Updated 12/11/2023

Enacted into federal law in January of 2021, the Corporate Transparency Act (“CTA”) established information reporting requirements for reporting companies. Reporting companies include (1) corporations, limited liability companies (“LLC’s”) or other entities created through the filing of a document with a state government, and (2) corporations, LLC’s or other entities formed under the law of a foreign country and registered to do business in the United States through the filing of a document with a state government. Effective as of January 1, 2024, reporting companies, including every existing, amended or new corporation, LLC or other entity created by following the incorporation procedures with the secretary of state or similar state entity, and foreign entities registering to do business in a state, will be subject to enhanced reporting requirements under the CTA’s newly adopted Section 6403.

Under Section 6403, reporting companies will be obligated to provide extensive information about two distinct groups of people: (A) uniform beneficial owners (“UBO”) created in or registered to do business in the United States who directly or indirectly exercise substantial control over a company or owns at least twenty-five percent (25%) of its ownership interests; and (B) company applicants, which include individuals who are primarily responsible in filing the formation document that creates a domestic reporting company or registers a foreign reporting company, as well as the individual who is primarily responsible for directing or controlling such filing. Exclusions from being a UBO include: (A) minor children (parents or guardians are required to report); (B) nominees; (C) employees (other than senior officers); (D) future inheritors; and (E) creditors.

Section 6403’s objective is to require companies to disclose UBO information to assist the United States government in its efforts to identify bad actors who use the anonymity provided by various corporate structures to achieve lawless or illicit purposes. This enhanced transparency is at the heart of an effort at reducing lawless and illicit activities, including terrorist financing, money laundering and similar financial activities achieved through the use of shell companies incorporated in the United States. Some states, as well as a number of non-US jurisdictions such as the United Kingdom, have in place or have proposed similar laws requiring enhanced corporate transparency.

Section 6403 will require reporting companies to submit general company information, UBO reporting and company applicant information to the Financial Crimes Enforcement Network (“FinCEN”). More specifically, Section 6403 will require reporting companies to file with FinCEN information including: (A) (i) the company name; (ii) company current address; (iii) state of incorporation/formation; and (iv) employer identification number (“EIN”), as well as (B) (i) the name; (ii) birth date; (iii) personal address; and (iv) government issued photo identification (such as a driver’s license or passport) of every direct or indirect UBO or company applicant of the reporting company. FinCEN has estimated that at least 32.6 million existing companies will be required to make filings in 2024 to comply with Section 6403.

Companies that fit the criteria of a reporting company will have different deadlines to comply with the reporting requirements of Section 6403 depending on the reporting company’s date of formation. Companies formed or registered before January 1, 2024 will have one year from the effective date of the CTA (January 1, 2024) to comply with the reporting requirements. Companies formed or registered on or after January 1, 2024 will have ninety (90) days from the date of their creation or registration to file their initial reports with FinCEN. Failure to meet the applicable deadline could result in the potential civil and criminal penalties described below.

There are potential civil and criminal penalties for individuals who knowingly provide false or fraudulent information in connection with the beneficial ownership report and companies that fail to comply with either the timing or substance of the reporting requirements. Civil fines can accumulate at a rate of $500.00 per day for as long as inaccurate reports remain uncorrected, while criminal penalties include fines of up to $10,000.00 and potential jail time of up to two (2) years for violators.

Despite the worry of an overbroad application of Section 6403 to most existing entities, there are twenty-three (23) exemptions provided. Examples include various regulated entities and their subsidiaries, investment companies, registered investment advisers, pooled investment vehicles and large operating companies. A complete list and description of all twenty-three (23) exempt entities is set forth below.

