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Smart Summary

• Beginning January 1, 2024, the “Beneficial Ownership Information Reporting Rule” promulgated under the Corporate Transparency Act will go into effect.
• Virtually all existing and new limited liability companies, corporations, limited partnerships and other entities formed by a filing with a secretary of state (or an Indian tribe), except certain exempt entities, will be Reporting Companies required to timely file beneficial ownership reports with FinCEN, the Financial Crimes and Enforcement Network.
• The reports will include identifying information about all significant owners, senior officers and others in substantial control of the reporting company, as well as up to two individuals involved with the entity formation filing (such as attorneys, paralegals, assistants).
• Reporting companies formed prior to January 1, 2024, have until December 21, 2024 to make their first filing.
• Reporting companies formed on or after January 1, 2024, must file within 30 days of formation, although a proposed extension for 2024 filings to 90 days is anticipated to be adopted.

We call your immediate attention to this Alert and recommend you begin planning for compliance as soon as possible. Reach out to us to help you with the CTA!

Background of the Corporate Transparency Act

Beginning January 1, 2024, the Beneficial Ownership Information Reporting Rule promulgated under the Corporate Transparency Act (“CTA”) will become effective and require most entities, which are referred to as “Reporting Companies” and which include most limited liability companies, corporations, limited partnerships and other entities formed by a filing with a secretary of state or an Indian tribe, except for certain exempt entities, to file Beneficial Ownership Reports with the Financial Crimes Enforcement Network (FinCEN), which is an agency in the U.S. Department of the Treasury. These Reports will contain personally identifying information about the Reporting Companies and certain individuals who control them, referred to as “Beneficial Owners,” and (for entities formed on or after January 1, 2024), about up to two individuals who were involved in their formation, referred to as “Company Applicants.”

What entities are reporting companies?

Reporting Companies include (with some exceptions discussed below) every domestic corporation, limited liability company and other similar entity ever formed by the filing of a document with a secretary of state or similar office or an Indian tribe, and every foreign entity registered to do business in the United States. However, entities that are not formed by filing such a formation document, such as many estate planning trusts, are not deemed Reporting Companies.

What entities are exempt from the CTA filing requirements?

The CTA exempts 23 types of legal entities from its reporting requirements:

• SEC reporting issuers, governmental authorities, banks, credit unions, bank and savings and loan holding companies, money transmitting businesses, broker-dealers, investment companies, investment advisers, venture capital fund advisers, insurance companies, public accounting firms and public utilities;
• certain tax-exempt entities, such as nonprofit organizations, political organizations and some tax-exempt trusts;
• “large operating companies,” which are entities (i) with more than 20 full-time employees in the United States, (ii) that filed a federal income tax or information return for the previous year showing more than $5,000,000 in gross receipts or sales, and (iii) that have a physical office within the United States;
• inactive entities that (i) were in existence on or before January 1, 2020, (ii) are not engaged in active business, (iii) are not owned by a foreign person, (iv) have not experienced any change in ownership in the prior 12-month period, and (v) do not hold any assets; and
• subsidiaries that are wholly owned, directly or indirectly, by exempt entities.

When are the Reports required to be filed with FinCEN ?

Reports are required to be filed as follows:

• For Reporting Companies formed (or foreign entities registered to do business) on or after January 1, 2024, initial Reports must be filed within 30 days of formation (or for foreign entities, of U.S. registration) for entities formed (or registered) during 2024, then within 30 days after formation (or registration) for entities formed beginning in 2025.
• For Reporting Companies formed (or foreign entities registered to do business) prior to January 1, 2024, there is a one-year phase-in so that the initial Reports must be filed by December 21, 2024.
• After an initial Report is filed, a Reporting Company must file amendments to their Reports with any changes or corrections within 30 days of any change or discovery of any error in the filed Report, such as new Beneficial Owners or changes to information relating to existing Beneficial Owners.

What information is filed in the Reports to FinCEN ?

The initial Reports filed with FinCEN must include certain identifying information about the Reporting Company, including its legal name and any trade name or d/b/a, address, state or jurisdiction of formation, and tax identification number (or, for foreign companies without an EIN, a tax identification number issued by the foreign jurisdiction).

The initial Reports must also include certain personally identifying information about each individual Beneficial Owner and Company Applicant, including such individual’s full legal name, birth date, residential address (business address for Company Applicants) and driver’s license or passport identification number or other identification document issued by a state or local government or Indian tribe, or a foreign passport for individuals who do not have any of the foregoing, along with an image of that document. The initial Reports of Reporting Companies formed prior to January 1, 2024, do not need to include information about their Company Applicants.

Reports must be filed with FinCEN via its electronic filing platform. Reporting Companies and individuals may obtain a “FinCEN identifier” that may be included in Reports rather than the above information, although the same identifying information will be required to be filed with FinCEN in order to obtain a FinCEN identifier. 

Who are “beneficial owners”?

Beneficial Owners are individuals who:

• own or control, directly or indirectly, at least 25% of the ownership interests (which may occur through ownership of equity, voting rights, options, convertible securities or other arrangements);
• are senior officers (such as the President, CEO, CFO, COO and General Counsel); or
• otherwise substantially control, or direct or have substantial influence over important decisions of, the reporting company (such as the manager of a limited liability company). 

As a Reporting Company grows and its ownership and management structures become more complex, the proper identification of Beneficial Owners may become more challenging.

Who are “Company Applicants”?

Company Applicants are up to two individuals involved in the filing of the Reporting Company’s formation document, including the individual directing the filing (such as an attorney) and the individual actually making the filing (such as a paralegal or legal assistant).

What are the penalties for failing to timely file Reports ?

A willful violation of the CTA can result in civil fines of up to $500 per day and criminal fines of up to $10,000 and/or imprisonment of up to two years.

Do any states have similar reporting requirements ?

Although Ohio has not adopted any similar reporting requirement, other states have adopted or are considering similar reporting requirements, including New York, Pennsylvania, and California.

Who will have access to the information in the Reports ?

Although the Reports will not be available to the public generally, they will be available to federal, state, and local enforcement agencies for certain purposes, such as national security, intelligence, and certain investigations, foreign law enforcement, prosecutors or judges via requests through a U.S. federal agency, or the Treasury Department (including the IRS). In addition, if a Reporting Company consents, the Reports will be made available to financial institutions in connection with “know your customer” requirements.

What should I do now?

• Determine if your entity is a Reporting Company or falls within one of the exemptions.
• If your entity is not exempt, identify the individuals who directly or indirectly own or control 25% or more of its ownership interests, are senior officers, or otherwise have any form of substantial control over the entity, and begin gathering the required identifying information regarding those individuals.
• Consider whether to accelerate the formation of any new entities before January 1, 2024 in order to take advantage of the one year phase-in period for such existing entities.
• Dissolve any unneeded, inactive entities before December 31, 2023.
• Create internal procedures to (1) ensure initial Reports are filed, (2) monitor changes in beneficial ownership and management that require an updated Report to be filed, (3) keep an accurate record of owners, officers, and others in substantial control.
• For individuals likely to be Beneficial Owners in multiple Reporting Companies, consider obtaining a FinCEN identifier when they become available to simplify the reporting process.
• Consider including provisions in LLC operating agreements, shareholders agreements, codes of regulations, and the like that require individuals that constitute Beneficial Owners to promptly provide the Reporting Company all information needed for the Reporting Company to file initial and updated Reports.
• Reach out to us to help you get ready for, and to help you comply with, the CTA!