The Corporate Transparency Act: What Is It? And Why Should Businesses Care?

This article was written for New Orleans CityBusiness and was published September 7, 2023.

Congress passed the Corporate Transparency Act in 2021 to combat the facilitation of illicit activities – including money laundering, financing of terrorism, and various acts of financial fraud – by malicious actors concealing their ownership of corporations, limited liability companies, or other similar entities in the United States.

Sounds good, but what does that have to do with me?

Effective January 1, 2024, and subject to certain exceptions, existing and newly formed corporations, limited liability companies, and similar entities (referred to in the Act as a “reporting company”) will be required to file a report with the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN) identifying the beneficial ownership of the reporting company. Reporting entities formed after the effective date will need to include similar identifying information for their applicant.

Am I a beneficial owner or an applicant?

You are a “beneficial owner” of a reporting company if you exercise substantial control over the entity or own or control 25% or more of the ownership interests in the entity. There are exceptions, including for minor children (if the information of the parent or guardian is reported), an inheritor of ownership interests in the entity, and certain creditors. What constitutes substantial control includes:

• • Serves as a senior officer.
  • Authority over the appointment or removal of directors, officers and persons holding similar offices.
  • Discretion, determination or decision-making authority over (or substantial influence over) important matters of the reporting company.

An “applicant” is an individual who registers or files an application to form a reporting company under the laws of a state or American Indian tribe. If you file or otherwise form a reporting company on or after the Effective Date, your identifying information will need to be reported.

So what goes in the report?

The report must provide the full legal name, any trade name or “doing business as” designation, the business street address, the state or American Indian tribal jurisdiction of formation, and an IRS TIN or other identifying number of the reporting company.

It must also identify each beneficial owner and, if applicable, applicant, by full legal name, date of birth, current residential address for an individual or business address for an entity, and unique identifying number and image from an approved identification document (including a nonexpired passport or state-issued identification document or driver’s license). By filing this information, beneficial owners and applicants may also obtain a unique FinCEN identifier that may then be submitted in lieu of the information listed above.

Each reporting company is ultimately responsible for its filing and must certify that it is true, correct and complete.

Do all reporting companies need to act?

It appears most small businesses will be required to comply with the Act, but there are exceptions. Entities that are exempt from the reporting requirements include:

• • Issuers of securities registered under the Securities Exchange Act
  • Governmental authorities
  • Banks, bank holding companies, credit unions and money transmitting businesses
  • Broker-dealers
  • Investment companies and advisers
  • Insurance companies
  • Tax-exempt entities
  • Large operating companies that employ more than 20 employees in the United States, filed federal income tax returns evidencing more than $5,000,000 in gross receipts or sales in the previous year, and have a physical office within the United States
  • Subsidiaries of certain exempt entities

Who will have access to this information?

Per the Act, FinCEN is required to maintain the confidentiality of reported information but is authorized to make disclosures for specific purposes to certain government authorities and to financial institutions.

What if I ignore the reporting requirement?

You may be subject to civil and criminal penalties, including fines of up to $10,000 and imprisonment for up to two years.

OK, so when do I have to act?

Reporting companies existing prior to the effective date must submit an initial report no later than January 1, 2025. A reporting company created on or after the Effective Date must file its initial report within 30 days of the effective date of its creation or registration. Updated and corrected reports must be filed within 30 days after the date of a change to any required information previously submitted or after the date the inaccuracy is discovered, respectively.

I have questions. What should I do?

Reporting companies should be proactive to ensure they comply with the Act, either by determining they are exempt from the reporting requirements or ensuring the required reporting information is easily accessible and up to date. We strongly suggest reporting companies begin this exercise well in advance of the effective date and requisite reporting deadlines.

Please contact Trevor Haynes or any member of Phelps' Business team if you have questions or need advice and guidance.