This article originally appeared in the November 2023 issue of the Rockford Chamber of Commerce VOICE.
Beginning on January 1, 2024, businesses will need to begin reporting the ownership structures of their state-registered business entities to the Financial Crimes Enforcement Network (“FinCEN”), to comply with the federal Corporate Transparency Act passed by Congress on January 1, 2021. The information that FinCEN collects is purportedly to be used only for state and federal criminal matters and in conjunction with financial institutions’ Know Your Customer (“KYC”) regulations. However, similar state laws, such as New York’s, have eventually been amended to make such information reported publicly available via a searchable database.
The Corporate Transparency Act applies to ‘reporting companies,’ which is defined as any domestic entity that is created by a filing with a state secretary of state or an entity that registers to do business with a state secretary of state. Here in Illinois, common examples of ‘reporting companies’ would be corporations, limited liability companies, many forms of Illinois partnerships, and any of the equivalent versions of those from neighboring states, such as Wisconsin or Iowa. As a federal law, these reporting requirements are not unique to Illinois businesses, and all U.S. businesses will need to evaluate themselves for compliance, whether they be based in Florida, Maine, or Alaska.
While there is an extensive list of 23 types of ‘reporting companies’ that are otherwise exempt from FinCEN reporting, the most commonly used exemptions are expected to be nonprofit entities, political organizations, and publicly-traded companies or similar entities subject to regulatory oversight. For reporting companies, companies may be able to make use of the ‘large operating company’ exemption, defined as an entity (i) with more than 20 full time US employees, (ii) operating from a physical location in the US, and (iii) reporting more than $5 million in revenue.
Business owners and their advisors need to be prepared for compliance on three different fronts. First, for ‘reporting companies’ created after January 1, 2024, they will need to submit their beneficial ownership information as to any owner that owns or controls more than 25 percent of that business entity’s ownership interests. Second, for ‘reporting companies’ that were in existence prior to January 1, 2024, FinCEN requires that those companies report their beneficial ownership information prior to December 31, 2024. Third, there is a continuing obligation to report changes in beneficial ownership within 30 days of those changes. For ‘reporting companies,’ the information that must be provided includes (A) the beneficial owners’ full legal names; (B) birth date; (C) residential address; and (D) a passport or driver’s license number, and needs to be reported on FinCEN forms within 30 days, although FinCEN is considering extending the initial reporting deadline for a full 90 days for 2024. It is important to recognize that the FinCEN reporting requirement is as to ‘beneficial ownership,’ which circumstantially could include trust beneficiaries, land trust owners, and other indirect methods of ownership.
FinCEN is still finalizing its reporting system and its proposed forms as the date of this article, and it is possible that implementation of the Corporate Transparency Act will be delayed while FinCEN finalizes its reporting apparatus.
Failure to comply with the federal Corporate Transparency Act can result in civil and criminal penalties including $10,000 fines and up to two years of imprisonment. Importantly, liability also attaches to senior employees and officers of ‘reporting companies’ that fail to comply with the Corporate Transparency Act. However, given the information that needs to be collected for reporting, it is critical that businesses that believe they may qualify for reporting consult their advisors to determine their compliance obligations.