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The Corporate Transparency Act’s New Reporting Requirements

Dec 29, 2023 | Guest Author, Professional Services

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Under a new federal law to address money laundering and other financial crimes, business entities must file new information reports with the US Department of the Treasury starting January 1, 2024.

The Corporate Transparency Act (CTA) requires an informational filing with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

The purpose of the CTA is to combat money laundering, terrorism, and human trafficking. The filings provide law enforcement with information on the ownership and control of business entities obscured behind shell companies and non-disclosure. The information is confidential and, generally, will be available only to law enforcement and banks.

However, the law imposes a strict and—in some cases—complex reporting burden on many businesses.

Who Must Report?

In general, every entity created by filing a document with a state or under tribal law, along with foreign entities registered in the United States, is a “reporting company” required to file with FinCEN. Reporting companies include corporations, LLCs, limited partnerships, nonprofits, and professional corporations. They do not include partnerships, sole proprietorships, or other entities that are not formed by filing paperwork with a government agency. Reporting entities must disclose basic information about the person creating the entity, as well as details about entity owners, managers, and officers.

While the reporting obligation appears straightforward, often it’s not clear whether an entity must file. There are important exemptions for entities considered by FinCEN to be low risk or already highly regulated:

  1. Large Operating Companies: Entities with more than twenty full-time employees and more than $5 million in gross revenue.
  2. Subsidiaries of Large Operating Companies: Subsidiaries controlled or wholly-owned, directly or indirectly, by a Large Operating Company (or other exempt entity).
  3. Government agencies or authorities.
  4. Banks, credit unions, and insurance companies.
  5. Public utilities.
  6. Tax-exempt entities under § 501 of the Internal Revenue Code.
  7. Other Highly-Regulated Entities: Entities subject to reporting under the federal Securities Exchange Act, Investment Company Act, or the Commodity Exchange Act.
  8. Most trusts, including Alaska Native Settlement Trusts (because trusts are not created by filing).
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Beneficial Ownership

A reporting company must provide information about its beneficial owners. Determining when this obligation to report on beneficial owners arises and what must be disclosed can be complex. Any individual who directly or indirectly exercises or has substantial control or influence over the reporting company or directly or indirectly owns or controls at least 25 percent of the ownership interests of the reporting company is a “beneficial owner.”

For example, if an Alaska Native regional corporation owns 25 percent of an LLC, the LLC would have to disclose information about beneficial ownership of the Alaska Native corporation. This could mean disclosing individuals in senior management. Who, exactly, will depend on the organizational and operational structure of the Alaska Native corporation. Guidance on this issue is still evolving, and companies should seek counsel to determine which members of management must be reported.

In another example, if an Alaska Native regional corporation only owns 20 percent of an LLC, but it is also the manager of the LLC, the LLC would have to disclose information about beneficial ownership of the Alaska Native corporation (including individuals in senior management).

Reporting requirements may apply directly to some smaller Alaska Native village corporations as well. Some village corporations that do not have more than twenty employees and $5 million in annual gross revenue will have to report beneficial ownership information. This could include officers, management, possibly some or all directors, and others who have substantial control over the corporation.

As a first step toward compliance, all businesses should evaluate their organizational structure, including any investments through subsidiaries. Any entity with less than twenty employees and $5 million in revenue must report unless they qualify for another exemption.

Basic Information

Besides providing general information about the entity, a reporting company must report the following information about each “company applicant” that files the formation documents of the entity and each “beneficial owner”: name, date of birth, residential address, and a “unique identifying number” associated with the person, such as a driver’s license number. A copy of the document providing the unique identifying number also must be provided.

Note that, with few exceptions, the information to be reported relates to individuals, not entities. Organizational structures are collapsed for purposes of CTA reporting so that information must be provided about the individuals who ultimately own or control reporting companies or beneficial owners.

Timing of Reporting

Reporting is required for all new entities starting January 1, 2024. Entities formed before 2024 must comply by filing by January 1, 2025, and do not have to report “company applicant” information.

An initial FinCEN report must be filed within thirty days of formation. There is no annual, biennial, or other periodic reporting requirement. However, an updated report must be filed if there is a change in beneficial ownership, a change or correction in any previously reported information, or if an entity later qualifies for an exemption (e.g., hires additional employees to meet the twenty-employee benchmark). The update must be filed within thirty days after the change.

Should You Apply for a FinCEN Identifier?

Individuals that have an ownership interest in or control numerous reporting companies may want to consider applying for a FinCEN identifier. Privacy-minded individuals may also want to consider applying for a FinCEN identifier. The application asks for the same beneficial ownership information, which the individual must update as needed. The applicant receives a unique FinCEN identifier, which can be supplied to reporting companies in lieu of the required beneficial ownership information. FinCEN is still developing the forms and website to make applications and submit reports.

Penalties for Non-Compliance

The CTA comes with teeth. Non-compliance could result in civil and criminal penalties for reporting companies and for beneficial owners who provide false or incomplete information. Reporting violations are punishable by civil penalties of up to $500 per day that the violation is outstanding, fines of up to $10,000, and imprisonment for up to two years.

Alex Kubitz and Ben Spiess are attorneys in Anchorage with Landye Bennett Blumstein. Additional CTA information is available online at lbblawyers.com/resources.

 

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Welcome to the 2024 Best of Alaska Business special section! For the ninth time we invited our readers to tell us which Alaska businesses they love the most, this year in forty-four categories. Throughout the month of March, you told us who should be featured in these pages, and we're thrilled to be able to publish the results.
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