Corporate Transparency Act Update

by Hunter Taylor

December 13, 2023

We are writing to remind you about some regulatory changes which are going into effect in the coming weeks which may impact your business. As you may have heard or seen in prior updates, The Corporate Transparency Act (CTA) has been enacted and it is crucial for all business owners to be aware of its applicability and considerations.

Overview of the Corporate Transparency Act

The Corporate Transparency Act, passed as part of the National Defense Authorization Act for Fiscal Year 2021, aims to enhance corporate transparency and combat illicit activities such as money laundering and “terrorism financing.” In short, the CTA requires certain businesses to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) in an effort to hedge against those illicit activities.

Applicability

The CTA applies to “reporting companies”, which include corporations, limited liability companies (LLCs), and similar entities that do not qualify for one of the available exemptions. If your business falls within the scope of a reporting company, you will need to comply with the disclosure requirements outlined in the Act.

Key Considerations

Reporting companies are required to submit information about their beneficial owners to FinCEN. Beneficial owners are individuals who exercise “substantial control” over a reporting company, or directly or indirectly own or control 25% or more of the ownership interests in the company. 

Compliance Deadlines

It is important to be aware of the compliance deadlines. Entities formed after January 1, 2024 must comply at the time of formation, while existing entities have a grace period to comply which is currently set at one (1) year. This is a key consideration in corporate governance planning for the next year, and may favor filings being made before January 1, 2024 for certain structures.

Information to be Disclosed

The information to be disclosed includes the names, dates of birth, addresses, and unique identification numbers of the beneficial owners; each of which must be submitted using FinCEN’s online portal (which, as of today, has not yet been released for access). There are significant penalties for lack of disclosure, so it is essential to take proactive steps to meet these new regulatory requirements.

Our corporate law team is available to assist you in understanding and complying with the Corporate Transparency Act. Again, if you are considering forming a new entity in the near future, you may want to do so before the turn of the new year. If you have any questions regarding the CTA and its new regulatory requirements, please do not hesitate to reach out to our office. 

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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.

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.