New Federal Reporting Rules for Businesses and Other Legal Entities

As of Jan. 1, 2024, wide-reaching new regulations require many businesses and corporate entities created or registered to do business in the United States to report information regarding their owners, officers and other controlling persons. The obligations stem from the recently enacted Corporate Transparency Act and regulations issued by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department. In an effort to combat money laundering, terrorist financing and other illicit activity, FinCEN will maintain a database accessible to law enforcement agencies with the beneficial ownership information of all non-exempt entities.

These regulations create new and ongoing reporting obligations for a large portion of entities operating in the United States. Businesses and other legal entities will need to understand whether they must report under the new regime and what information they may have to gather.

This article includes recommendations on best practices for achieving compliance with this new reporting regime, as well as a brief overview of the rules.

Who Is Required To Report?

These legal entities are “reporting companies” (absent an exemption) that must submit beneficial ownership information to FinCEN:

• Corporations, limited liability companies, limited liability partnerships or other entities created by the filing of a document with a secretary of state or any similar office under the laws of a state or Native American tribe; and
• Entities created under the laws of another country registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of any state or Native American tribe.

Are There Any Exceptions?

The final rules include 23 exemptions from the new reporting regime. If an entity qualifies for one of these exemptions, it is not a “reporting company” and need not file a report with FinCEN for so long as the exemption applies. Notable exemptions include the following:

• Public companies
• Banks and credit unions
• Registered investment companies or investment advisers
• Registered venture capital fund advisers
• Public utilities
• Pooled investment vehicles operated by a bank, credit union, broker, registered investment company or adviser, or registered venture capital fund adviser
• Tax-exempt entities
• Inactive entities
• Large operating companies — meaning an entity that: (a) employs more than 20 full-time employees in the United States, (b) has an operating presence at a physical office within the United States, and (c) filed a federal income tax return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales (excluding sales from sources outside the United States)
• Subsidiaries whose ownership interests are controlled or wholly owned, directly or indirectly, by certain specified exempt entities (including those listed above, except for pooled investment vehicles)

A complete list of the exemptions appears in the final rule. In addition, FinCEN has published a compliance guide that includes a questionnaire to assist in determining whether an exemption is available.

What Information Must Be Reported to FinCEN?

Reports must disclose information regarding the reporting company (defined above under “Who is Required to Report”), the individual beneficial owners of the reporting company, and for reporting companies formed or registered in the United States on or after Jan. 1, 2024, the individual(s) who acted as the “company applicant” of the reporting company.  

A “beneficial owner” is any individual who, directly or indirectly, exercises substantial control over the reporting company or owns or controls at least 25% of its ownership interests. The rule defines “substantial control” to include certain specified senior officers of an entity, individuals who have authority over the appointment or removal of any those officers or a majority of the board of directors (or similar body), and individuals who have substantial influence over important decisions made by the reporting company. The rules provide color on what constitutes an “important decision,” which include decisions regarding the company’s business, finances or structure.

The rules also include a catch-all category, deeming any individual with any other form of substantial control over the reporting company to be a beneficial owner.

In general, beneficial ownership reports are designed to capture the individuals who are beneficial owners — requiring companies to look through intermediate entities in a corporate chain to the ultimate beneficial owners. The exception to this rule is that a reporting company may elect to omit the names of individuals who own or control a reporting company exclusively through one or more entities exempt from the definition of “reporting company” (see above for some of those exemptions). In that scenario, the reporting company may list the name of such exempt entities instead of the individuals who beneficially own the reporting company through such exempt entities.  

A “company applicant” is defined as any individual who directly files the documentation creating the entity or registers a foreign entity to do business in the United States and any individual who directed or controlled such filing (up to two total individuals). Reporting companies formed before Jan. 1, 2024, need not report information regarding their company applicants.

What information about a reporting company must be reported? Each reporting company must report its:

• full legal name;
• any trade names or “doing business as” names;
• complete current address for U.S. entities and primary U.S. address for foreign entities registered in the United States;
• state or foreign jurisdiction of formation; and
• IRS Tax Identification Number including an Employer Identification Number, or if not available, the tax identification number issued by a foreign jurisdiction.

What information about a beneficial owner or company applicant must be reported? Each beneficial owner and company applicant must report his or her:

• full legal name;
• date of birth;
• complete residential street address (except for company applicants who form or register a company in the course of their business — such individuals may report the business street address);
• a unique identifying number from, and the issuing jurisdiction of, one of the following non-expired documents: a U.S. passport; a state, local or tribal ID card; a state driver’s license; or foreign passport (if such individual does not have any of the approved U.S. documents); and
• an image of such government-issued photo ID.

Individuals and reporting companies may obtain a FinCEN Identifier number by submitting the above information directly to FinCEN, and may use a FinCEN ID in place of providing such information to a reporting company. Individuals and reporting companies who have obtained FinCEN IDs must update or correct any information submitted in applying for the FinCEN ID within 30 days of a change in reported information or learning of an inaccuracy.

