By David Barrett, Executive Partner, Faegre Drinker
Many have heard about the Corporate Transparency Act (CTA) and have ignored it. But given that this new law went into effect on January 1, 2024 and carries potential criminal penalties for noncompliance, it is now time to understand it and put a plan in place to comply with it.
Why Did Congress Pass the CTA?
In passing the CTA in 2021, Congress highlighted reasons like companies concealing ownership information through a series of shell companies; various "illicit activity" like money laundering, financing of terrorism, and drug trafficking; national security concerns; and evading and hindering law enforcement.
Does it Apply to Your Company?
My advice is to start with the question of whether the CTA even applies to your company. This article focuses only on companies formed in the U.S. that have U.S.-based operations. If you are a U.S.-based company that was formed via a filing with a Secretary of State or equivalent office, the CTA applies to you unless you have an exemption. Sole proprietorships and general partnerships are two examples of entities to which the CTA does not apply. To be clear, the CTA does apply to non-U.S. companies.
If it Applies, Are You Exempt?
Although there are 23 exemptions, the most likely exemption for a private company is the "large operating company exemption," which has a two-part test for U.S. based companies: (1) $5 million or more of U.S. sourced revenue that is documented by a federal tax return; and (2) 20 or more full-time employees in the U.S. If you meet both parts of the test, you are exempt.
What About Your Subsidiaries and Affiliates?
The CTA potentially applies to all companies. However, if a parent company is exempt, all wholly-owned subsidiaries and subsidiaries that are controlled by the parent company are also exempt. Exactly what constitutes control is not yet clear.
Many private companies, family offices, and private equity companies have other entities outside of the main family tree. Each separate ownership tree will need to be evaluated separately, as will any subsidiary that is not wholly-owned.
What Information Do You Have to File?
If you are required to report (and thus are a "reporting company"), you must make a filing that provides information on the "beneficial owners" of each reporting company. For all reporting companies formed on or after January 1, 2024, you also have to provide information about the "company applicants" who helped form each such company.
"Beneficial owner" may not have been the best choice of words as it means more than ownership. You are a "beneficial owner" if you either (1) own or control at least 25% of the ownership interests of a reporting company or (2) exercise "substantial control" over a reporting company. So certain officers, directors, managers, etc. would be "beneficial owners," in addition to those actually owning at least 25% of the company.
You can become a "company applicant" in two ways: (1) You are the person who directly files the formation document with a Secretary of State (or equivalent); or (2) If more than one person is involved in the filing, you are the individual who is primarily responsible for directing or controlling the filing.
What are the Filing Deadlines?
For any companies formed before January 1, 2024, you have until January 1, 2025 to do your initial reporting. You have 90 days to do your initial reporting for any companies formed in 2024. Then starting January 1, 2025, you only have 30 days to do your initial reporting. Filings are made via a secure electronic portal with the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury.
Do You Have Ongoing Obligations?
After the initial filing is made, reporting companies are required to submit updated reports within 30 days of when a change occurs to any information reported about the reporting company or its beneficial owners. There is no de minimis exception. For example, each of the following scenarios require an updated report: the reporting company hires a new CEO, a beneficial owner dies, a beneficial owner gets married and changes their name, or the company has a new 25% owner. So, it will be important to think about implementing policies to ensure that you collect and report the information on a timely basis and that you appropriately handle this sensitive information.