Corporate Transparency Act goes into effect January 1

Beginning January 1, 2024, the process of forming a business entity in the U.S. will substantially change. On that date, the Corporate Transparency Act (CTA) will go into effect. The CTA is a U.S. law that requires reporting companies to disclose company information and certain beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. For the first time, the United States now will require certain legal entities to report to the federal government identifying information about the individuals who directly or indirectly own or control a company within the scope of the CTA. Although FinCEN is not yet ready to receive the required filings, the compliance obligations will begin for new reporting companies formed after December 31, 2023.

Basic requirements of the CTA

The CTA applies to reporting companies that are not exempt from compliance. A reporting company is a corporation, limited liability company, partnership, or similar entity and it can be domestic or foreign; in essence, any entity created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian tribe. The CTA's reporting regime requires a reporting company to electronically file an initial return, called a beneficial ownership information return with FinCEN. This filing must contain information about:

1. The reporting company itself.
2. The individual(s) known as the beneficial owners, who directly or indirectly control or own the reporting company (i.e., any owner holding 25% or more of an interest in the company). 
3. The individual(s) who directly assist the reporting company in submitting information to FinCEN.

What businesses are exempt from the CTA?

As is true with many regulatory schemes, the exemptions are most critical. The CTA excludes 23 specific categories of businesses, and a couple are critical to understanding the focus of the CTA. All public companies and any business satisfying all of the following requirements are excluded from the scope of the CTA:

• Employ more than 20 full-time employees in the United States.
• Have an operating presence at a physical office in the United States.
• Have filed a U.S. federal income tax or information return for the previous year demonstrating more than $5 million in gross receipts or sales (excluding gross receipts or sales from non-U.S. sources).

What businesses must comply with the CTA?

In general, what remains are smaller businesses, businesses that are virtual, and any newly formed business. Any new business, unless in an exempt category of businesses, will automatically be covered by the CTA and it must complete the FinCEN submissions. If a business in the future satisfies an exemption to be excluded from the scope of the CTA, for example, it is a larger business, the business must file an update to its FinCEN record to eliminate continuing reporting obligations. FinCEN has not yet completed the process of establishing each of these reporting procedures.

Currently, every reporting company must file with FinCEN within 30 days after it completes its formation process. However, FinCEN has issued proposed rulemaking to modify the 30-day deadline for reporting companies to submit an initial submission to FinCEN by extending it to 90 days. This extension will also give FinCEN enough time to complete its system to permit the electronic filings.

The reporting obligations in 2024 will apply solely to reporting companies formed in 2024 and later. Beginning January 1, 2025, all entities formed before 2024 that qualify as reporting companies must submit company and beneficial ownership information.

The reporting obligations are not limited to an initial filing. If beneficial ownership changes or information changes, updated reports and corrected reports are required to be filed within 30 days after the change.

This brief summary of practical aspects of the CTA does not address many of the compliance complexities.  Please contact a member of McDonald Hopkins corporate team to discuss in detail the potential impact of the CTA on your business.

What can be done now to prepare for the CTA?

McDonald Hopkins is developing a process to assist our clients with CTA compliance. We will establish a process to collect information that will be required to be reported in 2024 on behalf of each reporting company. We will use entity documents that will include provisions designed to facilitate reporting under the CTA. We are meeting with our registered agent service providers to obtain updated information to ensure timely and accurate filings. And we continue to update our information as FinCEN provides additional guidance and implements its secure filing system for CTA reporting.

What does this mean for you?

Traditionally, forming a new legal entity, whether for a new enterprise, as part of an estate-planning process, as a corporate reorganization, or for any other purpose, required very little information to create the legal entity and obtain a taxpayer identification number. Commencing on January 1, 2024, anyone forming a new entity will need substantially more information to comply with FinCEN reporting requirements under the CTA. We anticipate that these changes will compel changes to the entity formation process, and will likely extend the time necessary to complete the entity formation process.

McDonald Hopkins attorneys can assist in assessing the application of the reporting company requirements to new entities. Once FinCEN finalizes its electronic submission process, and third-party service providers update their systems, we will be able to identify reporting and submission processes available to our clients.