[Greenville, SC, December 28, 2023] – Beginning January 1, 2024, companies around the United States, and even foreign companies registered in the United States, must conform with the reporting requirements under the Corporate Transparency Act (CTA) promulgated by the Financial Crimes Enforcement Network (FinCEN). Previously, registering and forming a company was largely a State regulatory function, with the owners or future owners of businesses filing formation documents with the Secretary of State in which the company would be domiciled. Beginning in 2024, existing business owners and individuals forming new businesses must meet federal reporting requirements unless exempt. Before diving into the reporting requirements and exemptions, if you currently have an ownership interest in an entity that was created by filing forms with a Secretary of State in the United States (e.g. corporation, limited liability company, or limited partnership among others), you may be subject to these federal reporting requirements. For existing owners of entities formed with a Secretary of State, unless exempt, you must file a report with FinCEN by January 1, 2025. Any individuals forming a new entity on or after January 1, 2024 with a Secretary of State must file a report with FinCEN within thirty (30) days of formation of that new entity. While there are exemptions, all small business owners need to be aware of these reporting requirements to ensure compliance. To begin, the Corporate Transparency Act was made to combat financial crimes through domestic and foreign entities registered in the United States with concentration on money laundering and terrorist financing. Failing to comply with these reporting requirements can result in significant fines and, in some cases, prison sentences. Companies that are required to submit reports to FinCEN include corporations, limited liability companies, and similar entities that were formed by filing formation documents with Secretaries of State. Importantly, sole proprietorships, general partnerships, and sole proprietors or general partnerships registering a trade name such as a “d/b/a” fall outside the scope of the CTA.
There are currently 23 types of entities that are exempt from these reporting requirements, which includes banks, credit unions, and insurance companies. However, the exemption that will most likely provide exemption from the CTA reporting requirements for transportation companies are “large operating companies.” In order to qualify as a “large operating company” the company must have: (1) 20 full-time employees (definition of full-time employee is the same definition as used by the Internal Revenue Service); (2) have an operating presence in a physical office within the United States; and (3) have filed a U.S. federal income tax return for the previous year demonstrating more than $5 million in gross receipts or sales from U.S. Sources. Importantly, the CTA is a continuous reporting requirement, so if the company originally met this exemption and no longer meets the exemption, then the company must file the FinCEN report within 30 days of no longer being exempt. Additionally, if you file a report and information filed in the initial report changes, you will have 30 days from the change to file an updated report.
Information that must be reported to FinCEN includes the full legal name of the entity; any trade name used by the entity, current street address of the principal place of business; the jurisdiction in which the entity was formed; if a foreign company the U.S. jurisdiction where the company first registered; IRS Taxpayer Identification Number (EIN); and a list of the beneficial owners of the company. For new entities that are formed with a Secretary of State on or after January 1, 2024, the reporting company must list its “Company Applicant.” The “Company Applicant” is the individual who filed the formation documents with the Secretary of State or the individual who directed or controlled the filing of the formation documents with the Secretary of State. The list of beneficial owners is the only requirement that needs further explanation.
The CTA has defined a “Beneficial Owner” as any individual who meets at least one of two criteria: (1) exercising substantial control over the reporting company; or (2) owning or controlling at least 25% of the ownership interest of the reporting company. If an individual meets either of those criteria, they must be listed in the report to FinCEN. Under the CTA “substantial control” is defined as an individual that: (1) serves as a senior officer of the reporting company (for example, President, CEO, COO, CFO, or General Counsel); (2) maintains authority over the appointment or removal of a senior officer or a majority of the board of directors or managers for a limited liability company; (3) directs or has substantial influence over important decisions made by the reporting company. Important decisions of the reporting company can include the nature of the business, reorganization, merger, transfer of principal assets, major expenditures, termination of business lines, compensation for senior officers, entry into of significant contracts, or amendments to a company’s governance documents. This can include control over an intermediary entity that exercises substantial control over the reporting company. Next, for the 25% ownership interest, an “ownership interest” includes: any equity, stock, voting trust, capital or profit interest, a convertible instrument, put, call, option, or privilege of buying or selling an equity interest. The above requirements are not an exhaustive list but are only provided as examples of considerations for determining beneficial owners. Need for further review and interpretation will be required before determining whether an individual is in fact a beneficial owner.
Violations of these reporting requirements can apply to both entities and individuals. If an individual willfully reports false information or willfully fails to file a report with FinCEN, then that person could face individual liability. Additionally, if an individual is in substantial control of a reporting company that willfully files false information or willfully fails to report, that person may face individual liability.
It is important to note that access to the information filed in these reports will be restricted to U.S. Government Agencies engaged in national security, intelligence and law enforcement activity (both civil and criminal); Department of Treasury officials and employees in their course of official duties; State and Local law enforcement agencies in connection with civil or criminal investigations; financial institutions but only to assist with anti-money laundering compliance; and foreign agencies that request information through a U.S. federal agency and with which the United States has a treaty. Importantly, FinCEN has stated that the information reported will not be subject to FOIA requests. All reports will be filed online through FinCEN and at this time, they will not be accepting paper reports.
Although there are exemptions to these reporting requirements, it is important that all companies become familiar with this new form of compliance. This is a large deviation from previous requirements on entities that only needed to provide information to Secretaries of State in order to form new companies. Although entities remain creatures of State statute, these reporting requirements provide a federal element that will need to be addressed when forming new companies and for existing business owners. The lawyers at Moseley Marcinak Law Group are ready to help you with this compliance and can provide review of your operations in order to determine whether any exemptions exist for your business.
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Attorneys at Moseley Marcinak Law Group LLP have decades of experience representing trucking companies, brokers, logistics companies and insurers in disputes including freight claims, commercial transportation accidents, federal and state safety regulations, and insurance coverage disputes. For more information about the firm go to www.momarlaw.com.