On Jan. 1, 2024, the U.S. government debuted the Corporate Transparency Act (CTA). This legislation established the requirement for the majority of private companies, both big and small, to file information with the Financial Crimes Enforcement Network (FinCEN).
As with most new laws, the initial guidance and interpretations have been both challenged and questioned. In response, FinCEN recently turned out new FAQs, which we review below.
Big Question First: To Report or Not
Reporting is generally required by all private, for-profit entities. This includes corporations, LLCs, S-Corps, etc., whenever the company was created by filing a document with the office of the Secretary of State. Entities formed under the laws of jurisdictions outside the United States are also likely subject to reporting if they are registered to do business in the United States.
To help visualize the above, you can take a look at this flowchart published on the FinCEN website.
Screenshot from FinCEN website
While the general rules seem (and are) broad in construction, there are 23 specific exemptions, including publicly traded companies, nonprofits, and certain large operating companies. The FinCEN’s Small Entity Compliance Guide checklist can help in determining if you fall under an exemption.
Now, let’s move on to more specific questions.
Who is a beneficial owner?
An individual who either directly or indirectly exercises substantial controls or owns 25 percent or more of the reporting company.
What constitutes substantial control?
There are four (separate) ways to exercise substantial control:
- The individual is a senior officer
- Has the authority to appoint or remove officers or a majority of directors
- An important decision-maker (regarding strategic, business, or finance)
- They have any other form of substantial control as per the FinCEN’s Small Entity Compliance Guide.
Who is a company applicant for a reporting company?
Another of the more perplexing questions revolves around exactly who a company applicant of a reporting company is.
First, only reporting companies created or registered on or after Jan. 1, 2024, need to concern themselves with the company applicant rules; companies formed before are exempt.
There are two possible individuals who could be considered company applicants. One is the person who directly files the documents to create and register the company. This person will always exist and be an applicant of the reporting company. In the case where there were multiple people involved in the filing or registration, the individual who primarily controlled the filing is also considered an applicant.
Thankfully, FinCEN created another handy flowchart to help navigate through this rather confusing decision.
Screenshot from FinCEN website
What about sole proprietorships?
It depends. Sole proprietorships only have to report if the entity was created by filing a document with a secretary of state or similar office. In other words, if you just start freelancing and don’t file anything with a secretary of state office, you are not subject to the reporting requirements. Basically, if you didn’t form an LLC, you don’t need to report. For example, obtaining an employer identification number, a fictitious business name, or a professional or occupational license does not subject you to the FinCEN reporting requirements.
What if my company ceased to exist before the CTA requirements went into effect?
If a company ceased to exist on or before Jan. 1, 2024, then they are NOT subject to the reporting requirements.
Do I have to report more than once?
No, you only have to file an initial report once. There is NOT an annual report. You do, however, need to amend your original filing to update pertinent changes or corrections within 30 days of their occurrence.
What happens if I don’t file a report?
Willful violation can subject one to a fine of up to $500 per day until the violation is resolved. Criminal penalties could also be imposed, resulting in up to two years imprisonment and a fine of up to $10,000.
Conclusion
The FinCEN released its guidance to clarify uncertainties around the new CTA-created reporting requirements. The goal is to ensure full and accurate compliance without undue burden on companies and individuals.
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