(919) 518-9508NOTE: This article is intended for informational purposes only, and it should not be construed as legal advice. It is not intended to be a comprehensive or exhaustive explanation of the law. This information is general in nature and may not apply to your specific circumstances. If you have questions about your compliance with the Corporate Transparency Act, you should contact your attorney.
Tucked away in the National Defense Authorization Act of 2021 was a little noticed provision known as the Corporate Transparency Act (the “CTA”), the purpose of which is to combat money laundering, terrorism, and to prevent criminal actors from using American business entities to hide illicit gains. Under the CTA, beginning on January 1, 2024, every limited liability company and corporation in the United States, with very few exceptions, will be required to report, among other things, the personal information of its beneficial owners and its organizers and incorporators to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
Please take note: the definitions in the CTA are broad and vague. There is no defense for making a good faith effort to comply with the reporting requirements, and strict liability may apply to any senior officer of the company. The penalty for failure to provide the Federal Government with this information includes criminal and civil penalties in the neighborhood of $10,000.00 or two (2) years’ imprisonment, or both.
Further information on the reporting requirements under the Corporate Transparency Act is available at https://www.fincen.gov/boi.
What does the CTA require?
Beginning January 1, 2024, every “Reporting Company” must report to FinCEN the “Personal Information” of such company’s “Beneficial Owners” and “Company Applicants”.
As more fully explained in the hypotheticals below, generally every corporation and limited liability company must report to FinCEN the Personal Information for each and every shareholder, officer, director, incorporator, member, manager, and organizer. If any of these positions are filled by a business entity, then the Personal Information of such entity’s shareholders, officers, directors, members, and managers must be reported to FinCEN.
Deadlines for Reporting the Personal Information?
For Reporting Companies formed prior to January 1, 2024, the Personal Information must be reported on or before January 1, 2025. For any “Reporting Company” formed after January 1, 2024, the Personal Information must be reported within ninety (90) days of filing the Articles of Incorporation or Articles of Organization that created the Reporting Company.
In the event there is any change to any of the information previously reported to FinCEN, such change must be reported within thirty (30) days. For example, if a Beneficial Owner moves to a new home, his new residential address must be reported to FinCEN within thirty (30) days of his moving.
Definitions in the CTA:
1. “Reporting Company” means any entity that is created by the filing of a document with a state agency (or the District of Columbia or an Indian Tribe). Note that this definition includes every single limited liability company and corporation formed in the United States. There are a multitude of exceptions listed in the CTA for companies that do not need to make the required report, but the exceptions are narrow and generally only apply to publicly traded companies and companies operating in highly regulated industries, so chances are your business entity does not qualify for an exception.
2. “Beneficial Owners” means each and every individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, either:
(a) exercises substantial control over such reporting company; or
(b) owns or controls at least 25% of the ownership interests of such reporting company.
3. “Company Applicants” means: (i) the individual who actually files the Articles of Organization or Articles of Incorporation; and (ii) the individual who is primarily responsible for directing or controlling the filing of the Articles of Organization or Articles of Incorporation.
4. “Personal Information” means: (i) full legal name; (ii) date of birth; (iii) complete residential address; (iv) driver’s license number (or passport number); AND (v) a photograph of your driver’s license (or passport).
How will this look in practice?
Hypothetical #1
Mayberry Storage, LLC owns and operates a self-storage facility in Mayberry, NC. The company was formed when Andy Taylor told Howard Sprague, County Clerk and Notary Public, to file Articles of Organization with the North Carolina Secretary of State. Howard filled out the Articles of Organization form promulgated by the Secretary of State, signed his name as the Organizer, and filed the Articles. Under the Operating Agreement of the company, the Managers are Andy Taylor and Barney Fife. The Managers are elected by the Members, and they are responsible for the day-to-day operation of the company. The consent of the Members is required for all actions outside of the ordinary course of business, including the sale, lease or purchase any real estate, admission of new members, and dissolution of the company. There are five (5) Members, each owning a 20% Membership Interest in the company, to wit: Andy Taylor, Barney Fife, Aunt Bea, Opie Taylor, and Gomer Pyle.
Under the CTA, Mayberry Storage, LLC must report to FinCEN the Personal Information for:
(1) Howard Sprague – Howard directly filed the Articles of Organization, and even though this is merely a clerical function over which he had no discretion, and even though he has no ownership interest or management authority in the company, he qualifies as a Company Applicant and his Personal Information must be reported. Note that there is an additional wrinkle to Howard’s reporting requirement. Under North Carolina law, the Organizer of the LLC must identify the initial members of the LLC, and until he has done so, it can be argued that he exercises not just substantial, but complete control over the company, so Howard may need to also be reported as a Beneficial Owner in addition to being reported as a Company Applicant.
