ComplianceOctober 11, 2022

CT expert insights: Understanding the Corporate Transparency Act (CTA) reporting requirements, with Sandra Feldman

FinCEN has issued the final rule implementing the reporting requirements of the Corporate Transparency Act (CTA). In an earlier edition of Expert Insights, we discussed the CTA and that it will require certain companies to file a report with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) containing personal identifying information about beneficial owners and applicants. In this podcast, CT’s Corporate Publications Attorney, Sandra Feldman, shares the newly released reporting details that small businesses must abide by to comply.

In Sandra’s comprehensive update, she reviews important details contained in the rule, including when reporting will begin, which is January 1, 2024. She also discusses what kind of entities have to file a report and what companies are exempt, the deadlines for filing reports for companies in existence now and those that will be created after January 1, 2024, what information has to be reported, and more. Tune in to learn the important facts about this significant update.

For more information, read the related article: FinCEN issues final rule implementing the reporting requirements of the Corporate Transparency Act

Transcript

Greg Corombos: Hi, I'm Greg Corombos, our guest in this edition of expert Insights is Sandra Feldman, publications attorney at CT Corporation, Sandra will be providing an update on a new reporting requirement for small businesses imposed by the corporate Transparency Act. Earlier this year, Sandra and I talked about the change in broad terms. But at that time, the government had not provided many specifics. Now we have some of those specifics. And we're going to share them with you and Sandra, as always, thanks so much for being with us.

Sandra Feldman: Thank you, Greg. And I'm happy to say that I can finally share some of the details we've been waiting for, about when reporting will begin, what has to be filed, by who, and when, under this new reporting requirement imposed by the corporate Transparency Act. And I'm going to share some of those details with the listeners today.

GC: Well, let's get into it. But before we do that, can you remind us what the Corporate Transparency Act is?

SF: That's probably a good idea. People may have forgotten about the Corporate Transparency Act because it was enacted by Congress way back in January 2021. And the main purpose of the Corporate Transparency Act is to protect the United States financial system from being used for money laundering and other illicit activities. And it seems that the people who are engaged in money laundering and other illicit activities don't do it in their own name. They do it through LLCs. And corporations, and other similar entities. And law enforcement has trouble finding out who were the individuals behind these entities. Because when they're created in the United States, or in the case of entities created in foreign countries, they register to do business in the United States and they aren't required to provide the names of the individuals who ultimately own or control the entity.

GC: So one of the purposes of the Corporate Transparency Act then is to require them to provide those names, is that right?

SF: That is exactly right. The Corporate Transparency Act requires entities to file a beneficial ownership information report with the Department of Treasury's Financial Crimes Enforcement Network, an agency better known as FinCEN. And since then, we'll keep that information in a private database, where access will be limited mainly to government law enforcement agencies, although financial institutions can have access with a company's consent. And in the Corporate Transparency Act, Congress directs FinCEN to provide the details about how this reporting will work through its rulemaking. And on September 29 of this year, FinCEN issued its first final rule that among other things, prescribes who has to file the report, what information it has to contain, when the initial report has to be filed and when the report has to be updated. And I'll give you some of the highlights from this final rule.

GC: Okay, well, let's start with which companies will have to file a beneficial ownership information report.

SF: The final rule describes two types of reporting companies, a domestic reporting company, and a foreign reporting company. A domestic reporting company is a corporation, LLC or other entity that is created by the filing of a document with the Secretary of State or similar office. And a foreign reporting company is a corporation, LLC or other entity created in a foreign country that is registered to do business in the United States by filing a document with the Secretary of State or similar office.

GC: Sandra, do we know what other entities besides corporations and LLCs are included here?

SF: Well, the final rule does not define other entity types. However, FinCEN and its comments accompanying the final rule said that it expects other entity types to include limited liability partnerships, limited liability, limited partnerships, business trusts, and most limited partnerships.

GC: Does every LLC, corporation or other entity have to file a report? Or are there some exemptions allowed here?

SF: The final rule has 23 exemptions. And a company that qualifies for an exemption is not a reporting company and does not have to file a beneficial ownership information report.

GC: and what kind of companies are exempt?

SF: I won't list all 23. I'll spare you that. But most of the companies that are already subject to federal estate regulations under which their beneficial ownership information is already known. And this would include, for example, companies that file reports, the Securities and Exchange Commission, banks, insurance companies, accounting firms, and tax-exempt entities. There's also an exemption that I think many of the listeners will be particularly interested in for what is called a large operating company.

GC: Well, let's define that. What is a large operating company?

SF: It's a company that employs more than 20 full-time employees in the United States, and has an operating presence at a physical office in the United States. And that's filed a federal tax or information return for the previous year, showing it had more than $5 million dollars in gross receipts or sales. So Greg, when you take into account all of the exemptions, this is really a reporting requirement imposed on small businesses, which is no small thing because most businesses in the United States are small businesses and FinCEN estimates that they will be 32.6 million reporting companies when the rule goes into effect, with 5 million being added each year. So this is a big deal.

