduct of their business. These threshold coverages usually consist of a Commercial General Liability (CGL) policy, coupled with a workers’ compensation and employer’s liability policy and a commercial automobile liability policy. However, the provision of technology-related products and services entails certain unique risks not faced by the “ordinary” business, and a business engaged in providing those products and services (and their customers) run the risk of a very unpleasant surprise when a claim is made and the business discovers that these standard insurance products may not provide coverage. As such, businesses that provide technology-related products and services – from software development and licensing to IT professional services and data hosting – should be aware of additional insurance products that are available to insure against the risks that are unique to their business operations.
Compliance with the CTA requires a business to determine whether it is a “reporting company”, and if so, what information it must disclose, including who qualifies as the beneficial owners of the business. If you need assistance in assessing your business’s responsibilities under the CTA, please contact Andrew Hazen (ahazen@fh2.com; 770-771-6818), Matthew Haan (mhaan@fh2.com; 770-771-6835), or Anne Marie Simoneaux (asimoneaux@fh2.com; 770-771-6811) or visit fh2.com to learn more about how the attorneys at Friend, Hudak & Harris, LLP can help.
 ahazen@fh2.com |
About the Author: Andrew Hazen Partner, Corporate practice leader Andrew focuses his practice on corporate, transactional, and real estate matters. Andrew also serves as outside general counsel to a number of closely-held businesses in a variety of industries, including healthcare, long-term care and senior living, manufacturing and distribution, construction, agriculture, and commercial real estate. For more information about Andrew click here. |
 mhaann@fh2.com |
About the Author: Matthew Haan Associate Matthew brings his large law firm experience to FH2’s diverse and expanding corporate and litigation practices. Matthew concentrates his practice on business litigation, business transactions, labor and employment, corporate and real estate matters. For more information about Matthew click here. |
 asimoneaux@fh2.com |
About the Author: Anne Marie Simoneaux Associate Anne Marie represents clients in all aspects of general commercial litigation and business transactions. She regularly assists clients in the healthcare, insurance, manufacturing, commercial real estate, and telecommunications industries with contract drafting, asset purchases and divestitures, and other corporate and outside general counsel matters. For more information about Anne Marie click here. |
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