Decoding the Corporate Transparency Act

By Nils P. Johnson Jr.
Johnson & Johnson Law Firm

YOUNGSTOWN, Ohio – The U.S. Congress adopted the Corporate Transparency Act in December 2020, motivated in large part by media reports of how anonymous “shell” corporations have helped certain oligarchs and other international bad actors launder money.

The act empowers the Department of Treasury to issue regulations requiring certain individuals owning an LLC, corporation or any other entity created by filing documents with a secretary of state to file reports to the Financial Crimes Enforcement Network (FINCEN).

These reports must identify the name, date of birth, address and photo identification of all “beneficial owners” of the entity. Individuals failing to timely file such a report will face a civil penalty up to $500 per day that the violation continues and possibly imprisonment up to two years.

These penalties also apply to individuals who knowingly file incorrect information, as well as individuals who filed information that they believed to be correct, but in fact was not correct, and failed to make it correct within 90 days.

The regulations take effect Jan. 1, 2024, and govern “reporting companies.” These are companies that are “created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian Tribe.” Newly created companies registered with the secretary of state after Jan. 1, 2024, have 30 days from the date of registration to file their reports. Reporting companies that existed prior to Jan. 1, 2024, have until Dec. 31, 2024, to file their reports.

Reports must also be filed when there are changes to the identifying information of the beneficial owners, such as a new legal name, a new home address, the issuance of a new driver’s license or passport, etc.

Additionally, the “company applicant,” the individual registering the entity at the secretary of state (typically an attorney or an accountant,) needs to include his/her own identifying information in the report.

There are exemptions from having to file a report.

Some of the 23 types of business entities exempt from reporting are: insurance providers, publicly traded companies, banks, credit unions, investment companies, insurance providers and large operating companies with 20 or more employees that have generated more than $5 million in gross receipts and have a physical office within the United States. In addition to these entities, any wholly owned subsidiary of an exempt entity is also exempt from the reporting requirements.

Small businesses, generally, are not exempt from these reporting requirements.

The term “beneficial owner” means “any individual who directly or indirectly either (1) exercises substantial control over such reporting company or (2) owns or controls at least 25% of the ownership interests of such reporting company.”

This legislation defines the exercise of “substantial control” in a number of ways. A person has substantial control over the entity if that person: is a senior officer of the reporting company; has the authority to appoint or remove senior officers or a majority of the board of directors; directs, determines or holds substantial influence over important decisions; or “has any other form of substantial control over the reporting company.”

Put plainly, if an individual: has an ownership stake in, is a member of, is a director of, is a corporate officer of, or is involved in the management of, a company that is registered with the secretary of state, that individual has to file and continue to maintain a report.

It is important to begin taking steps to ensure compliance with this legislation. Each reporting entity should identify the person charged with monitoring compliance, decide on a process for updating reports and maintaining compliance, identify who the compliance officer will report to, how often the reporting entity should evaluate its compliance and what impact compliance will have on mergers and acquisitions.

Those who are the beneficial owners of reporting entities, or feel they are in a position that exercises substantial control over a reporting entity, should contact an attorney to further discuss what the Corporate Transparency Act means for them and their company.

The new regulations impose a burden on small businesses. It is anticipated that substantial questions will be raised concerning the constitutionality of the new law.

Copyright 2024 The Business Journal, Youngstown, Ohio.