GC: Alright, so let's move on to some other issues here. When will reporting companies have to file their initial beneficial ownership information report,

SF: The Corporate Transparency Act said that reporting would begin upon the effective date of FinCEN's Final Rule, implementing the reporting requirement, which was one reason why we were waiting so anxiously for FinCEN to finally issue that rule. But now they have and we know that the effective date of the rule, and therefore the date reporting begins is January 1, 2024. And all domestic and foreign reporting companies created or registered on or after January 1, 2024, have to file their initial report within 30 calendar days of receiving notice of their creation or registration.

GC: Well, those companies created or registered after that, or on January 1, 2024. I'm not sure how many will do it on New Year's Day. But what about the reporting companies in existence before that date January 1, 2024

SF: All domestic and foreign reporting companies created or registered before January 1, 2024. So that would include all companies in existence now having to file their initial report no later than January 1, 2025.

GC: So they get an extra year? What information has to be provided in the initial report,

SF: The information is required about the reporting company, its beneficial owners, and in the case of reporting companies created or registered on or after January 1, 2024, information about their company applicant.

GC: What information about the reporting company is required?

SF: Name, any trade or DBA names? The street address of its principal place of business, its jurisdiction of formation, the jurisdiction where first registered to do business in the case of a foreign company, and its IRS Taxpayer Identification Number,

GC: What about for beneficial owner Sandra, and when required for company applicant information?

SF: The information to be reported is the individual's full legal name, date of birth, current address, a unique identifying number from either an unexpired passport, state identification document, or driver's license, and an image of that document. And again, company applicant information is not required for reporting a company that's created or registered before January 1, 2024.

GC: Changes happen all the time, though. So what happens if there is a change in the information that was reported?

SF: If there's a change in the information previously reported, concerning the reporting company or its beneficial owners, the reporting company must file an updated report within 30 calendar days after the change occurs. Reporting companies do not have to update information on company applicants. Also, if any of the information was inaccurate, when the report was filed, the reporting company has to file a corrected report within 30 calendar days after becoming aware of the inaccuracy.

GC: Sandra, I just want to circle back to a point that we've raised a couple of times, we referred to it in passing and I know we've defined this in previous podcasts. But just so everyone's clear, who is considered to be a beneficial owner,

SF: A beneficial owner is defined as any individual who directly or indirectly either exercises substantial control over the reporting company, or who owns or controls at least 25% of its ownership interests. And an individual exercising substantial control would include senior officers, the people who can appoint and remove senior officers. And really anyone who directs, determines or has substantial influence over important decisions made by the company.

GC: And another term we threw out there a minute ago was company applicant. So who is a company applicant?

SF: That's the individual who directly files a document that creates a domestic reporting company, or first registers a foreign reporting company, and the individual who is mainly responsible for directing or controlling that filing if more than one individual is involved in filing the document,

GC: Sandra, are there any other filings that have to be made, or that can be made with FinCEN that are described in the final rule that we should know about now?

SF: Well, there is one. Now this isn't required, but beneficial owners, company applicants, and reporting companies can file an application with FinCEN for what's called a FinCEN identifier. And that's a unique number that's issued for that individual or company. And the application filed by the beneficial owner or the company applicant would provide all of the personal information that otherwise would have to be reported in the beneficial ownership information report. And that individual can then provide the FinCEN identifier to each reporting company in which he or she is a beneficial owner applicant, rather than giving each one that personal information and that ID. The file could then be set forth in the beneficial ownership information report. And if any of the information provided in the application for FinCEN identify changes, with an accurate one filed and updated or corrected application would have to be filed within 30 days.

GC: Well, you've given us a ton of breaking news-type information here, given the fact that the government has just announced some of these specifics a few days ago. Any final comments or anything else we should know about this reporting requirement?

SF: I'd like to point out that FinCENs work is not done, they still have to issue two more rules, one on who will have access to this database, and how they'll make sure it's secure. And another revising the customer due diligence rule, which mainly affects financial institutions. They also have to draft the reporting forms and publish them for public comment. And FinCEN has said that they will be providing more guidance before reporting is set to begin. And that's really important because there are still quite a few issues that really aren't that clear. And we have CT Corporation closely monitoring these developments. And when we learn anything that we think will be important to our customers, or to the small business community at large, we will certainly share that information

GC: And we'll be glad to have you back when it does come out. Sandra always terrific insights. Thank you so much for being here. Have a great day. Thank you. Sandra Feldman, publications attorney at CT Corporation. I'm Greg Corombus reporting for Expert Insights. For more information on this topic, please call CT at 844-787-7782

Sandra Feldman
Publications Attorney
Sandra (Sandy) Feldman has been with CT Corporation since 1985 and has been the Publications Attorney since 1988. Sandy stays on top of the most pressing and pertinent business entity law issues that impact CT customers of all sizes and segments.
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