What company leaders need to know about the CTA and required reporting

As of Jan. 1, 2024, a broad swath of companies previously considered “non-reporting” by the federal government are now required to report information about themselves each year

The new law requires annual disclosure of each company’s beneficial owners, and the individual(s) who created it to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

These requirements, imposed under the Corporate Transparency Act (CTA), are intended to combat money laundering and other illicit financial activity by promoting transparency and accountability in corporate ownership.

What does that mean for you? What follows is an expert summary of the key provisions of the new law, including who needs to file and when, what information their reports must contain, and the penalties for noncompliance.

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Who needs to file?

With certain exceptions discussed below, the CTA applies to two kinds of companies: all entities formed by filing a document with a secretary of state or similar state office — including corporations, LLCs, trusts and LLPs — and all entities formed under the laws of a foreign jurisdiction and registered to do business in any US state by filing a document with a secretary of state or similar office.

Entities that don’t fall under those parameters (i.e., domestic entities that don’t require a state filing for formation, such as general partnerships and sole proprietorships) will not need to do this reporting.

If your company does fall into one of the two categories, it will need to file a report with FinCEN — unless a specific exemption applies.

The CTA includes 23 such exemptions, the most notable of which apply to:

• Publicly traded companies.
• Large operating companies — must have more than 20 full-time employees in the US, a physical office in the US, and more than $5 million in sales from US sources.
• Certain already-regulated entities — those subject to existing regulatory reporting requirements, such as banks, credit unions, bank holding companies, registered securities brokers or dealers, registered investment companies, registered investment advisers, insurance companies, and public accounting firms.
• Certain tax-exempt entities, including 501(c) nonprofits.
• Subsidiaries owned or controlled by certain entities already exempted under the CTA

When do reporting companies need to file?

Already existing companies basically have a year’s grace period, but new companies have to act faster  — and changes have to be reported quickly.

Specifically, reporting companies created before Jan. 1, 2024 will have until Jan. 1, 2025 to file their initial reports with FinCEN.

Reporting companies created between Jan. 1, 2024 and Jan. 1, 2025 will have 90 days after creation to file their initial reports.  Entities created on or after Jan. 1, 2025 will have 30 days to file.

After the initial report, companies will have to make additional filings if there are any changes to their reported information. These filings must be made within 30 days of each change.

What information must be included in the filing?

Reporting companies will need to include the following information in their filings:

Company Information: The company’s full legal name and any trade name or “doing business as” name, current U.S. address, jurisdiction of formation or registration, and Taxpayer Identification Number (TIN) from the IRS (or, for foreign companies without a TIN, a tax identification number issued by a foreign jurisdiction and the name of that jurisdiction).

Beneficial Owners: The CTA defines a “beneficial owner” as any individual who, directly or indirectly, either (a) exercises “substantial control” over a reporting company or (b) owns or controls at least 25% of the ownership interests (such as equity, voting rights, or convertible instruments) of a reporting company.  An individual exercises substantial control over a reporting company if they meet any of following criteria: (a) they are a senior officer (i.e., a president, CEO, CFO, COO, etc.), (b) they have authority to appoint or remove certain officers or a majority of the company’s directors, (c) they are an important decision-maker (i.e., makes decisions on reorganizations, acquisitions, compensation, and entry or termination of significant contracts) or (d) they have any other form of substantial control over the company. All individuals who exercise substantial control over a reporting company must be reported as beneficial owners.

For each beneficial owner, companies must disclose their full legal name, date of birth, current residential address, and a unique identifying number from, and copy of, a U.S. passport, state driver’s license, or other state or federal issued identification (or a foreign passport if the individual does not have any of the previous documents).

Company Applicants: “Company applicants” include the individual who directly files the document that created the reporting company and/or the individual who was primarily responsible for directing or controlling such filing. Two company applicants is the maximum number that need to be reported.  Company applicant information is only required for entities formed after Jan. 1, 2024.

Companies will need to report the same information for company applicants as is required for beneficial owners (see above).

Who will have access to the information?

Federal, state, local and tribal officials, as well as certain foreign officials who submit a request through a U.S. federal government agency, will be permitted to obtain beneficial ownership information (BOI) if they can demonstrate that the request relates to national security, intelligence, and law enforcement.

Financial institutions will also have access to the information in certain situations, subject to the consent of the reporting company.

Penalties for noncompliance

Companies that fail to comply with the reporting requirements could face significant penalties.

Willfully failing to report complete or updated BOI to FinCEN, or making a false or fraudulent report, may result in civil penalties of up to $500 for each day that the violation continues. Depending on the severity of the violation, criminal penalties may also apply, including imprisonment for up to two years and/or a fine of up to $10,000.

Senior officers of a noncompliant reporting company could be held personally accountable, and potential state penalties may apply as well.

Many companies have complex corporate structures. Those creating new subsidiaries should carefully consider who the company applicants and beneficial owners will be so they are able to provide the required information. Company applicants will be certifying that the initial beneficial information report is true, correct, and accurate, and the penalties for willfully failing to meet this obligation are substantial.

Finally, given the requirement to report changes to previously disclosed information, managers should consider creating a procedure for ongoing compliance with CTA reporting requirements (for example, by adding this item to regular board meeting agendas).

Update: Courts have rendered future enforceability uncertain

As of this posting, at least one federal court has issued a ruling that the CTA is unconstitutional.

In an order issued March 1, Judge Liles Burke of the US District Court for the Northern District of Alabama rejected the government’s three arguments that Congress had the authority to enact the CTA under the following enumerated powers: (i) Congress’ foreign affairs powers; (ii) the Commerce Clause; and (iii) Congress’ taxing power.

Suggesting that Congress could pass a slightly revised version of the CTA, the Court found that the CTA lacked “jurisdictional hook” language. The Treasury Department is sure to appeal that ruling, and the case will be one to follow.

The future of the CTA across the country remains uncertain and this and any other potential litigation unfolds. While monitoring for new developments, it is important to also continue to follow best practices with respect to compliance.

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Kim’s Korner is a series of articles by Ballard Spahr’s emerging company and venture capital attorneys. The column is not legal advice. The substance of the column is derived from our experience working with founders and details many of the current critical issues facing startups.

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