Are You Ready for the Corporate Transparency Act? A New Federal Disclosure Requirement for Physician Practices
By Aaron Kacer, Esq., Associate Attorney and Steven T. Lawrence, Esq., Shareholder at Milligan Lawless, PC
Digital - August 2023
The Corporate Transparency Act (the “CTA”)[1] was enacted into law over a Presidential veto in 2021, without much fanfare. However, the implications of the law for physician practices and other businesses are significant. In particular, the new law and its implementing regulations, which take effect on January 1, 2024, create a new reporting requirement for certain entities. This article highlights the implications and summarizes the requirements under the CTA and the regulations promulgated under the CTA, for physician practices and many other businesses.
The CTA will implicate approximately 32.6 million companies, including many physician practices. If your practice is required to report under the CTA, certain information about your practice, its owners, and certain key individuals will have to be reported through an online filing in a secure system with the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the United States Department of Treasury.
General Reporting Requirements
The immediate questions to consider include: what entities are required to report; what are the reporting requirements under the CTA; what individuals within reporting entities are required to report; what type of information must be reported; what are the timelines for reporting; and what are the penalties for non-compliance?
Entities Required to Report
The CTA applies to corporations, limited liability companies, and other entities created or registered to do business in the United States, unless an exemption applies. The CTA exempts twenty-three categories of entities from reporting, including those already subject to substantial federal or state regulation, such as publicly traded companies. Unfortunately, there is not an exemption for healthcare entities. There are, however, exemptions for large operating entities, inactive entities, and subsidiaries of exempt entities.
To highlight the large operating entity exemption, the exemption applies to any entity that employs more than 20 employees on a full time basis; filed Federal income tax returns for the previous year demonstrating more than $5,000,000 in gross receipts or sales in the aggregate (which includes affiliated entities; and has an operating presence at a physical office within the United States.
Unless your practice meets an exemption, your practice will be subject to the CTA and required to file a report with FinCEN.
Individuals Who Are Required to Report
The CTA mandates two categories of individuals who are required to report information with FinCEN: the “beneficial owners” and “company applicants” of a reporting entity.
A beneficial owner is an individual who, directly or indirectly, owns or controls at least 25% of, or exercises substantial control over, a reporting entity. The term “substantial control” encompasses senior officers of an entity; individuals with authority to appoint or remove a senior office, or majority of the board of directors (or similar body) of a reporting entity; and individuals with direction, determination, decision authority, or substantial influence over, important matters of a reporting entity. A company applicant is an individual who files an application to register a reporting entity with the Arizona Corporation Commission or an equivalent agency.
If your practice is a reporting entity, the owners and key individuals with company decision-making authority must be included in your practice’s FinCEN report. Additionally, the individual or individuals who registered your practice with the Arizona Corporation Commission or Arizona Secretary of State must be included in your practice’s FinCEN report.
Information to be Reported
Reporting entities must provide certain information in their initial reports, including the reporting entity’s full legal name; any alternative names by which the reporting entity engages in business (e.g. dba and trade names); the reporting entity’s physical address and jurisdiction; and the reporting entity’s tax identification number. Beneficial owners and company applicants of the reporting entity must also provide their full legal name; date of birth; current residential address; and identification number from a state-issued ID or federally issued passport, along with a photograph of the identification document. Alternatively, these individuals can provide a specific FinCEN identifier, which is a unique identification code obtained upon application from FinCEN that can act as a substitute for reporting such information.
After your practice has identified its beneficial owners and company applicants, those individuals will be required to disclose personal information in your practice’s FinCEN report, unless such individuals have applied for and obtained a FinCEN identifier as a substitute for reporting such personal information.
Reporting Deadlines
A reporting entity that was formed or registered before January 1, 2024, is required to submit its initial report not later than January 1, 2025; a reporting entity formed on or after January 1, 2024, is required to submit its initial report within thirty days of formation. Reporting entities must also timely submit report updates and changes in submitted information. They must also correct any inaccurate submitted information on or before the earlier of: 30 days of the date on which the inaccuracy was discovered, and, 90 days from the date the inaccurate report was submitted.
Penalties for Reporting Violations
The CTA provides that it is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent information, or to willfully fail to report complete or updated information to FinCEN. Violations carry civil and criminal penalties, including: up to $500 per day for as long as the violation continues (up to a maximum of $10,000), imprisonment for up to two years, or both. If your practice is required to file a report with FinCEN and fails to do so, the CTA subjects individuals who are senior officers of the practice at the time of the violation to penalties.
Privacy of Reported Information
Certain privacy protections may exist under the CTA. FinCEN has expressed that information on their filing system database will not be publicly available. However, FinCEN may disclose reported information to the following agencies, through appropriate protocols: Federal, State or local law enforcement; Federal agencies engaged in national security or intelligence operations; the Department of Treasury; and Federal financial regulators, including the IRS.
FinCEN Report Checklist
If you believe your practice may be required to file a report with FinCEN, you may want to consider the following steps to achieve CTA compliance:
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Determine if a reporting exemption applies; if not,
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Determine the size of your practice and collect a list of entities your practice owns.
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Determine if practice organizational documents and filings with the Arizona Corporation Commission and Arizona Secretary of State are up to date.
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Determine ownership (including percentages), board membership or representation, officers, managers, and individuals with substantial control and decision-making authority.
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Determine who filed formation documents with the Arizona Corporation Commission or Arizona Secretary of State.
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Consider relationships with owners and key individuals, and begin to collect required personal information in a secure fashion.
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Consider practice dynamics and determine the immediacy of knowing of updates to business locations and personal information of owners and key individuals.
Conclusion
The CTA will go into effect on January 1, 2024, meaning practice entities, their owners and key individuals should begin to familiarize themselves with the CTA’s requirements, gather relevant information, and begin to work on the required reports. Do not hesitate to contact your counsel for assistance in this effort.
About the Authors:
Aaron E. Kacer is a business and transactional Associate at Milligan Lawless, PC, concentrating in the areas of business and corporate, healthcare and real estate law directed towards transactional and operational issues. Aaron is admitted to practice in Arizona and Iowa, holds a Juris Doctor and Certificates in Health Law, Business Law and Intellectual Property Law from Drake University Law School, a Master of Business Administration from Drake University College of Business and Public Administration, and a Bachelor of Arts in Biology from the University of Iowa.
Steven T. Lawrence is a Shareholder at Milligan Lawless, PC, and focuses on commercial transactions, including mergers and acquisitions, finance and licensing. Steve has substantial experience representing healthcare companies and individuals in the healthcare industry in matters ranging from complex commercial transactions to joint ventures and licensing arrangements. Steve is listed in “The Best Lawyers in America” for Corporate Law, M&A Law and Healthcare Law and Chambers USA for Corporate/M&A Law. Steve holds a Juris Doctor With Distinction from the University of the Pacific McGeorge School of Law, a LLM in Health Law from Loyola University Chicago, a MBA from the W.P. Carey School of Business at Arizona State University and a Bachelor of Science in Business Administration from California State University, Sacramento.
Citations:
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31 U.S.C. § 5336; 87 Fed. Reg. 59498 (Sept. 30, 2022).