New Business Reporting Requirements That Likely Apply to You

The Corporate Transparency Act’s Reporting Requirements

What Is the Corporate Transparency Act?

The Corporate Transparency Act ("CTA") was enacted January 1, 2021 as part of the National Defense Authorization Act, aimed at combating money laundering, terrorism financing and other forms of illegal financing. The CTA requires legal entities (primarily small businesses) to report their owners with a “beneficial interest” in the entity to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department.  FinCEN will retain the information reported for at least five (5) years and will permit Federal, State, local, and Tribal officials, as well as certain foreign officials who submit a request through a U.S. Federal government agency, to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. Reporting requirements will begin January 1, 2024.

Reporting Requirements

Under the CTA, legal entities, including corporations, limited liability companies and partnerships that have been created through registration with a state’s Secretary of State (“SOS”) or equivalent, are required to provide information about their beneficial interest owners to FinCEN. This requirement is also applicable to foreign entities who have registered their entity with a state’s SOS or equivalent.

“Beneficial interest owners” are individuals who directly or indirectly own 25% or more of the equity interests of the legal entity or exercise substantial control over the entity. However, this does not include an individual whose only interest in the entity is through a right of inheritance. It also does not include a creditor unless the creditor meets the aforementioned criteria.

Beneficial interest owners must report their name, address, date of birth, and identification number to FinCEN. The identification number includes an unexpired driver's license, passport, or similar official government identification document.

Entities formed on or after January 1, 2024 will only have 30 days from the date of formation to comply with the CTA reporting requirements. This 30-day deadline will begin from the time the entity receives actual notice that its creation or registration is effective, or after a SOS or similar office first provides public notice of the entity’s creation or registration, whichever is earlier. Entities formed prior to January 1, 2024 will have until January 1, 2025 to comply with the CTA reporting requirements.

Exceptions to the Reporting Requirement

The CTA provides a number of exceptions to the reporting requirement, though most will not be applicable to healthcare and wellness businesses. However two exceptions of note are the inactive business exception and the large operating company exception.

Inactive Business Exception

An entity that has been in existence for over 1 year that: 1) is not engaged in active business; 2) is not owned, directly or indirectly, by a foreign person; 3) has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000; and 4) does not otherwise hold any kind or type of assets, including an ownership interest in any corporation, limited liability company, or other similar entity, will not be subject to the beneficial interest ownership reporting requirement.

Large Operating Company Exception

An entity that: 1) employs more than 20 employees on a full-time basis in the United States; 2) in the previous year filed Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate (including the receipts or sales of other entities owned by the entity and other entities through which the entity operates); and 3) has an operating presence at a physical office within the United States, will also be excepted from the reporting requirement.

Penalties for Noncompliance

The CTA imposes penalties for failure to comply. The penalties include up to $500 in civil penalties for each day of noncompliance and up to $10,000 in criminal penalties for willful violations. The act also includes provisions for imprisonment of up to two years.

Considerations for Your Business

Of course it will be of primary importance to determine whether the reporting requirement is applicable to your business/legal entity. If it is, you will need to identify each beneficial interest owner and ensure all required information for reporting is obtained and up to date in advance of the reporting requirement. This includes ensuring required government issued identification is not expired.

You may also want to have existing corporate documents such as bylaws, shareholder agreements and operating agreements modified to include compliance with the CTA as a requirement for ownership of 25% or more of the entity as well as including noncompliance as grounds for dissociation of an owner.

Next Steps

While you may want to get ahead and complete your required reporting now, FinCEN is not currently accepting any beneficial ownership information reports and will not begin accepting reports until January 1, 2024. Further, the form to report beneficial ownership is not yet available. Once it is available, it will be available here.

In the meantime, if you have questions about the Corporate Transparency Act and how it affects your business, do not hesitate to reach out. While I do not provide legal advice through The Integrative Lawyer I do provide legal advice through my law firm  HealthWise Legal, APC. There, we can help you ensure compliance with the CTA and make sure all reporting is done correctly and on time.