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We previously alerted you to the enactment of The Corporate Transparency Act (the “CTA”) and the proposed rules issued by the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). This article is intended to point out certain changes made by the final rules issued by FinCEN on September 30, 2022.

The CTA will take effect January 1, 2024. Under the CTA, most business entities created by statute (with named exceptions) must file a beneficial ownership information report, which includes personal information on the individuals who own the entity and personal information about the individual or entity filing to create the entity.

The reporting requirement enacted by the CTA is required for both entities created after the Act takes effect and prior to the Act taking effect, with notable differences between the two in timing for filing. Moreover, failure to file may subject entities to penalty.

Who Must File: Definition of Reporting Company

A reporting company is defined as any corporation, limited liability company, or similar entity that is (1) created by filing a formation document with a secretary of state or similar office or (2) formed under the law of a foreign country and registered to do business in the United States. Thus, reporting companies will include limited partnerships and limited liability limited partnerships, in addition to corporations and LLC.

FinCEN acknowledged that other types of legal entities, including sole proprietorships, “certain types” of trusts and general partnerships are not created by the filing of a document with a secretary of state or similar office, and thus are excluded from the definition of a reporting company.

Under the CTA, there are 23 types of entities exempt from reporting requirements. FinCEN did not create any new exemptions, and the final rules adopt the proposed rules with minimal changes. However, should an entity once exempt subsequently lose its exemption status, that company is required to file an initial report within 30 calendar days after the date that it no longer meets the criteria for exemption.

Reporting Requirements

An entity fitting under the definition of a reporting company must identify itself and report information about each of its beneficial owners. Beneficial Owners under the CTA are individuals who either directly or indirectly exercise substantial control over a reporting company or own or control at least 25 percent of the ownership interests of a reporting company. Individuals are considered to exercise “substantial control” over a reporting company if they serve as a senior officer or otherwise have control or decision-making power over material matters affecting the business or operation of the reporting company. The definition of “senior officer” now excludes corporate secretaries and treasurers, although the general counsel role remains as a senior officer position, and the commentary to the final rule notes that titles are not dispositive.

A reporting company must identify itself, which includes:

  1. The company’s full legal name and any DBA or trade name
  2. A complete current address of the company
  3. The state, tribal, or foreign jurisdiction where the company first registers
  4. The company’s TIN or EIN provided by the IRS

Moreover, the company must also identify four additional items of information about each of its beneficial owners, being:

  1. The Beneficial Owner’s Name
  2. The Beneficial Owner’s Birthdate
  3. The Beneficial Owner’s Address
  4. A unique identifying number and issuing jurisdiction from an acceptable identification document, with a provided image of that document.

Additionally, “company applicants” of reporting companies will be required to disclose certain personal information. The final rules greatly reduce the number of “applicants” to be identified in CTA filings, relieving law firms and corporate formation companies of a potentially overwhelming burden. Only reporting companies formed or registered after December 31, 2023 will be required to identify “applicants” and updating of applicant information will not be required. The definition of an applicant is now limited to at most two individuals–the individual who directly files the company formation or registration documents and the individual who is “primarily responsible” for directing or controlling such filing. For reporting companies formed after the effective date, attorneys, corporate formation company personnel and others who filed the creation or registration documents must be identified to FinCEN as company applicants.

The final rules make some changes regarding the address to be provided in the com­pany reports. For a reporting company with its principal place of business in the United States, the street address of that principal place of business must be used; in all other cases, the street address of the primary location in the United States where the reporting company conducts business is to be used. A third party address or P.O. box address is not allowed.

Reporting Deadlines

Reporting companies formed before January 1, 2024 will have until January 1, 2025 to file their beneficial owner disclosure reports. Reporting companies formed after January 1, 2024 are allowed 30 days to file their beneficial owner disclosure reports, counting from the date of actual or public notice of creation or registration.

The final rules also increase the time to file corrected reports from 14 to 30 days, now consistent with the requirement for updating previously reported information. Note that inactive companies formed after January 1, 2020 (the date of enactment of the CTA) will have to file beneficial owner reports.

What To Do now?

Because FinCEN is still developing its filing system, the process for filing initial reports and reporting changes is yet to be determined. However, with 2024 fast approaching, we are closely monitoring the situation to help our clients comply with the Act.

If you would like more information, you can reach out to one of the attorneys at Sprouse Shrader Smith, PLLC to review your business entity structure and help prepare you for the reporting requirements of the CTA.

Article by Suzannah Snider
Sprouse Shrader Smith PLLC