(2) Andy Taylor – Andy directed Howard to file the Articles of Organization and therefore he is primarily responsible for directing the filing of said Articles, and he must be reported as a Company Applicant. Andy must also be reported as a Beneficial Owner, because, even though he owns less than 25% of the company, he exercises Substantial Control directly in his capacity as a Manager. Also, as a Member, he is entitled to vote to elect the Managers, and the consent of the Members is required for all actions outside the ordinary course of business, so it can be argued that in the aggregate all Members indirectly exercise Substantial Control and therefore the Personal Information of all Members, including Andy Taylor, must be reported.
(3) Barney Fife – Just like Andy Taylor, the CTA also requires that Barney be reported as a Beneficial Owner, because, even though he owns less than 25% of the company, he exercises Substantial Control directly in his capacity as a Manager. Also, as a Member, he is entitled to vote to elect the Managers, and the consent of the Members is required for all actions outside the ordinary course of business, so it can be argued that in the aggregate all Members indirectly exercise Substantial Control and therefore the Personal Information of all Members, including Barney Fife, must be reported.
(4) Aunt Bea and Gomer Pyle – Aunt Bea and Gomer Pyle own less than 25% of the company, but as a Member, they are entitled to vote to elect the Managers, and the consent of the Members is required for all actions outside the ordinary course of business, so it can be argued that in the aggregate all Members indirectly exercise Substantial Control and therefore the Personal Information of all Members, including Aunt Bea and Gomer Pyle, must be reported.
(5) Opie Taylor – Minor children are exempt from the reporting requirements for Beneficial Owners, and Opie is a minor child, so he is the only person whose Personal Information need not be reported. However, the Personal Information of Opie’s parents or guardian will need to be reported, therefore, Andy Taylor’s Personal Information will have to be reported in lieu of Opie’s. Note that the CTA requires that the Personal Information be updated anytime there is a change, and as such, when Andy married Helen Crump, she presumably also became Opie’s guardian, and her Personal Information may have to be reported as well.
Hypothetical #2
Good Ole Boys, LLC is a limited liability company engaged in the business of transporting spirituous liquors. The company was formed when Uncle Jesse filed Articles of Organization with the Georgia Secretary of State. Under the Operating Agreement, there are two (2) classes of member interests: Class A Members and Class B Members. The total number of outstanding membership interest units is 1,500. The day-to-day business of the company is run by its Managers: Bo Duke and Luke Duke. All major decisions (e.g. whether to borrow money, sell any real estate, and elect the managers) are made by the sole Class A Member, which is Boars Nest, LLC (owning 1,000 Class A Membership Units). The Class B Members only have the right to receive distributions of the profits, but their consent is required in order to dissolve the company. The Class B Members are Daisy Duke (owning 750 Class B Membership Units), Boss Hogg (owning 250 Class B Membership Units), Sheriff Rosco P. Coltrane (owning 250 Class B Membership Units), and Cooter Davenport (owning 250 Class B Membership Units).
Under the CTA, Good Ole Boys, LLC must report to FinCEN the “Personal Information” for:
(1) Uncle Jesse – Since he directly filed the Article of Organization, he qualifies as a Company Applicant and his Personal Information must be reported. Note that Uncle Jesse, like Howard Sprague in the above hypothetical, may also need to be reported as a Beneficial Owner, because until the initial members are identified, it can be argued that he exercises not just substantial, but complete control over the company.
(2) Bo and Luke Duke – Even though they hold no ownership interest in the company, they directly exercise substantial control over the company in their capacity as Managers, so their Personal Information must be reported.
(3) Boars Nest, LLC – Although it may be true that Boars Nest, LLC itself is a Reporting Company and must make its own report to FinCEN, unless Boars Nest, LLC is exempt from the CTA, then God Ole Boys, LLC must report the Personal Information of Boars Nest, LLC’s Beneficial Owners.
(4) Daisy Duke – She owns 750 Class B Membership Units, which is 50% of all outstanding membership interest units, so she qualifies as a Beneficial Owner, and her Personal Information must be reported.
(5) Boss Hogg, Sheriff Rosco P. Coltrane, and Cooter Davenport – They each own only 250 Class B Membership Units out of 1,500 total outstanding membership interest units (16.67% of the company each); however, as Class B Members, they are entitled to vote on whether to dissolve the company, and in the aggregate, those Class B Members can, in limited circumstances, exercise Substantial Control over the company. Therefore, their Personal Information must be reported.
Further information on the reporting requirements under the Corporate Transparency Act is available at https://www.fincen.gov/boi.
