Final Rule Issued for Corporate Transparency Act: What Businesses Need to Know

As we previously addressed in 2021, Congress passed the Corporate Transparency Act (“CTA”), which requires certain business entities to report the “beneficial ownership” of an entity to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCen”).

The CTA is intended to deter activity such as money laundering, financing terrorism, and tax fraud, among other things. Failure to disclose the necessary information may subject businesses to significant civil and criminal penalties.

On September 29, 2022, FinCEN issued its Final Rule, and a corresponding Fact Sheet. These rules set forth the requirements for certain businesses (“reporting companies”) to disclose information regarding the individuals who own or control the business (“beneficial owners”). The CTA is a complex statute, and non-compliance with its reporting requirements can subject businesses to significant penalties, so it’s important to consult with a business attorney to understand your business’s reporting obligations.

Here are some of the key takeaways from the Final Rule.

Who Must Report

The CTA applies to a “reporting company” which includes:

• Domestic Company: a corporation, limited liability company (LLC), or any entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.
• Foreign Company: a corporation, LLC, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.

Several types of entities are exempt from reporting requirements, including:

• Companies with 20 or more full-time U.S. employees, more than $5 million in federal income tax revenue, and have an operating presence at a physical office within the United States;
• Issuers registered with the Securities and Exchange Commission;
• Banks, bank holding companies, savings and loan holding companies, credit unions, financial market utility entities, and money services businesses registered with FinCEN;
• Registered Commodity Exchange Act entities, registered investment companies or investment advisers, broker-dealers, and registered venture capital fund advisers;
• Insurance companies or state-licensed insurance producers;
• Accounting firms;
• Public utilities;
• Certain pooled investment vehicles;
• Tax-exempt entities or entities that exist solely to assist a tax-exempt entity; and
• Certain inactive companies.

Defining Beneficial Owners

Under the Final Rule, a “beneficial owner” includes any individual who, directly or indirectly, either (i) exercises substantial control over a reporting company, or (ii) owns or controls at least 25 percent of the ownership interests of a reporting company.

Filing Beneficial Ownership Information Reports

The Final Rule requires that when filing beneficial ownership information reports with FinCEN, the reporting company must identify itself and report the following four pieces of information for each of its beneficial owners:

• Full legal name,
• birthdate,
• residential address, and
• a unique identifying number from either an unexpired passport, state identification document, or driver’s license, and an image of that document.

Timing for Reports

The effective date for the Final Rule is January 1, 2024. Reporting companies created or registered before January 1, 2024, will have one year from that date to file their initial reports, while reporting companies created or registered on or after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports. Furthermore, a reporting company will need to update their prior report within 30 days of any change to a beneficial owner’s information

What to do Next

The foregoing is a summary of some of the important provisions of the Final Rule. The CTA and Final Rule are lengthy and complex and there is much more to know. Businesses should consult with their attorney to understand their obligations.

This is a brief summary and does not constitute legal advice. For assistance, please contact Robert D. Burgee.

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Robert D. Burgee is an attorney at Fraser Trebilcock with over a decade of experience counseling clients with a focus on corporate structures and compliance, licensing, contracts, regulatory compliance, mergers and acquisitions, and a host of other matters related to the operation of small and medium-sized businesses and non-profits. You can reach him at 517.377.0848 or at bburgee@fraserlawfirm.com.