Businesses Will Need To Take Quick Action on Congress’ New Corporate Transparency Act
This article was written for Birmingham Business Journal and was published July 13, 2023.
Little attention has been paid to the Corporate Transparency Act (CTA). The act was passed to combat money laundering, terrorist financing, corruption and tax fraud as a result of an uptick in illicit actors using corporate structures to conceal their identities and launder money.
Beginning in 2024, the CTA requires new and existing companies to file reports with the Financial Crimes Enforcement Network (FinCEN) identifying their beneficial owners and for newly formed companies, the individuals who created the company.
The CTA applies to all corporations, limited liability companies and similar entities that register to do business by filing with a secretary of state or a similar office under the law of a state or Indian tribe. Companies created prior to Jan. 1, 2024, have until Dec. 31, 2024, to file an initial report. Companies created on or after Jan. 1, 2024, will have 30 days after their creation to file an initial report.
Who is exempt from filing?
Notable exceptions to the reporting requirements include companies reporting under the Securities Exchange Act, banks, credit unions and certain nonprofit entities, but the most notable exception is for “large” operating companies and their wholly owned subsidiaries.
A large operating company is defined as an entity that:
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- Has more than 20 full-time employees in the U.S.
- Filed Federal income tax returns in the prior year demonstrating aggregate gross receipts or sales of more than $5 million.
- Has an operating presence at a physical office in the U.S.
What do companies need to file?
Existing and newly formed companies are required to provide:
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- Full legal name.
- All trade name or “doing business as” names.
- Street address.
- State or tribal jurisdiction of formation.
- IRS taxpayer identification number.
For each beneficial owner, they must provide:
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- Full legal name.
- Date of birth.
- Current residential street address.
- Unique identifying number.
- Image of the document from which the unique identifying number was obtained.
Newly formed companies are also required to report the same information for each “company applicant,” the individual who files the document creating the company and if more than one individual is involved in filing, the individual primarily responsible for directing or controlling the filing. Thus, an attorney and the paralegal that pushes the button or files the formation document are both company applicants.
If the information in an initial report is inaccurate or there is a change in the information of the reporting company or its beneficial owners, the report must be updated. Updating must occur within 30 days of a change and will likely be a significant burden on companies who now must keep track of and report any changes in the reported information for beneficial owners, including changes of addresses and new driver’s license numbers.
To streamline the process and provide for more confidentiality, beneficial owners and company applicants may obtain a FinCEN ID number, which may be provided in lieu of the required information. A FinCEN ID number will be most helpful to beneficial owners of multiple companies and those whose information changes often.
A beneficial owner is an individual who, directly or indirectly, exercises substantial control over a company or owns or controls not less than 25% of the company. A difficult question for many companies will be who has “substantial control.”
The FinCEN regulations list three indications of substantial control:
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- Serving as a senior officer.
- Authority over the appointment or removal of a senior officer or a majority of the board of directors or similar body.
- The direction, determination or substantial influence over important decisions.
Senior officers are persons holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer or any officer performing similar functions. Interestingly, corporate secretaries and treasurers are not deemed “senior officers” by FinCEN.
Important decisions are defined broadly and include decisions regarding:
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- The nature, scope and attributes of the company’s business, including the sale, lease, mortgage or other transfer of a principal asset.
- Reorganization, dissolution or merger.
- Major expenditures, issuance of debt or equity or approval of the operating budget.
- The selection or termination of business lines or ventures or geographic focus.
- Compensation schemes and incentive programs for senior officers.
- Entry into, termination or fulfillment of significant contracts.
- Amendment of the company’s certificate of formation, bylaws, LLC agreement and significant policies or procedures.
Congress estimated that over 32 million existing businesses will be affected by the CTA and millions more will be formed each year. FinCEN estimates that it will cost companies $85 to prepare and submit an initial report. That estimate doesn’t include the cost of monitoring and updating the information. Given the vagueness of some of these requirements and the definitions, the actual cost of compliance will likely be much greater.
Please contact Hal West or any member of Phelps' Business team if you have questions or need advice and guidance.
