Corporate transparency: New federal law imposes reporting requirements on some businesses

A federal law passed in 2021 and crafted to fight illegal activity by foreign-based and domestic shell companies is causing more legal red tape for some Indiana companies and their attorneys.

The Corporate Transparency Act went into effect in January, and companies that don’t qualify for its exemptions still have months to get into compliance with the new law’s reporting requirements.

The law is intended to provide law enforcement with ownership information about many companies for the purpose of detecting, preventing and punishing terrorism, money laundering and other misconduct through business entities.

David Barrett, an executive partner in Faegre Drinker Biddle & Reath LLP’s Indianapolis office, said he felt most of the larger companies in Indiana and nationally were aware of the new law and its possible filing requirements.

“I think a lot (of companies) are waiting a little bit,” Barrett said.

Greg Ellis, the Indiana Chamber of Commerce’s vice president of energy, environmental affairs and federal relations, said the chamber sent out interim updates to its members in December and reminded them the new law would be going into effect Jan. 1.

Companies that are aware of the new law and are required to file will likely chalk it up to the cost of doing business, Ellis said.

“I do think it’s going to impact the majority of our members,” Ellis said.

Lots of exemptions

Barrett wrote an article for the Indiana Manufacturers Association that put a spotlight on the new federal law and what businesses should be aware of in terms of compliance.

There are 23 exemptions for businesses included in the new law.

For Barrett, the most likely exemption for a private company is the “large operating company exemption,” which has a two-part test for U.S. based companies. They are exempt if they have $5 million or more of U.S. sourced revenue that is documented by a federal tax return and 20 or more full-time employees in the U.S.

Barrett noted, however, that the new law potentially applies to all companies. Many private companies, family offices, and private equity companies have other entities outside of the main family tree.

Each separate ownership tree will need to be evaluated separately, as will any subsidiary that is not wholly-owned, for potential reporting requirements

“However, if a parent company is exempt, all wholly-owned subsidiaries and subsidiaries that are controlled by the parent company are also exempt. Exactly what constitutes control is not yet clear,” Barrett said.

An individual who qualifies as a “beneficial owner” also is subject to reporting requirements.

A “beneficial owner” either has a major influence on the reporting company’s decisions or operations, owns at least 25% of the company’s shares, or has a similar level of control over the company’s equity.

Mary Schmid, general counsel for Kleenco Maintenance & Construction, Inc., said it’s a challenge for any company to keep up with new laws and regulations, particularly one like Kleenco that operates in several different states.

“The way I look at it is it’s just one more thing,” Schmid said of the new law.

She said she briefly reviewed the filing requirements and the list of 23 exemptions and determined Kleenco met one of the exemptions.

Schmid said Kleenco qualified for the regarding companies with 20 or more employees.

She noted that a lot of businesses would likely qualify for that exemption.

Those businesses with less than 20 employees may not be aware that there’s a new filing requirement.

“I don’t think it’s gotten a lot of publicity,” Schmid said.

Steve Koers, an attorney with Lewis and Wilkins LLP and general counsel for Safe Hiring Solutions LLP, said Safe Hiring also qualified for the exemption that covers Kleenco.

He said general counsel and CPAs are making their clients aware of the new regulation.

“This law is long and kind of tedious. They do have good guidance online,” Koers said.

Koers said if general counsel do a filing under the new act on behalf of a client, they do have to identify themselves as the filing individuals, making it important that all forms are filled out completely.

The attorney also represents Sun King Brewery, which is exempt as well.

When do non-exempt businesses need to file?

According to the U.S. Department of Treasury, which will serve as the enforcement agency for the new law, companies that are required to comply must file their initial reports by the following deadlines:

Existing companies: Reporting companies created or registered to do business in the United States before Jan. 1, 2024 must file by Jan. 1, 2025.

Newly created or registered companies: Companies created or registered to do business in the United States in 2024 have 90 calendar days to file under the new law after receiving actual or public notice that their company’s creation or registration is in effect.

Beneficial ownership information reporting is not an annual requirement. A report only needs to be submitted once, unless the filer needs to update or correct information.

Generally, reporting companies must provide four pieces of information about each beneficial owner: name; date of birth; address; and the identifying number and issuer from either a non-expired U.S. driver’s license, a non-expired U.S. passport, or a non-expired identification document issued by a state (including a U.S. territory or possession), local government, or Indian tribe.

The company also must submit certain information about itself, such as its name(s) and address. In addition, reporting companies created on or after Jan. 1, 2024, are required to submit information about the individuals who formed the company.

Barrett said Faegre Drinker has been advising clients that are not exempt to file the new forms sooner rather than later.

He said there could be a mad rush in the fourth quarter of the year made by businesses that procrastinated.

“My number one piece of advice to clients is to try and get out in front of it,” Barrett said.

CTA filings aren’t super complicated, Barrett noted, but he stressed that what will be potentially cumbersome and time-consuming for companies is the data collection involved.

Like a lot of things on the regulatory front, being compliant and filing is an added cost for non-exempt businesses, Barrett said.

And there are potential criminal penalties for not complying with the new law. According to the American Bar Association, violations of the transparency act are punishable by up to two years in prison and carry civil fines of $500 per day, up to maximum of $10,000, per violation.

Barrett said most people don’t expect regulators to seek criminal penalties unless it’s a particularly egregious case.

The Faegre Drinker lawyer also mentioned an Alabama court case that businesses and attorneys have also been keeping an eye on.

In March, a judge in the U.S. District Court in Alabama ruled in favor of the National Small Business Association that the Corporate Transparency Act was unconstitutional.

Judge Liles Burke wrote that “The Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers,” according to the court decision.

A Reuters story reported that the federal government is expected to appeal the court’s ruling.

Barnett said there may be some companies waiting to see if that court decision ultimately knocks out the transparency act and its reporting requirement.

“I think it’s going to be viewed as a necessary evil, kind of like filing your taxes,” Ellis said of the CTA filing requirements.•