In both music and the music business, structure matters. An F major chord will be an F major chord, regardless of its inversion. But not every construction of an F major chord will work equally well in all situations, and root position and first inversion constructions are commonly preferred. Similarly, a band will be a band regardless of whether it operates as a sole proprietorship, partnership, a corporation, or a limited liability company. But these choices are not equal, and corporations and limited liability companies are often selected by touring and recording artists as the preferred structures for professional activities, holding assets, and loanout functions. Beginning January 1, 2024, the Corporate Transparency Act (the “CTA”), a new federal law, will require every such operating and loanout company to comply with new reporting requirements or face substantial penalties.
Overview of the Corporate Transparency Act Reporting Requirements
Under the CTA, a “reporting company” must report certain information about itself, its “beneficial owners,” and its “company applicants” to the Financial Crimes Enforcement Network (“FinCEN”). Generally, almost all U.S. entities formed by a Secretary of State filing (e.g., corporations, limited liability companies) and most foreign entities registered to do business with a Secretary of State are considered reporting companies. Certain entities that might otherwise qualify as reporting companies — generally entities that are already subject to substantial regulatory oversight — are exempt from the reporting requirements.
The definition of “beneficial owner” is broad, including each person who owns or controls, directly or indirectly, 25% of the ownership interests of the reporting company and each person who exercises “substantial control” over the reporting company (including, among others, any person who has substantial influence over the entry into or termination, or the fulfillment or non-fulfillment, of significant contracts). The “company applicants” of a reporting company are certain individuals involved in the formation of the reporting company.
A reporting company will be required to report its legal name, d/b/a name, street address, tax ID number, and jurisdiction of formation or first registration. A reporting company will also be required to report the following information for each beneficial owner and, for reporting companies formed on or after January 1, 2024, each company applicant:
- full legal name;
- date of birth;
- residential address (or business address, in the case of a company applicant only);
- unique identifying number from an acceptable identifying document (generally, a state-issued ID or driver’s license or a passport); and
- a copy of such acceptable identifying document.
Alternatively, if a beneficial owner or company applicant obtains a FinCEN identifier and provides that identifier to the reporting company, the reporting company may report that FinCEN identifier instead of the information listed above.
Penalties for failure to comply are significant. A person who willfully provides false beneficial ownership information or who willfully fails to report complete or updated beneficial ownership information to FinCEN:
- may be civilly liable for a penalty that accrues at the rate of $500 per day; and
- may also be fined up to $10,000 and imprisoned for up to two years.
Timelines for Reporting
Reporting companies in existence before January 1, 2024, will generally have until January 1, 2025, to make an initial report under the CTA. Reporting companies formed on or after January 1, 2024, will generally have 30 days from notice of formation or registration, as applicable, to make an initial report, but under proposed rules, reporting companies formed in 2024 will generally have this deadline extended to 90 days.
If any information reported to FinCEN (other than company applicant information) changes after reporting company files a report, or if the entity becomes exempt from or subject to the requirements of the CTA, the entity generally has 30 days from the date of such change to file an updated report. This could happen if, for example, a band member who is a beneficial owner of a reporting company moves or withdraws from the reporting company.
Preparation for Implementation
Bands should consider taking the following actions in anticipation of the implementation of the CTA:
- Educate themselves regarding the potential triggers for updated CTA reports and ensure that they have a plan in place for staying compliant.
- Amend governance documents (bylaws, operating or limited liability company agreements, etc.) to address reporting obligations of beneficial owners and to provide for remedies for a beneficial owner’s failure to comply.
- Dissolve entities that are no longer used.
To learn more about the CTA and to discuss how these requirements may impact you, please contact AGG Entertainment & Sports co-chair Matt Wilson or AGG Corporate associate Garrett Brown.