As discussed in a prior newsletter, the Corporate Transparency Act (CTA) was enacted as part of the Defense Reauthorization Act in late 2021 to help prevent and combat money laundering, terrorist financing, tax fraud, corruption and other criminal activity. The new reporting system is still scheduled to launch on January 1, 2024. The main goal of the CTA is to look through entity ownership structures to report the individual people who are the beneficial owners of each reporting company.

For some small businesses, determining the identity of the beneficial owners will be straightforward. For example, if the entity is a single member limited liability company that has one natural person as the 100% owner and that member controls the activities of the company, the report will be straightforward. For other small businesses, such as those that have multiple owners, are wholly- or partially-owned subsidiaries of another entity, or have complex control structures, determining the identity of the beneficial owners will be much more complicated. 

In determining the beneficial ownership of each reporting company, the CTA and its regulations set forth rules to determine both who “owns or controls” the equity in the company and who exercises “substantial control” over the company. Both groups qualify as beneficial owners. Reporting companies may need assistance to determine who qualifies as “beneficial owners” for purposes of the CTA.

Once the identity of the beneficial owners is determined, reporting companies will need to collect the personal identifying information about each individual beneficial owner of the company in order to file the required report. That information includes each beneficial owner’s: legal name, birth date, current street address, a unique identifying number from a government document (such as a driver’s license or passport), and a legible copy of that identifying document.

As an alternative, individuals may apply for a FinCEN identifier by providing the same information in an online application. Once a FinCEN identifier is issued, individuals may provide their FinCEN identifier in lieu of providing their personally identifying information. The FinCEN identifier will be included in the reporting company’s report instead. The application for FinCEN identifiers is anticipated to launch on January 1, 2024 with the entire reporting system.

Getting the reporting right is important: the CTA includes substantial penalties for both failing to file and for willfully providing false or fraudulent beneficial owner information. These penalties include fines of $500 per day that a report is outstanding up to a maximum fine of $10,000 and sentences of up to two years in prison.

With the reporting requirements coming closer, now is the time for reporting companies to identify their beneficial owners and reach out to them. If you or your company need assistance in determining whether your company is a reporting company and who your beneficial owners are, we can help. Please reach out to Kathryn E. Diehm for guidance.

Kathryn E. Diehm is a business attorney with Rucci Law Group, LLC. She has experience with all areas of business law. Kate can be reached at 203-202-9686 or at kdiehm@ruccilawgroup.com.