The Corporate Transparency Act (“CTA”) requires most small businesses operating in the United States to register with the Financial Crimes Enforcement Network (“FinCEN”) starting January 1, 2024. As part of this registration, businesses are required to provide personal information and identifying documents for certain owners and top-level employees.
Critchfield has been following this law closely and is ready to help clients satisfy the new requirements. Here is a quick overview of what you need to know. It is also recommended that you review our other recent blog post regarding scammers who are taking advantage of this new law to trick business owners into providing sensitive information.
Is My Business Affected?
If you have a small business, it is likely required to register under this new law. Unlike many federal business regulations, the CTA primarily affects businesses under a certain size, and there is no such thing as a business that is “too small” to be required to register.
There are two primary criteria for businesses operating in the United States:
- Is a “Business Entity” such as a corporation, limited liability company (“LLC”), or any other type of company that is “formed by the filing of a document with the Secretary of State, a similar state agency, or an Indian tribe.”
- Has EITHER:
- Fewer than 20 full-time employees, OR
- Less than $5 million in gross receipts or sales, as identified in the company’s U.S. tax return.
If a company meets both of the above requirements, it is required to register. There are limited exemptions for certain types of businesses in highly regulated industries. If you are concerned as to whether your business is required to register, our attorneys can help you make that determination.
Who is Required to Provide Personal Information?
In addition to information on the business itself, the CTA requires businesses to provide personal information and identifying documents for (1) “Beneficial Owners” and (2) “Company Applicants.” Each of these must be actual human beings, and there are rules for tracing indirect ownership when an owner is a trust or another business entity.
“Beneficial Owners” include any individuals who:
- Own or control (directly or indirectly) at least 25% of the Company; or
- Exercises “Substantial Control” over the Company.
While many small businesses may find it easy to identify their beneficial owners, businesses with complex ownership, management, or benefit arrangements may need assistance. This is further complicated if a non-owner exerts “substantial control” over the company, which is based on a variety of factors identified by FinCEN.
Company Applicants – Only for Businesses Formed On or After January 1, 2024
Businesses formed on or after January 1, 2024, are also required to report their “Company Applicants,” which are the people involved in filing the company’s formation paperwork. A Company must have at least one Company Applicant, with a maximum of two. These include:
- Direct Filer – The individual who filed the paperwork to form the company.
- Requestor – An individual at the “top of the chain” who asked the Direct Filer to form the company if the Direct Filer was not doing for themselves.
There will always be a Direct Filer, but there may not always be a Requestor. If we assist you with forming a new entity in or after 2024, the Direct Filer will likely be a Critchfield attorney or employee, and the Requestor will be one of the individuals for whom the company is created.
What Information do Beneficial Owners and Company Applicants Need to Provide?
Beneficial Owners and Company Applicants will need to provide the following:
- Full Legal Name
- Date of Birth
- Residential or Business Address
- Unique Identification Number (“UIN”) from an approved, non-expired government ID, including:
- A state-issued license
- A state/local/Tribe-issued ID
- A U.S. or foreign passport
- A scan or photograph of the ID used to obtain the UIN.
What are the Registration Deadlines?
- Entities Formed Before January 1, 2024 – One year after the CTA goes into effect.
- i.e. Before January 1, 2025
- Entities Formed After January 1, 2024, but Before January 1, 2025 – 90 days after formation.
- Entities Formed After January 1, 2025 – 30 days after formation.
What are the Penalties for Non-Compliance?
Beneficial Owners and Company Applicants that either (1) fail to register in time or (2) submit false or fraudulent information can face:
- Civil Fines: Up to $500 per day, capped at a total of $10,000.
- Criminal Penalties: Up to 2 years in prison for individuals who provide false or fraudulent information.
Do Companies Need to Keep Their Registration Up to Date?
Companies must provide updated reports if there is any change to the information submitted in the initial registration. This update must be submitted within 30 days of the change.
Changes can include:
- Sales or transfers that change who meets the 25% ownership threshold
- The removal or appointment of new directors or senior officers
- A new business name
- Any change to a Beneficial Owner’s:
- Unique Identifying Number
We can work with you to establish contingency plans and reminder systems to ensure that updated reports are submitted correctly and on time. Keeping your registration up to date may be the furthest thing from your mind, especially in the case of changes that result from unexpected and/or disruptive events such as death or unforeseen terminations. Unfortunately, late or missed updates can trigger significant penalties, and FinCEN does not presently allow any exemptions or extensions based on circumstances. It is best to be prepared ahead of time so that you and your business are ready for any sudden changes.
How Can Critchfield Help?
The scale of the CTA is unprecedented both in scope and in the burdens placed upon small businesses, with an estimated 32 million businesses affected in its first year alone. The attorneys at Critchfield, Critchfield & Johnston are available to provide information, answer questions, and assist your business as you plan for these new requirements. Our services can include, but are not limited to:
- Determining whether your business or any of its owners qualify for exemptions
- Identifying your business’s Beneficial Owners
- Establishing the best approach for businesses with complex corporate structures or owners with sophisticated estate planning arrangements
- Collecting the necessary information and documents
- Submitting your CTA registration
- Establishing systems to ensure that updated reports are submitted on a timely basis
The attorneys at Critchfield continue to monitor new developments and keep clients informed as changes come to light. Keep an eye on this website and our social media channels for new developments.