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November 7th, 2023

Compliance with Corporate Transparency Act Obligations

Posted in: Business Law  Featured    Tagged: Andrew L. Schwartz

Author: Andrew L. Schwartz

The Corporate Transparency Act (“CTA”) requires certain entities (referred to as “reporting companies”) to report information about the entity and its beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury. The CTA becomes effective January 1, 2024. 

Here are some key points of the CTA:

Reporting Companies: Domestic and foreign corporations, limited liability companies, limited partnerships, limited liability partnerships and other entities created by the filing of a document with a secretary of state or similar office are required to report. General partnerships that have not filed formation documents with a state are not required to report. There are multiple exemptions, including an exemption for a “large operating company.” A large operating company is an entity that employs more than 20 full time employees in the U.S., has filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5 million in gross receipts or sales, and operates at a physical office within the U.S.

Reporting Requirement: Reporting companies must file an initial report with FinCen. The initial report must include certain information about the reporting company and its beneficial owners. 

The following information about the reporting company is required to be reported: 

1. The full legal name of the reporting company (name used to establish the entity);
2. Any trade name or DBA;
3. Complete current address consisting of:
   • In the case of a reporting company with a principal place of business in the U.S., the street address of such principal place of business; and
   • In all other cases, the street address of the primary location in the U.S. where the reporting company conducts business
4. The state of formation; and
5. IRS Tax ID number (EIN or TIN for foreign reporting company).

The CTA defines a beneficial owner as an individual who directly or indirectly owns 25% or more of the ownership interest of a reporting company or who exercises substantial control over a reporting company. An individual exercises substantial control if he/she is a senior officer of the reporting company, has authority over the appointment or removal of any senior officer or a majority of the board of directors of the reporting company, or directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding the nature, scope, and attributes of the business of the reporting company. 

The following information about the beneficial owners is required to be reported:

1. The full legal name of the individual;
2. The date of birth of the individual;
3. The complete current address of the individual’s residence;
4. A unique identifying number and the issuing jurisdiction from:
   • A non-expired passport issued to the individual by the U.S. Government;
   • A non-expired identification document issued to the individual by a State, local government, or Indian tribe;
   • A non-expired driver’s license issued to the individual by a State; or
   • A non-expired passport issued by a foreign government to the individual, if the individual does not possess any of the above documents; and
5. An image of one of the documents from subparagraph (4) above.

Reporting Deadlines: The CTA requires reporting companies that were created before January 1, 2024 to file the initial report on or before January 1, 2025. For reporting companies created on or after January 1, 2024, the initial report must be filed within ninety (90) calendar days of the earlier of: (i) the date on which actual notice of creation or registration of the entity was received; or (ii) the date the Secretary of State provides public notice of creation or registration of the entity.

Updated or Corrected Reports: In addition to filing an initial report, certain circumstances may require a reporting company to file an updated or corrected report. A reporting company must update or correct an initial report within thirty (30) calendar days after a change in information regarding the reporting company or its beneficial owners, or if it qualifies for an exemption after filing the initial report. Further, if an entity that was exempt from filing an initial report and, thus, did not file an initial report, no longer meets the criteria for an exemption, it must file a report within thirty (30) calendar days after the date that it no longer meets an exemption criteria. Additionally, if an initial report contained inaccurate information at the time of filing, the reporting company must file a corrected report within thirty (30) calendar days after becoming aware of or having reason to know of the inaccuracy.

How to Submit a Report: All initial reports and any updates or corrections will be filed through the Beneficial Ownership Secure System (“BOSS”) database. Reports will be accepted through BOSS beginning on January 1, 2024. Reported information is required to be kept confidential by FinCEN.

Penalties for Non-Compliance: Failure to comply with the CTA’s reporting requirements or willfully providing false or fraudulent information to FinCEN may result in significant penalties, including fines, jail, or both.

What are Your Next Steps: It is important that you determine whether your entity is subject to the CTA and, if required, ensure that you meet the reporting requirements in a timely and compliant manner. You may be required to file a report beginning on January 1, 2024.

Stein Sperling stands ready to assist. If you would like us to help you determine your obligations under the CTA or file such report on your behalf for a reporting company that existed prior to January 1, 2024, please contact us at 301-340-2020 and ask for a member of the Business Department.

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