Founders face any number of challenges when launching a business, and that list grew longer on January 1, 2024 when the Corporate Transparency Act took effect. This law imposes sweeping new reporting requirements that will affect founders and their businesses. This Q&A-style article explains what the CTA is, what businesses it applies to, the type of information that must be reported, and what founders need to do to ensure compliance.

1. What Is the Corporate Transparency Act?

The CTA is a new law that requires certain business entities – referred to as “reporting companies” – to submit reports to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). These reports require disclosure of certain information about the reporting companies themselves, their “beneficial owners” and their “company applicants.” The stated purpose of the CTA is to protect the U.S. financial system from illicit activities, such as money laundering, fraud and terrorism.

2. What Entities Are Considered Reporting Companies?

There are two types of reporting companies under the CTA – domestic and foreign. Domestic reporting companies include corporations, limited liability companies, limited partnerships, and any other entity created by the filing of a document with the Secretary of State or similar office under the law of a U.S. state or any tribal jurisdiction. Foreign reporting companies include entities formed under the laws of a foreign (non-U.S.) country that are registered to do business in any U.S. state, territory or possession or tribal jurisdiction by filing a document with a state secretary of state or any similar office of a state, territory or possession or tribal jurisdiction.

3. What Entities Are Not Considered Reporting Companies?

There are 23 types of entities that are exempt from disclosing information to FinCEN. Some of the broad exemptions include:

• Issuers of public securities registered under the Securities Exchange Act of 1934
• Broker-dealers and others registered under the Exchange Act
• Banks and credit unions
• Insurance companies
• Tax-exempt entities (including Section 501(c)(3) entities)
• U.S. government and public utilities entities

Exempt entities also include “large operating companies” that meet all of the following three requirements: (a) employing more than 20 full-time employees in the United States, (b) maintaining an operating presence at a physical office in the United States, and (c) having filed a federal income tax return in the United States for the previous year that demonstrated more than $5 million in gross receipts or sales (net of returns and allowances), excluding gross receipts or sales from outside the United States.

Founders should note that a newly formed entity that has not yet filed a U.S. income tax return will not qualify for the large operating company exemption even if it meets the employment and physical presence requirements of this exemption.

4. Who Is a “Beneficial Owner” Under the CTA?

Beneficial owners are individuals who directly or indirectly own or control 25% or more of the ownership interests of a reporting company or, through any contract, arrangement, understanding relationship or otherwise, exercise “substantial control” over a reporting company.

5. What Is “Substantial Control” Under the CTA?

An individual is deemed to exercise substantial control over a reporting company if the individual: (a) serves as a senior officer of a reporting company (including the president, CFO, COO, general counsel, or any other officer, regardless of title, who performs a similar function), (b) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of the reporting company, (c) directs, determines, or has substantial influence over important decisions made by a reporting company, or (d) has any other form of substantial control over the reporting company.

6. What Information Needs to Be Disclosed?

All reporting companies must report information relating to the company itself and each of its beneficial owners. If the company was formed on or after January 1, 2024, it must also report on each of its company applicants. There can be up to two company applicants for a reporting company: (a) the person who directly files the formation or registration documents of a reporting company, and (b) the person primarily responsible for directing or controlling such filing. Entities formed prior to January 1, 2024 are not required to submit company applicant information.

Reporting company information must include:

• Full legal name of the reporting company
• Any trade name or “doing business as” name of the reporting company
• Street address of the reporting company’s principal place of business in the United States
• The reporting company’s jurisdiction of formation or, for foreign reporting companies, its jurisdiction of registration in the United States
• The tax identification number of the reporting company or, for foreign reporting companies, an equivalent foreign tax identification number

Beneficial owner and company applicant information must include:

• The full legal name of the individual
• The date of birth of the individual
• The residential street address of the individual
• The identification number and issuing jurisdiction of a non-expired U.S. passport, U.S. driver’s license, U.S. government-issued identification or, if none of the foregoing is available, a foreign passport for the individual
• An image of the aforementioned passport, license or other form of identification for the individual

7. What Is the Timeline for Compliance?

Reporting companies in existence prior to January 1, 2024 have until January 1, 2025 to file its initial report with FinCEN.

A reporting company formed or registered to do business in the United States on or after January 1, 2024 but before January 1, 2025 will have 90 calendar days after the date of its formation or registration to file its initial report with FinCEN.

A reporting company formed or registered to do business in the United States on or after January 1, 2025 will have 30 calendar days after the date of its formation or registration to file its initial report with FinCEN.

8. What Happens if Reported Information Changes or Is Found to Be Incorrect?

Reporting companies are required to amend any submitted reports no later than 30 calendar days after any submitted information changes or after discovering an error. Changes that require the submission of an amended report include changes relating to the company itself (for example, a new senior officer is appointed or the company registers a new “doing business as” name) or changes to any existing individual beneficial owner information (for example, a beneficial owner changes his or her name or residential address or the composition of the reporting company’s beneficial owners changes).

9. What Are the Penalties for Noncompliance?

The CTA authorizes civil and criminal penalties for willful failure to report complete or updated information. Violators may incur a civil penalty of up to $500 for each day that a violation has not been remedied, and a fine of up to $10,000 and/or imprisonment for up to two years. FinCEN has stated that it does not expect that inadvertent mistakes made in good faith will constitute a violation, but reporting companies should not assume they will receive a pardon from FinCEN.

10. How and Where Can Reports Be Submitted?

FinCEN has developed a secure filing system available on its website for the direct filing of beneficial ownership information reports, which can be accessed here: Beneficial Ownership Information Reporting | FinCEN.gov. Several third-party service agencies have also developed services and platforms to facilitate the filing of reports with FinCEN.

NOTE: The CTA and its requirements are subject to modification and further guidance. FinCEN has published tools that may be useful in interpreting the regulations, including FAQs and a Small Entity Compliance Guide. We at Fox Rothschild continue to monitor these developments and are available to assist founders in navigating these complicated new requirements.