By: Robert E. Petrowsky
Private business owners should prepare for compliance with a recently enacted law known as the Corporate Transparency Act (the “CTA”). The CTA will require businesses to report information regarding beneficial ownership to the Financial Crimes Enforcement Network (“FinCEN”) in the near future. The purpose of the CTA is to create an ownership database and streamline criminal investigations to minimize money laundering and other financial crimes. While the regulations are not finalized yet, business owners should start preparing for compliance in advance.
The CTA applies to “reporting companies,” which are essentially all private entities, other than a handful of exemptions. Any type of business entity can be a reporting company, including corporations, limited liability companies, partnerships, joint ventures, and business trusts. While there are exceptions to the definition of reporting company, the general rule is that almost every small business will qualify as a reporting company. The companies that are exempt tend to be publicly traded or heavily regulated in such a way that some regulatory agency already has the ownership information. These include companies such as banks, certain insurance companies, companies that exercise government authority, and investment companies or investment advisors.
Those businesses that fall within the CTA’s definition of a “reporting company” will be required to provide personal information for any beneficial owner and the organizer – the person who set up the company. A “beneficial owner” is anyone who owns more than 25% of the outstanding equity of the company or who has substantial control. While providing beneficial ownership information is straightforward, finding the information for the person who set up the company may be very difficult, especially if the company has been bought and sold or has gone through multiple generations since it was formed.
The information that the CTA will likely require will include the name, date of birth, address, and identification number (most likely the driver’s license number) for each beneficial owner and organizer. The report will also include the company’s name, alternative names and d/b/a names, business address, jurisdiction of formation or registration, and its unique identification number, such as an EIN.
If any portion of a reporting company is owned by a minor child, then the child’s parent or legal guardian will need to provide their personal information in lieu of providing the information for the minor child. Once the child reaches the age of 18, the report will need to be amended to list the child rather than the parent or legal guardian.
There are two compliance dates depending on when the company was created. If created after the regulations are issued, the report must be filed within 14 days of forming the company. For existing companies, the reports must be filed no later than two years after the rules are published. This may seem like a long time, but there may be a considerable amount of work for certain older companies to determine who to list as an organizer.
If any information changes on a report, including an exempt company becoming a reporting company, an updated report must be filed within 30 days of any such change. This is important to keep in mind if your company or its owners have any desire to sell any ownership in the company in the future. The requirement to report changes also applies if a beneficial owner dies. For some companies, this might mean that the entire analysis of who is a beneficial owner changes, so it is important to address the need to file an updated report early.
If a business fails to comply with these rules, civil, and potentially a criminal, penalties may be imposed. These penalties could be as high as $500 per day for as long as a violation continues.
If you currently own or manage a company, you should first determine whether your company is a “reporting company” under the CTA, and if so, you should begin gathering the required information as soon as possible. For very small and newer companies, the information is likely readily available. However, older companies, entities that may have many owners, or businesses with an unknown history should start gathering the required information early so that such companies are not pushing up against the compliance deadline. Reach out to your attorney with any questions regarding the CTA and for assistance on how to comply with these impending regulations.
Robert Petrowsky is an associate in the estate planning and transactional practice groups of Carnahan Evans PC. He can be reached at email@example.com.