IMPORTANT UPDATE: (Updated December 4, 2024): On December 3, a federal district court in Texas issued a preliminary nationwide injunction, meaning a pause, on the need for all US businesses to comply with this requirement until further notice. This injunction is a temporary hold pending a final decision, meaning it pauses the compliance requirements and enforcement of this law until a final judgment is released. Preliminary injunctions are orders that judges can issue early in lawsuits to stop a certain action — in this case the need to comply with, and the government’s ability to enforce, the CTA — before the court has the time to issue a final judgment. This injunction may be heard by a higher court, but it is likely a final decision won’t come for some time. For now, existing businesses do not need to report by the applicable filing deadlines (or until further notice).
New federal reporting requirements for many non-public (including small) businesses will go into effect on January 1, 2024, requiring disclosures of information related to owners, locations, and other company details. In this blog post, we’ll break down what we know so far and as more information and reporting forms are released we’ll keep ya updated!
The final rule, which is estimated to affect more than 32 million entities in the first year of reporting, was issued under the Corporate Transparency Act by the Financial Crimes Enforcement Network known as FinCEN within the US Department of Treasury. It will require most corporations, LLCs, and other entities created in or organized to do business in the US to report information about their “beneficial owners” – defined as those who exercise “substantial control” (which is defined in the act and includes any individual with substantial influence over important decisions by the company) OR who “own or control at least 25% of the ownership interests” of the company submitting the report.
Companies created or registered before January 1, 2024, will have one year to file their initial reports. Companies created after the first of the year will have 90 days to comply. Then in 2025 companies will have 30 days to comply after formation. Companies will also be required to file updates to beneficial owners within 30 days of a change.
What Must be Included in the Report?
In short, each report must include:
The full legal name or trade name (DBA) of the company;
Its beneficial owners and personal identifying information pertaining to them (as well the information around individuals submitting the filings);
a complete current address;
the jurisdiction where the company is formed/registered (state, tribunal or foreign place);
the company’s EIN;
potentially other details.
According to FinCEN, this information will be stored in a heightened level of secure databases only accessible under specific circumstances (for example, states will only be able to access it with a court order). We’ll have more information once the actual reporting form and system is released.
Are There Any Exceptions to Who Has to Report?
There are 23 specific types of companies/entities exempt from having to report under this rule. They include publicly traded companies, insurance companies, banks, and tax-exempt entities (like 501(c)(3)s), among others). Most exemptions you will see are because they’re obligated to other types of reporting and ownership requirements. For example, publicly traded companies are required to submit and make public annual and quarterly reports that list specific ownership details. It’s likely that exempt organizations will still have to make a note in the system that they are exempt, but because the system is not yet live, it is not certain what this will fully entail.
Additionally, “large operating companies” are exempt from reporting if they have more than 20 full-time employees, a physical operating presence in the US, and more than $5 million in gross receipts or sales as shown on the company’s previous year’s federal tax return.
What is the Purpose of This?
The short answer: the stated purpose of the rule is to fight fraud and protect national security. According to FinCEN, the purpose of these requirements is to “enhance the ability of FinCEN and other agencies to protect U.S. national security and the U.S. financial system from illicit use and provide essential information to national security, intelligence, and law enforcement agencies; state, local, and Tribal officials; and financial institutions to help prevent drug traffickers, fraudsters, corrupt actors such as oligarchs, and proliferators from laundering or hiding money and other assets in the United States.”
Essentially, they want to have tabs on companies doing business in the US to prevent fraud and the creation of shell companies for illicit activity and money laundering.
Are There Any Penalties for Failing to Report?
Owners of companies that fail to report could face both fines and/or jail time, including $500/day (up to $10,000) and up to two years in jail, and there are higher penalties for those who intentionally report on behalf of companies without valid authorization to do so.
This data has not been published publicly, but there are ways that the information can be accessed for official government law enforcement purposes.
Also to put on your radar, Pennsylvania recently passed an update to its reporting requirements of companies as well, requiring annual reporting instead of the previous once every 10 years (see info on the law here). This will go into effect in 2025 so stay tuned for updates on how to comply with these as well.
For both of these reporting requirements, we recommend all Pennsylvania businesses check for accuracy their business registration address with the PA department of state so they can receive any important communications around these filing requirements and make sure their operating agreements/bylaws, and corporate records reflect current ownership. Stay tuned for a follow-up blog about getting this and your business in order before these rules go into effect.
If you’re an existing Trellis client or soon-to-be one, reach out if you have questions.
For more details about the federal rule, check out the Fincen Fact Sheet or read the lengthy rule. You can learn more about updates to the Pennsylvania annual reporting requirements, which we’ll discuss in more detail soon.
DISCLAIMER: This blog post is meant for informational purposes only and does not constitute specific legal advice or create an attorney-client relationship. Readers should discuss their specific situation with an attorney.
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