The federal Corporate Transparency Act (“CTA”) and related regulations will impose significant reporting obligations on many businesses owned and operated in Alaska.[1] Businesses should start analyzing how they will be impacted by the CTA.
The CTA was enacted in 2021 and compliance obligations commence January 1, 2024. The CTA’s goal is to enable law enforcement agencies to better identify and prosecute money launderers, terrorists, drug and human traffickers, and other bad actors who obfuscate or hide their money in ownership of U.S. companies. The “solution” of the CTA is to require most U.S. domestic and foreign entities to report to the Financial Crimes Enforcement Network (“FinCEN”) identifying information about certain individuals who own or have substantial control over the entity.
The following is a brief primer on the CTA. As of the date of this article, the only current sources of direction on CTA compliance are the act, the regulations, and FinCEN’s commentary on the regulations. No cases, rulings or official interpretations exist. Certain forms and policies are not final, including the reporting form and FinCEN identifier application. We will strive to update this article as new information becomes available, but check the FinCEN website for up-to-date information at https://www.fincen.gov/boi.
Who must report to FinCEN?
Reporting companies. In general, every entity created by filing a document with the secretary of state or any similar office under state or tribal law is a “reporting company.” This generally includes corporations, LLCs, limited partnerships, limited liability partnerships, cooperatives, nonprofit corporations, and professional corporations. This generally excludes sole proprietorships, general partnerships, joint ventures, trusts (including settlement trusts), estates, governmental bodies, and congressionally or federally chartered entities (such as national banks, U.S. Postal Services, Fannie Mae, etc.).
The regulations contain 23 specific exemptions to what constitutes a “reporting company.”[2] If an entity falls within one of these exemptions, the entity is not a reporting company for as long as the conditions of the exemption are met. However, just because an entity is not a reporting company does not mean it is free from the CTA’s clutches. To the extent a non-reporting company has an ownership interest in or control over a reporting company, disclosure of such ownership or control may be required. More on that below.
What information has to be reported?
In additional to general information about the entity[3], each reporting company must report the following information about each “company applicant”[4] who forms 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 or passport number. A copy of the document providing the unique identifying number also has to be provided.
With few exceptions, the information to be reported relates to individuals, not entities.[5] Organizational structures are collapsed for purposes of CTA reporting so that information must be provided about the individuals who ultimately own or control the reporting company.
As of the date of this article, FinCEN has published a proposed reporting form, and solicited comments through March 31, 2023, but has yet to publish a final form.[6] The proposed form has generated some controversy, given that it includes an option to check a box stating that a company applicant or beneficial owner is unable to be identified.
Individuals who regularly form entities or who have a stake in or control numerous reporting companies may want to consider applying for a FinCEN identifier, which can be provided to the reporting company and used in the report in place of the required beneficial owner information.
When must initial reports be filed?
Reporting companies formed before January 1, 2024, will have until the end of 2024 to comply. Reporting companies formed on or after January 1, 2024 must file an initial report within 30 calendar days after the entity receives notice that its creation filing has become effective, or the state filing office provides public notice of the entity creation, whichever is earlier. Continuing reporting obligations are discussed below. Importantly, public notice, such as listing of the entity on the Alaska Division of Corporation’s website, could occur several days before the entity receives notice of a paper filing being processed. Reporting companies should be sure to pay attention to these dates when calculating reporting deadlines.
Who is a beneficial owner?
The definition of “beneficial owner” in the regulation is extensive.[7] In essence, it is any individual who directly or indirectly exercises “substantial control” over the reporting company or directly or indirectly owns or controls at least 25% of the ownership interests of the reporting company.
What is “substantial control”?
“Substantial control” includes, by definition, all “senior officers” of the reporting company.[8] These are defined as the president, chief executive officer, chief financial officer, general counsel, chief operating officer, and any other officer who performs similar functions. “Substantial control” also includes anyone with authority over appointment or removal of senior officers or a majority of the board, and anyone with authority to direct or determine, or who has substantial influence over, important decisions made by the reporting company, including regarding the nature, scope and attributes of the reporting company’s business, sale or lease of principal assets, reorganization, major expenditures and investments, approval of the operating budget, selection and termination of business lines or ventures, compensation of senior officers, entry into or termination of significant contracts, and amendment of governing documents such as bylaws and significant policies.
An individual can exercise substantial control through various means, including board representation, ownership or control of majority voting power, financing arrangements or control over intermediary entities that collectively exercise substantial control, or by “any other contract, arrangement, understanding, relationship or otherwise.”
The determination of who has “substantial control” of a reporting company presents uncertainty, risk, and potential for dispute and disagreement regarding CTA reporting requirements. There is not a bright line, and familiarity with the organizational documents and operating and governance structure of the reporting company and corporate law are required to make an informed and reasoned decision.
Who is exempt from reporting?
Many types of entities are exempt from being considered a “reporting company.” There are 23 exemptions set out in the regulations.[9] The exemptions center around entities that are already significantly regulated under other laws, or theoretically do not have private owners that can manipulate business operations for an improper purpose.
We expect the following will be some of the most heavily relied upon:
- Large operating companies—the entity must have an operating presence in the U.S. but it does not have to be particularly “large.” It must employ more than 20 full time employees in the U.S. and have reported more than $5 million in gross receipts or sales from U.S. sources in its previously-filed tax return. Note the regulation defines “employees” and otherwise elaborates on these qualifications, so reading and understanding the CTA and regulation is critical to determining if an entity qualifies for an exemption.
