Commencing on January 1, 2024, the provisions of the Corporate Transparency Act (“CTA”) will go into effect. Broadly, the CTA will require many business entities (each, a “Reporting Company”) to report to the United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCen”) detailed information regarding the beneficial owners of such entities. Reporting Companies also will be required to report any changes to the beneficial owners. The purpose of the CTA is to prevent money-laundering, terrorism financing, and other illicit activities.
Reporting Companies are corporations, limited liability companies, and similar entities that have been created in the US by filing a document (e.g., Articles of Incorporation) with a Secretary of State or similar office under the laws of a US State or created under the laws of a foreign country and registered to do business in the US by filing a document with a Secretary of State or similar office under the laws of a US State. Certain entities, however, will be exempt from the reporting requirements under the CTA. Exempt entities include, but are not limited to, certain large operating companies, public companies, banks, and entities that are owned or controlled, directly or indirectly, by an exempt entity. In order for a public company to qualify for an exemption, the securities of such company must be registered under Section 12 of the US Securities Exchange Act of 1934. Accordingly, companies whose shares are publicly traded only on a non-US stock exchange apparently would not qualify for the exemption.
Under the CTA, a beneficial owner is an individual who, directly or indirectly, owns or controls 25% or more of a Reporting Company. Beneficial ownership reporting will go up the chain of ownership, subject to certain exemptions and limitations. Beneficial owners also include individuals who exercise substantial control over a Reporting Company, which includes senior officers and possibly certain directors.
Entities that existed prior to January 1, 2024 will have until January 1, 2025 to submit their initial beneficial ownership reports to FinCen. Reporting Companies created or registered in 2024 will have 90 days from the date of receiving actual or public notice of their creation or registration becoming effective to file their initial reports, and Reporting Companies created or registered on or after January 1, 2025 will have 30 days to file their initial reports with FinCen. Changes to beneficial ownership must be reported within 30 days of the change.
Willful failure to file a beneficial ownership report or willfully providing false or fraudulent information can result in severe penalties, which include a fine of not more than $500 for each day of noncompliance up to $10,000 and imprisonment for up to 2 years. Officers, directors, and other employees should beware that liability for non-compliance with the CTA may be attributed to them. Therefore, it is important for every Reporting Company to adopt policies and procedures that ensure compliance with the CTA.
For assistance in determining whether your entity is subject to CTA registration, is entitled to an exemption, or for any other CTA related inquiries, please contact any of the following LimNexus attorneys:
- Paul Kim, Partner
- David Nealy, Associate
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