This is Part 1 of a 3-Part series (Part 2: FAQs & Part 3: The Form) of information we are sending out to our small business clients regarding the Corporate Transparency Act (CTA) and its impact on millions of small businesses. The CTA was passed by Congress a couple of years ago and the government has been ironing out the details since that time. Starting January 1, 2024, the Financial Crimes Enforcement Network (FinCEN), in an effort to track criminals and other bad actors who are laundering illicit funds through the United States using shell and front companies, will begin enforcement of a reporting requirement for small businesses.  Reports will need to be filed on-line with FinCEN that identify two categories of individuals who will need to provide information to FinCEN: the “Beneficial Owners” of a newly formed or currently operating entity (called a “Reporting Company”), and persons who have registered those entities with their state-specific Secretary of State’s office (called the “Company Applicant”).

Because the regulations and forms have not yet been completed by FinCEN, this first article will explain what we believe will be required for businesses to complete the reports to FinCEN.  Future articles will give more details and hopefully a copy of the forms required.

REPORTING COMPANY

So a Reporting Company is defined as “any corporation, limited liability company, or other similar entity created by filing a document with a State or Indian Tribe or formed in a foreign jurisdiction and registered to do business in the United States through the filing of a document with a State or Indian Tribe”.  31 CFR 1010.380(c)

This definition includes all types of cooperatives and most entities that are required to register with the Secretary of State when the company is first formed.  Some entities are excluded from these reporting requirements, including most nonprofit entities and companies that are already required to register information elsewhere, such as public corporations that file reports with the SEC.  If you are interested, please contact us to get a complete list of entities excluded from the reporting requirements.  NOTE: the definition of Reporting Company does NOT include a company with more than 20 employees or more than $5 million in annual revenue.  Each of our clients will need to review the requirements and determine whether or not reporting is required.  For example, if a company has only 10 employees, it would generally be required to report. But if the company does more than $5 million in revenue each year, it is probably not required to file the report.  Later regulations may change this interpretation but that is how we are reading it currently.

So what does a Reporting Company have to report?  First, it reports information about itself. And then information about each Beneficial Owner and the Company Applicant.  As to the company, it reports:

• Its legal name;
• Any trade names, “doing business as” (d/b/a), or “trading as” (t/a) names;
• The current street address of its principal place of business if that address is in the United States (for example, a domestic reporting company’s headquarters), or, for reporting companies whose principal place of business is outside the United States, the current address from which the company conducts business in the United States (for example, a foreign reporting company’s U.S. headquarters);
• Its jurisdiction of formation or registration (in other words, the state where it was formed); and
• Its Taxpayer Identification Number.

BENEFICIAL OWNER

The Beneficial Owner is broadly defined in the current regulations as:  anyone who (i) exercises substantial control over the entity; or (ii) owns or controls at least 25% of the entity’s ownership interests.  Directly or indirectly.  31 CFR 1010.380(d)

So any person who owns at least 25% of a company is considered a Beneficial Owner.  And although the definition of “substantial control” is subject to interpretation, some of the comments from FinCEN in its regulations note that the board of directors certainly qualify as exercising substantial control over their companies.  Some officers of companies would also be included in the definition so please reach out to us and we can explore who may be required to report to FinCEN, starting next year.

For our cooperative clients, with multiple member-owners, each owning less than 25%, we are taking the position that at least the Board of Directors or Board of Managers will be required to file reports.  The information that FinCEN will be looking for from each Beneficial Owner is:

• The individual’s name, date of birth, and residential address;
• A unique identifying number from an acceptable identification document (examples are unexpired drivers licenses, state or government identification cards or passports); and
• The name of the state or jurisdiction that issued the identification document.

In addition, the Reporting Company must submit an image of the identification document associated with the unique identifying number reported to FinCEN.

COMPANY APPLICANT

The Company Applicant is the person who actually files the registration documents with the Secretary of State.  In Colorado, for example, the Articles of Incorporation or Organization have cover sheets that include the company name and address, registered agent name and address and the “person” who caused the document to be filed.  This could be someone from the company or from your law firm or accountant’s office.

There can be up to two individuals who qualify as Company Applicants — the individual who directly files the document that creates, or first registers, the Reporting Company; and the individual that is primarily responsible for directing or controlling the filing of the relevant document.

No reporting company will have more than two company applicants. If only one person was involved in filing the relevant document, then only that person should be reported as a company applicant.

Only reporting companies formed or registered on or after January 1, 2024, will have to report their company applicants. Companies created or registered before January 1, 2024, do not have to report their company applicants.  So new companies formed in 2024 and going forward will need to be concerned about Company Applicants.

The information to be reported for Company Applicants is the same as for Beneficial Owners, except that if a Company Applicant is a person whose regular job is filing these documents (like a paralegal, attorney or a corporate formation agent), then the address of the Company Applicant can be the business address of the Applicant, rather than their residential address.

So this is the end of Part 1 of the Corporate Transparency Act information we will be sending to all of you.  In the next posting, we will answer some FAQ’s and give you an idea as to timing on filing the reports.  Please feel free to give us a call in the meantime if you have immediate questions or concerns.