Federal Government Issues Procedures for “Corporate Transparency”
by Hunter Taylor
March 6, 2023
In an effort to hedge against ill-dealings and potential foreign security threats in American business entities, Congress enacted the Corporate Transparency Act (“CTA”) in 2021 with the intent of increasing the availability of information regarding corporate ownership. Recently, efforts have been made by the Financial Crimes Enforcement Network (“FinCEN”) to establish enforcement mechanisms which serve to give the CTA “teeth.” To this end, FinCEN recently issued a Final Ruling, as further supplemented, which outlines enforcement procedures and disclosure requirements associated with the CTA. This ruling, in short, requires certain non-exempt entities to timely file reports identifying and providing information about their owners and business affairs above and beyond what has ever been previously required.
The ownership disclosure requirements set forth in the CTA and the Final Ruling will change the way that business owners plan for the future, especially with regard to non-exempt complex and multi-level corporate structures which are involved in more than one industry. For this reason, each business owner, manager, principal, and officer needs to be aware of the potential implications which are associated with these lingering disclosure requirements and plan accordingly.
Disclosure Rules Will Affect Your Business
The basic consequence to each business owner which does not qualify for an exemption (each, a “Reporting Company”) involves disclosure of its ownership to a government authority, itemized down to what the law defines as a “Beneficial Owner”. This disclosure will require (i) the entities full name, (ii) any trade or DBA name, (iii) the entity’s street address, (iv) State or country (if foreign) of formation, and (v) the entities Taxpayer Identification Number (“TIN”). Additionally, each “Beneficial Owner” of each Reporting Company will be required to disclose their (i) legal name, (ii) date of birth, (iii) current address, (iv) a unique identification number from a passport, state driver’s license, or other government-issued identification document, and (v) an image of that document.
The Final Rule defines a Beneficial Owner as any individual who, directly or indirectly, either (i) exercises “substantial control” over a Reporting Company, or (ii) owns or controls at least 25% of the ownership interests of a Reporting Company. The Final Rule sets forth that an individual exercises “substantial control” if they serve as a senior officer, have authority over appointment or removal of officers or board members, or have “substantial influence” over important matters of the Reporting Company (among others).
Applicability
Unless an entity qualifies for an exemption, any entity that is a corporation, limited liability partnership, or other entity registered with the Texas Secretary of State will be required to file a Beneficial Ownership Information Report. To the extent that an entity is either (i) publicly traded, or (ii) is a “large operating company” with more than 20 employees and gross receipts in excess of $5 million, an exemption may be available. However, unless an entity is able to qualify for such an exemption, disclosure of its “Beneficial Owners” will be required.
Timelines
All new non-exempt entities formed on or after January 1, 2024, will be required to file a report with FinCEN detailing its ownership and other required business-related information within thirty (30) days of formation. All applicable entities formed before this date will be required to file a report with the same or similar information on or before January 1, 2025.
Access to Information
The CTA authorizes FinCEN to maintain a database of the information disclosed in Beneficial Ownership Information Reports, and to disclose this information to US Government Agencies, certain foreign agencies and authorized persons, and financial institutions using the information for KYC purposes, among others.
Noncompliance
While the penalties actually enforced by FinCEN are unclear pending the CTA’s implementation, the law provides criminal penalties including fines of up to $10,000 or up to two years in prison when a business entity willfully fails to report complete or updated information or willfully provides false or fraudulent information. Accordingly, the timely filing of accurate reports is paramount to continued compliance.
Key Takeaways
Beginning on January 1, 2024, a vast majority of business entities will be required to disclose information regarding their ownership to the government. To discuss how these compliance and disclosure laws could impact your business, please consult with one of our attorneys at (972) 392-8900.
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This update should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Further, this update shall not create a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult an attorney regarding the contents hereof.