When Must a Reporting Company File a Report?

Any reporting company created or registered before Jan. 1, 2024, must file an initial report with FinCEN by Jan. 1, 2025. A domestic reporting company created or registered during calendar year 2024 must file an initial report within 90 days of the date it receives actual or public notice of its creation, whichever is earlier. Any entity that becomes a foreign reporting company during calendar year 2024 must file an initial report within 90 days of receiving actual or public notice of being registered to do business in a U.S. jurisdiction. After calendar year 2024, the 90-day period is reduced to 30 days. All reports must be filed electronically through an online database to be administered by FinCEN.

Must Filed Reports be Kept Up-to-Date?

Yes. It is the responsibility of each reporting company to file an updated report within 30 days of any change to the information filed in its previous report, including, among other events:

• Any change in the beneficial owners, such as a new senior officer or a transfer of equity resulting in a change of individuals with at least a 25% ownership in the reporting company;
• Any change in a beneficial owner’s name, address or unique ID number; and
• Any change in the reporting company’s name, trade name or principal address.

Each reporting company is also responsible for ensuring the accuracy of the information filed in its report and must submit a corrected report within 30 days of the date it learns of any inaccuracies in a previously submitted report.

What are the Penalties for Noncompliance?

Noncompliance with the CTA reporting requirements can result in harsh penalties, both civil and criminal, including fines of up to $500 per day (up to $10,000) and imprisonment. Senior officers of an entity that fails to file a required report may be held accountable for that failure. In addition, an individual may be subject to civil and/or criminal penalties for willfully causing a company not to file a required report (such as by refusing to provide required information) or providing incomplete or false information.  

Who May Access the FinCEN Database of Beneficial Ownership Reports?

The information reported to FinCEN under the CTA will not be publicly available, and will be accessible only to authorized government agencies and, with permission, financial institutions, in each case only for purposes authorized by law.

Best Practices to Begin Now

The CTA creates reporting obligations for a vast group of entities not previously subject to similar obligations. Because the new rules require ongoing reporting (as opposed to, for example, annual reports filed with a secretary of state), compliance with the CTA will be a new work stream for many businesses and entities. To begin your compliance programs, consider these steps:

Determine applicability. The first step is to determine if your existing business is subject to the CTA reporting requirements or if it qualifies for an exemption. Every entity that meets the definition of a reporting company must either provide a report or have a valid exemption. Thus, you must examine each entity in a corporate chain to determine whether it has reporting obligations under this regime.

Identify beneficial owners and consider asking them to obtain FinCEN IDs. If you have a reporting company, you must identify all beneficial owners and collect their required personal information. For more complex corporate structures, creating a centralized repository or register to maintain accurate and up-to-date information about your beneficial owners may be helpful. This register should be easily accessible and regularly updated to reflect any changes in ownership or control.

You may also wish to ask that your beneficial owners obtain FinCEN IDs, as this may reduce the need for you to gather personally identifiable information about the beneficial owners and would allow the beneficial owners to update their own information (for example, a change in a beneficial owner’s residential address) without the company having to submit a new report to FinCEN. Note that individuals who have obtained FinCEN IDs must update or correct any information submitted in applying for the FinCEN ID within 30 days of a change in reported information or learning of an inaccuracy.

Develop a compliance program. Implement a comprehensive compliance program to ensure ongoing adherence to the CTA’s requirements. This program should outline policies and procedures for identifying and verifying beneficial owners, maintaining the beneficial ownership register, reporting beneficial ownership information to FinCEN and safeguarding the collected personal information. Once established, these policies should be periodically reviewed and updated to reflect any changes in FinCEN regulations and guidance. There are also third-party service providers who have developed compliance programs that may assist companies in their CTA reporting obligations.

Mandate reporting obligations on beneficial owners. If your business might be a reporting company, consider updating the company’s governing documents to require beneficial owners to provide the information required under FinCEN regulations and to indemnify the company in connection therewith. Similarly, consider including such provisions in the governing documents of any new entities you form.

Keep your information safe. The CTA reporting requirements have spurred fraudulent attempts to solicit personal information. Such fraudulent attempts may be titled “Important Compliance Notice” and/or ask individuals to click on a URL or scan a QR code. FinCEN does not send unsolicited requests for information.

Stay informed. FinCEN continues to provide guidance regarding the new rules. Businesses should expect clarifications and updates from FinCEN as more companies begin their compliance programs.

Seek professional guidance. We encourage you to consult with legal counsel for guidance on complying with this new reporting regime. Attorneys at Robinson Bradshaw can assist in determining if your business qualifies as a reporting company, identifying beneficial owners, and designing and implementing CTA compliance programs.