- Subsidiaries of exempt entities, with some exceptions, if the subsidiary’s ownership interests are controlled or wholly owned, directly or indirectly, by one or more exempt entities.
- Government agencies—entities established under federal, state, tribal or local law exercising governmental authority.
- Banks, credit unions, other money services institutions and insurance companies.
- Public utilities.
- Tax exempt entities under IRC § 501, tax exempt political organizations under IRC § 527, trusts under IRC § 4947, and entities that operate exclusively to provide financial assistance to or hold governance rights over tax-exempt entities and are owned and controlled exclusively by U.S. citizens.
- Old, defunct entities. Entities that existed as of January 1, 2020, but are not engaged in active business, do not have assets, and have had no change of ownership.
- Accounting firms registered under the federal Sarbanes-Oxley Act.
- Other highly regulated entities
- Entities subject to reporting under the federal Securities Exchange Act, the Investment Company Act or Commodities Exchange Act.
- Entities involved in the regulated securities or investment industry, such as registered brokers and dealers.
Are exempt and excluded entities completely unaffected by the CTA reporting?
No. Just because an entity is not a ‘reporting company,’ if the entity owns or controls a reporting company, the ownership and/or control information of the exempt or excluded entity still has to be reported. However, if an exempt entity is a beneficial owner of a reporting company only by virtue of its 25% or more ownership interest (and not by control), only the name of the exempt entity has to be reported.[10]
Are there ongoing reporting requirements after an initial report is filed?
Yes. There are no annual, biennial, or other periodic reporting requirements under the CTA and regulations. Instead, the CTA has rolling reporting requirements.[11] A reporting company must file an updated report if there is a change in beneficial owners or the reporting company’s or beneficial owner’s information previously reported, or if the reporting company later meets the criteria to be exempt (e.g., additional employees are hired to reach the 20-employee benchmark or an entity previously exempt no longer meets the exemption criteria). A reporting company must file an updated report within 30 days after the change.
A reporting company must file a corrected report within 30 days after the reporting company becomes aware or has reason to know that a previous report was inaccurate when filed. As mentioned already, updates do not need to be filed for a company applicant. However, a reporting company must correct inaccurate information previously filed about a company applicant.
We expect that, practically, these rolling reporting requirements will be onerous for entities. As such, companies need to develop procedures and forms to:
- Collect required information from beneficial owners and senior officers;
- Promptly collect updates and corrections to required information from beneficial owners and senior officers, and obtain commitments by beneficial owners and senior officers to provide prompt updates and corrections; and
- Confirm continuing availability of exemptions.
What are the penalties for violations of the CTA?
It is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information. It also is unlawful for any person to willfully fail to report complete or updated beneficial ownership 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 2 years.[12] This includes a person, such as a beneficial owner, providing information to a reporting company for purposes of making a CTA report. If a person inadvertently submits a report with inaccurate information and promptly submits a corrected report (within 90 days after the inaccurate report was submitted, not 90 days after learning that reported information is inaccurate), penalties are waived.
Are beneficial owners required to provide their information to the reporting company?
As written, the CTA and regulations place the reporting burden on the reporting company.[13] The CTA and regulations do not require beneficial owners to provide required information to the reporting company. Providing information to a reporting company is treated the same as reporting directly to FinCEN for penalty purposes (see preceding section), but nothing actually requires beneficial owners to provide information. As such, reporting companies may begin including reporting obligations by contract, whether in applicable governing documents, employment agreements, and/or personnel policies.
Conclusion
CTA compliance deadlines are fast approaching, and there are still many unanswered questions. We expect (hope) that FinCEN will issue guidance on these questions. Until then – ready or not – the time is now for companies to start preparing for CTA compliance and analyze what reporting requirements they may have.
[1] 31 U.S.C. § 5336, added by P.L 116-283 § 6403, 134 Stat. 4605 (2021); 31 C.F.R. § 1010.380.
[2] Also, every entity formed under foreign law that has registered to do business in a state or tribal jurisdiction by filing a document with the “secretary of state or any similar office” has to report.
[3] Including the legal name of the company, any trade names or d/b/a’s, principal address, jurisdiction of formation, and TIN.
[4] Company applicant information only has to be reported once, for entities formed on or after January 1, 2024. Beneficial owner information must be continually updated, as discussed below.
[5] An exempt entity that has an ownership interest in a reporting company, and is a beneficial owner of the reporting company only by virtue of its ownership interest, and not via control, is only required to have its entity name listed in the report; the entity’s beneficial owners are not required to be reported.
[6] https://www.federalregister.gov/documents/2023/01/17/2023-00703/agency-information-collection-activities-proposed-collection-comment-request-beneficial-ownership.
[7] 31 C.F.R. § 1010.380(d).
[8] 31 C.F.R. § 1010.380(d)(1)(A), (f)(8).
[9] 31 C.F.R. § 1010.380(c)(2).
[10] 31 C.F.R. § 1010.380(b)(2)(i).
[11] See generally 31 C.F.R. § 1010.380(a)(2).
[12] 31 C.F.R. § 1010.380(g).
[13] 31 C.F.R. § 1010.380(a).
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