New Year, New Filings, New Regulatory Burdens and Compliance Costs, Oh My! 

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The Corporate Transparency Act’s Effects on Economic Development Projects.

For new economic development projects, it is common for a company to form a new entity as a subsidiary to undertake the project. This custom is prevalent for businesses headquartered in another country. 

On January 1, 2024, a new federal law called the Corporate Transparency Act (“CTA”) went into effect, making it more cumbersome for companies to do business in the United States. In addition to the burden of the new reporting requirements, failure to comply with the CTA could result in significant monetary and criminal penalties.

What is required by the CTA, and what information must be reported?

The CTA requires business entities to submit certain information to the Financial Crimes Enforcement Network (“FinCEN”). The information that must be reported includes:

• Beneficial ownership information (“BOI”).
• Information about who created or registered the entity to do business in the United States.
• Any changes to previously reported information.

Most entities affected by the CTA seem particularly concerned with the reporting of BOI, which requires the submission of each beneficial owner’s full legal name, date of birth, complete current address, and identifying number from unexpired identification documents (e.g., driver’s license, or in the case of foreign individuals, a passport).  

A “beneficial owner” is any individual (an “individual” being a natural person) who, directly or indirectly, (i) exercises substantial control over the reporting company or (ii) owns or controls at least twenty-five percent of the ownership interests of the reporting company. The term “substantial control” includes individuals serving as senior officers of the company; having authority over the appointment or removal of senior officers or a majority of the company’s board; or having authority to direct, determine, or have substantial influence “over important decisions” made by the company. An “important decision” includes, among other things, major expenditures or investments, the selection or termination of business lines or ventures, or geographic focus, and the entry into or termination of significant contracts. To clarify, companies can have more than one beneficial owner, and to be a beneficial owner, an individual is not required to have an ownership stake in the entity. 

Companies formed after January 1, 2024 must also identify the “company applicant” and provide the same information required for a beneficial owner. A “company applicant” is defined as (i) the individual that directly files the document creating the company; (ii) the individual that first registers a foreign entity to do business in the United States; or (iii) where more than one individual is involved in the filing of the document, the individual that is primarily responsible for directing or controlling the filing of the relevant document.  

Other information that must be disclosed in the company’s report includes the full name of the company, any trade names, its current street address, state or foreign jurisdiction of formation, and its taxpayer identification number. Companies must also report any changes to the information provided in their report within thirty days of such change. For example, where a beneficial owner has a change in address, the information must be reported to FinCEN.

Filing Deadlines

Any company required to file under the CTA that was formed before January 1, 2024 must file its initial beneficial ownership information report on or before January 1, 2025. Companies formed between January 1, 2024 and January 1, 2025 must file initial beneficial ownership reports within ninety days of filing, but companies formed after January 1, 2025 will have only thirty days to file.

Penalties

Failure to comply with the CTA may result in significant civil and criminal penalties, including fines of up to $10,000 and up to two years of imprisonment for willful failure to file beneficial ownership reports.

Steps Toward Compliance

Gather information for filing.

• Take stock of current entities and determine which entities are required to report under the CTA. 

• For the entities that are required to report, review and potentially update operating agreements, bylaws, and/or other corporate documents to help determine who would qualify as a beneficial owner. It may be helpful to conduct interviews with employees of the subsidiaries to ensure you report all beneficial owners.

• Compile the required identifying information from each beneficial owner and all other information required by the CTA.

Implement procedures for future filings.

• Procedures should include processes ensuring timely reporting of any changes required to a beneficial ownership information report. As in an example mentioned above, where a beneficial owner changes their address, the company has 30 days to report such a move.

We hope this general overview of the CTA alerts companies to potential filing requirements and deadlines. However, we recommend careful review of any claimed exceptions and all filing requirements to ensure proper compliance. Should you have any questions regarding the CTA and its potential application, please do not hesitate to contact us with any questions.