1. Securities reporting issuer: any issuer of securities that is (A) an issuer of a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (the “SEA”), or (B) required to file supplementary and periodic information under Section 15(d) of the SEA;
2. Governmental authority: any entity that (A) is established under the laws of the United States, an Indian tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States, and (B) exercises governmental authority on behalf of the United States or any such Indian tribe, state, or political subdivision;
3. Bank: any bank, as defined in (A) Section 3 of the Federal Deposit Insurance Act (the “FDIA”), (B) Section 2(a) of the Investment Company Act of 1940 (the “ICA”), or (C) Section 202(a) of the Investment Advisers Act of 1940 (the “IAA”);
4. Credit union: any Federal credit union or State credit union, as those terms are defined in Section 101 of the Federal Credit Union Act (the “FCUA”);
5. Depository institution holding company: any bank holding company as defined in Section 2 of the Bank Holding Company Act of 1956 (the “BHCA”), or any savings and loan holding company as defined in Section 10(a) of the Home Owners' Loan Act (the “HOLA”);
6. Money services business: any money transmitting business registered with FinCEN under 31 U.S.C. 5330, and any money services business registered with FinCEN under 31 CFR 1022.380;
7. Broker or dealer in securities: any broker or dealer, as those terms are defined in Section 3 of the SEA, that is registered under Section 15 of the SEA;
8. Securities exchange or clearing agency: any exchange or clearing agency, as those terms are defined in Section 3 of the SEA, that is registered under Secs. 6 or 17A of the SEA;
9. Other Exchange Act registered entity: any entity other than that described under exemptions 1, 7 or 8 that is registered with the Securities and Exchange Commission (“SEC”) under the SEA;
10. Investment company or investment adviser: any entity that is (A) an investment company as defined in Section 3 of the ICA, or is an investment adviser as defined in Section 202 of the IAA, and (B) registered with the SEC under the ICA or the IAA;
11. Venture capital fund adviser: any investment adviser that (A) is described in Section 203(l) of the IAA, and (B) has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the SEC;
12. Insurance company: any insurance company as defined in Section 2 of the ICA;
13. State-licensed insurance producer: any entity that: (A) is an insurance producer that is authorized by a state and subject to supervision by the insurance commissioner or a similar official or agency of a state, and (B) has an operating presence at a physical premises/office within the United States;
14. Commodity Exchange Act (“CEA”) registered entity: any entity that (A) is a registered entity as defined in Section 1(a) of the CEA, or (B) is (1) a futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor, each as defined in Section 1(a) of the CEA, or a retail foreign exchange dealer as described in Section 2(c)(2)(B) of the CEA and (2) is registered with the Commodity Futures Trading Commission;
15. Accounting firm: any public accounting firm registered in accordance with Section 102 of the Sarbanes-Oxley Act of 2002 (the “SOA”);
16. Public utility: any entity that is a regulated public utility providing telecommunications services, electrical power, natural gas, water or sewer services within the United States;
17. Financial market utility: any financial market utility designated by the Financial Stability Oversight Council under Section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
18. Pooled investment vehicle: any pooled investment vehicle that is operated or advised by a person described under exemptions 3, 4, 7, 10, or 11;
19. Tax-exempt entities: (A) an organization described in Section 501(c) of the Internal Revenue Code of 1986 (the “Code”) and exempt from tax under Section 501(a) of the Code, (B) a political organization, as defined in Section 527(e)(1) of the Code, exempt from tax under Section 527(a) of the Code, or (C) a trust described in paragraph (1) or (2) of Section 4947(a) of the Code;
20. Entity assisting a tax-exempt entity: (A) operates exclusively to provide financial assistance to, or hold governance rights over, a tax-exempt entity, (B) is a United States person, (C) is beneficially owned or controlled exclusively by one or more United States persons that are citizens or lawfully admitted for permanent residence, and (D) receives a majority of its funding or revenue from one or more United States persons that are citizens or lawfully admitted for permanent residence;
21. Large operating companies: any entity that (A) employs more than 20 full-time employees in the United States, (B) brings in over $5,000,000.00 in gross receipts or sales (excluding international revenue sources) and (C) operates from a premises/office physically located in the United States;
22. Subsidiaries of exempt entities; and
23. Inactive entities.

A key issue to consider in connection with enhanced reporting is privacy. The reports filed with FinCEN will not be accessible to the public, are not subject to requests under the Freedom of Information Act and will be stored in a secure and confidential database. However, federal agencies engaged in national security, intelligence, and civil and criminal law enforcement, the Department of the Treasury, and state and local law enforcement agencies in connection with criminal or civil investigations will have access. FinCEN may also disclose such reported information to financial institutions to assist them in adhering to their anti-money laundering compliance requirements.

Another significant issue is this legislation’s effect on merger and acquisition transactions and general corporate law. Prospective acquirers involved in M&A transactions should be diligent in confirming whether their target companies fall under the definition of reporting companies and whether they are in compliance with CTA reporting obligations. Due to the increased reporting requirements the CTA will place on small businesses, such entities are encouraged to consult with an attorney in order to determine whether they fall under the definition of a reporting company and what they must do to comply with the CTA. Due to the CTA’s broadly drafted provisions, it may prove difficult for companies, especially start-ups, to make the required reporting determinations without proper counsel. In addition, operating agreements, subscription agreements and M&A documents will also likely need to be reviewed and revised to require the provision of UBO information, to ensure that such information is properly updated, and to authorize reporting companies to share required information with FinCEN.

If you have questions regarding the foregoing, please feel free to contact David J. Morris (312-224-1229; [email protected]) or the Fox Swibel attorney with whom you regularly work to address these issues.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances.  Under applicable rules of professional conduct, this content may be regarded as attorney advertising.