Corporate Transparency Act Deadline Fast Approaching

Authors: Michael T. Gershberg, Joseph P. Vitale

An important filing deadline under the Corporate Transparency Act ("CTA") is on the horizon. While many companies have already been complying with the CTA since it took effect on January 1, 2024, the reporting deadline for companies formed prior to 2024 is January 1, 2025. The CTA and regulations issued by the U.S. Treasury Department's Financial Crimes Enforcement Network ("FinCEN") require certain U.S. companies to submit reports containing information about themselves and their beneficial owners. This alert explains what companies need to know about the CTA and how to comply with its reporting requirements.

What entities are within the scope of the CTA?

The CTA covers only "reporting companies," which include:

1. any U.S.-organized entity that is created by filing a document with a secretary of state or similar office, and
2. any foreign-organized entity that has registered to do business in the United States by filing a document with a secretary of state or similar office.

Therefore, subject to the exemptions discussed below, domestic corporations, limited liability companies, limited partnerships, and business trusts would fall within the scope of the CTA. In contrast, sole proprietorships, trusts, and general partnerships that do not require any filing with a secretary of state's office are not reporting companies under the CTA.

What entities are exempt from reporting?

The broad definition of "reporting company" is made narrower through 23 exemptions. Many exemptions apply to regulated entities such as banks, credit unions, depositary institutions, investment advisors, and securities brokers and dealers, which are already subject to disclosure requirements by their regulators. Other exempt entities include public companies, governmental authorities, and tax-exempt entities. Subsidiaries of most exempt entities (but not subsidiaries of pooled investment vehicles, as described below) are also exempt.

Another exemption covers any "large operating company," which must meet three criteria:

1. employs more than 20 employees on a full-time basis in the United States,
2. has an operating presence at a physical office in the United States, and
3. had at least $5 million in gross receipts or sales in the previous year.

Pooled investment vehicles (i.e., private funds) that are operated or advised by certain exempt regulated entities (including SEC-registered investment advisors and relying advisors, as well as their affiliated fund general partners) are also exempt. For purposes of the CTA, pooled investment vehicles include (i) any investment company, as defined in section 3(a) of the Investment Company Act, or (ii) any company that satisfies the section 3(c)(1) or section 3(c)(7) exemption and is identified by its legal name by the applicable investment adviser in its Form ADV (or will be so identified in the next annual updating amendment Form ADV).

Although subsidiaries of pooled investment vehicles are not automatically exempt, they may qualify for another exemption such as an indirect subsidiary of a public company or registered investment advisor. If fund subsidiaries are required to file under the CTA, they do not need to disclose any individual equity owners that hold an interest through an exempt fund. However, those subsidiaries do still need to disclose certain beneficial owners via the control prong (as opposed to the ownership prong) of the rules, as discussed below.

Who needs to be disclosed in a CTA filing?

Reporting companies must disclose their "beneficial owners." These include all individuals -- not entities -- who, directly or indirectly, (i) exercise substantial control over the reporting company, or (ii) own or control at least 25% of the ownership interest of the reporting company. "Substantial control" is defined broadly and includes:

1. Serving as a senior officer;
2. Having authority over the appointment or removal of any senior officer or a majority of the board of directors;
3. Directing, determining, or having substantial influence over important decisions made by the reporting company; or
4. Having any other form of substantial control over the reporting company.

FinCEN has stated that a person (including the trustee of a trust) may exercise "substantial control" over a company through board representation, rights associated with financing arrangements, control over intermediate entities, or any other contract, arrangement, understanding, or relationship. For purposes of the ownership prong, FinCEN specifies that "ownership interest" may include equity, stock, any capital or profit interest, and convertible instruments, as well as warrants and rights to purchase, sell, or subscribe to any of the foregoing.

In addition to reporting beneficial owners, reporting companies created on or after January 1, 2024 must disclose one or two "company applicants." These include the individual:

1. who files the document that creates the domestic reporting company or that first registers the foreign reporting company, and
2. who is primarily responsible for directing or controlling the filing of such document (if different from the first person).

Note that reporting companies in existence prior to January 1, 204 do not need to report a company applicant.

What information must be provided to FinCEN?

The CTA beneficial ownership information reporting form requires reporting companies to provide:

• Full legal name of the reporting company (and any trade names or DBAs);
• Tax identification number;
• Jurisdiction of formation or first registration;
• Current U.S. address;
• Company applicant information for up to two company applicants; and
• Beneficial ownership information for each beneficial owner

Note that a disregarded entity for U.S. tax purposes that does not have its own tax ID number can report its owner's tax ID number in most cases.

The personal information required for each beneficial owner includes:

• Full legal name;
• Date of birth;
• Current residential address;
• Government-issued identifying document; and
• An image of the identifying document.

To lower the compliance burden on persons who are beneficial owners or company applicants of multiple reporting companies, an individual may apply for a FinCEN identifier by providing the required personal data directly to FinCEN. The FinCEN identifier can then be reported on CTA forms in lieu of the personal information.

When are CTA reports due?

Date of Entity Formation	CTA Report Deadline
Prior to January 1, 2024	January 1, 2025
January 1, 2024 - December 31, 2024	90 days after formation
January 1, 2025 and later	30 days after formation

Reports are only required to be filed once unless the information changes. In that case, reporting companies must file an amended report within 30 calendar days of any change in information previously provided.

FinCEN has clarified in guidance that dissolved entities are still required to file CTA reports as long as they were in existence for any period of time after the CTA took effect on January 1, 2024. This requirement applies even if an entity is dissolved prior to the January 1, 2025 deadline.

How should you prepare for CTA Compliance?

In order to help businesses prepare for CTA reporting requirements, FinCEN released multiple resources, including a list of frequently asked questions and a small entity compliance guide. In particular, entities should consider the following:

• Determine whether they are reporting companies: This is an important gating item for companies. In general, entities formed in any U.S. state or that register to do business in any U.S. state will be reporting companies.
• Determine whether an exemption applies: A full list of the 23 types of entities that are exempt from the reporting requirement can also be found in Table C.2 of the beneficial ownership information FAQs. Some companies may need to coordinate with joint venture partners, co-investors, and shareholders to make exemption determinations, especially under the subsidiary exemption.
• Create a plan for CTA compliance plan: Businesses that regularly form new entities should develop CTA compliance procedures to track new entities and timely conduct reporting analyses, collect required information, and file CTA reports when required. The procedures should also include a mechanism to monitor for and track any changes in beneficial ownership and to prepare updated reports.
• Build CTA compliance into governing documents: For newly created entities, consider including language on CTA compliance in operating agreements, limited partnership agreements, or similar government documents. Such language could require members or limited partners to provide and update the personal information that will be required for CTA reporting. CTA compliance provisions should be added to transaction and entity formation checklists as appropriate.
• Apply for FinCEN identifiers: Using a FinCEN identifier will cut down on the amount of personally identifying information that needs to be collected and shared within organizations and with third parties. Individuals who serve as company applicants or beneficial owners should obtain a FinCEN identifier. If any personal information changes in the future, it only needs to be updated once in the FinCEN identifier application rather than in each report.

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