Corporate Transparency Act

Introduction

The Corporate Transparency Act (“CTA”) went into effect on January 1, 2024. The goal of the Corporate Transparency Act is to combat the practice of using an entity as a facade for illegal activities. As a result, most companies will now be required to disclose certain information to the US Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) in a beneficial ownership interests report (“BOI report”).

Reporting Companies

The disclosure requirement applies to any reporting company. A reporting company is a corporation, a limited liability company, or any other entity formed by filing a document with the applicable state agency (i.e., the Virginia State Corporation Commission). If the company does not meet an exemption, it must comply with the disclosure requirement.

Exemptions

There are 23 listed exemptions to the disclosure requirement. Common exemptions include public companies, SEC-registered investment companies, insurance companies, tax-exempt entities, or a large operating company (defined as a company employing at least 20 full time employees that reported at least $5,000,000 in gross receipts or sales in the previous year’s tax return). If the company meets an exemption, it does not need to comply with the disclosure requirement. Unfortunately, many closely-held limited liability companies and corporations will need to file and keep current their BOI report to FinCEN.

Compliance Requirements

Non-exempt companies must disclose the beneficial owners of the company and may also need to report the company’s applicants. The beneficial owners of the company include anyone with substantial control in the company (such as the Manager of an LLC) or anyone who controls at least 25% of the ownership interests of the company. “Applicant” means the person who actually filed the document to form the company (i.e., Articles of Organization for an LLC, Articles of Incorporation for a corporation) and the person who directed the form to be filed.

The information required to be filed with FinCEN includes: (i) the company’s legal name, principal place of business, and Taxpayer Identification number; (ii) each beneficial owner’s full legal name, date of birth, residential address, and an image of a standard form of identification; and (iii) for each entity formed after January 1, 2024, the Applicant’s full legal name, date of birth, address, and an image of a standard form of identification. The disclosed information will be stored on a secure, non-public database. Federal, state, and local officials may submit a request to access the information. Financial institutions will also have access to the information with the company’s consent.

The best practice is to file the CTA requirements at the company’s formation, along with all the other organizational documents (Articles of Organization, Operating Agreement, EIN, BOI report). The information will also need to be updated to reflect any changes in beneficial ownership interests within 30 days of the change. This requirement should be considered when planning for membership interest transfers.

Penalties

If a reporting company fails to file the disclosure, the company or individuals associated with the company may be subject to civil penalties of up to $500 each day the violation persists and criminal penalties of up to two years’ imprisonment and a fine of up to $10,000.

Contact: Megan Sutherland, Esq. (megan@mcglothlinlegal.com) if you would like to discuss working with McGlothlin Legal to keep your business in compliance with the Corporate Transparency Act.