The Corporate Transparency Act (“CTA”) has gone into effect as of January 1, 2024, requiring timely submission of specified information on new or existing companies and their beneficial owners, regardless of industry. These new reporting obligations will impact millions of businesses and non-compliance can result in severe penalties.
The CTA was originally enacted by Congress in 2021 as part of the Anti-Money Laundering Act of 2020. The purpose of the CTA is to enhance transparency in entity structures and ownership to combat money laundering, tax fraud, and other illicit activities by establishing a national registry of identifying information about the people who beneficially own or control various business entities. The registry is maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) and is accessible only by law enforcement, government agencies and other officials.
Effective January 1, 2024, the beneficial ownership information reporting requirements mandated by the CTA will be phased in over a two-year period, imposing compliance burdens on millions of small business entities and their owners. Under these new rules, covered entities must report specified information about certain owners and officers to FinCEN, as well as provide timely updates on any changes.
Intentional failure to comply with these requirements can result in civil penalties of $500 per day with no cap, criminal penalties of $10,000 and/or imprisonment of up to two years. Not only can the penalty be imposed against the entity itself, but also against any person who either causes the failure or is a senior officer. This includes beneficial owners refusing to provide information to the entity or who provide false information knowing that the information is going to be reported to FinCEN. Penalties will not be imposed if a person, or reporting company, voluntarily submits a report correcting inaccurate information within 90 days of the deadline for the original report.
Given the severity of the abovementioned penalties, it is best practice to always report when in doubt. Further explanation on who must report, what information must be reported, when filing is required and how information is to be transmitted is provided below, as well as the applicable exemptions to the CTA reporting requirements.
Who Must Report
Companies required to report are called “reporting companies.” There are two types of reporting companies: (1) domestic reporting companies, which include corporations, limited liability companies (including single-member LLCs), limited partnerships and any other entity created by filing a document with the secretary of state or any similar office; and (2) foreign reporting companies, which include entities formed under the law of another country and registered to do business in the U.S. by filing a document with the secretary of state or any similar office.
Only entities that are “created” by filing a document with the secretary of state or any similar office must report. In most states, sole proprietorships operating under a “doing business as,” trusts, and general partnerships are not “created” in this manner and are therefore not considered as a reporting company.
What Information Must Be Reported
Reporting Company Information. A reporting company must disclose its: (1) name (including trade names and fictitious business names); (2) address of its principal place of business (cannot be a P.O. box); (3) the jurisdiction of formation; and (4) its taxpayer identification number.
Company Applicant Information. For entities formed on or after January 1, 2024, the entity must report information about its company applicants. A company applicant can be up to two individuals who directly file the document that creates or first registers the reporting company, and/or is primarily responsible for directing or controlling the filing of the document. A company applicant can be a lawyer, accountant, or another individual, such as a business formation service.
For a company applicant, a reporting company must disclose: (1) individual’s name; (2) date of birth; (3) address; and (4) an identifying number from an acceptable identification document such as a passport or driver’s license and the name of the issuing state or jurisdiction. Entities formed prior to January 1, 2024, do not have to report company applicant information.
Beneficial Ownership Information (“BOI”). For purposes of the new reporting requirements under the CTA, a reporting company’s beneficial owner(s) is any individual who, directly or indirectly, either: (1) exercises substantial control over the reporting company; or (2) owns or controls at least 25% of the reporting company’s ownership interests. A beneficial owner does not include corporate or other entity owners and can only be an individual. An individual owner may also be a beneficial owner from tiered entity relationships.
An individual can be considered to have substantial control over an entity if (1) the individual is a senior officer; (2) has authority over the appointment or removal of any senior officer; (3) directs, determines, or has substantial influence over important matters affecting the reporting company, directly or indirectly, through board representation, ownership or control over a majority of the voting power, control over intermediary entities, arrangements through financial or business relationships, or any other contract arrangement, understanding, relationship, etc. Clearly, the issue of substantial control should be carefully considered on a case-by-case basis.
If a trust owns at least a 25% interests in a reporting company, there are multiple individuals that may be considered a beneficial owner: (1) trustee or other individual with the authority to dispose of trust interests; (2) a beneficiary who is the sole permissible recipient of trust income and principal or who has the right to demand a distribution of or withdraw substantially all for the trust assets; and (3) a grantor or settler who has the right to revoke or otherwise withdraw assets.
There is no limit on the number of beneficial owners an entity may have, which is shown in the following example:
Example For Multiple Beneficial Owners. An LLC has three members each holding a 1/3 interest, none of which manages the LLC. As the members all hold at least 25% of the LLC interest, all three are considered beneficial owners. In addition, the LLC has a president, CFO, and CEO. All senior officers are also considered beneficial owners as they exercise substantial control over the LLC. Therefore, the LLC must include six beneficial owners in its BOI report.
A reporting company must disclose BOI including: (1) individual’s name; (2) date of birth; (3) address; and (4) an identifying number from an acceptable identification document such as a passport or driver’s license and the name of the issuing state or jurisdiction. The reporting company will also have to report an image of the identification document used to obtain the identifying number in item 4.
To date, FinCEN has not provided any specific guidance on constructive ownership rules for spouses / parents / children. Until guidance is issued, it is recommended to always error on the side of caution.
FinCEN Identifiers. In lieu of providing the above information in a report, a reporting company or beneficial owner can apply to FinCEN to obtain a unique FinCEN identifier. This unique identifying number can then be used in place of the company or individuals who otherwise required personal information in a BOI report.
When Is Filing Required
If the reporting company is created or registered to do business in the U.S. on or after January 1, 2024, then it must file its initial BOI report within 90 days after receiving actual or public notice that its creation or registration is effective. For a reporting company created or registered on or after January 1, 2025, the initial report is due within 30 days.
If the reporting company existed prior to January 1, 2024, it must file its initial BOI report by January 1, 2025.
The beneficial ownership reporting requirement is not an annual filing. Once the entity files its report, there are no further reporting requirements unless a correction or update is required. Updates include a change of address of either the reporting company or a beneficial owner, or the addition or removal of a beneficial owner. The corrected or updated report must be filed within 30 days of when the change occurs.
Reporting companies must rely heavily on beneficial owners to provide updated information whenever there is a change in their information. For example, name changes, divorce, death, expiration of driver’s licenses, passports, etc. are all conditions that will require an updated BOI report to be filed within the 30-day window. New images of identification documents will also be required to be included in the updated report.
How Is Information Transmitted
All BOI reports must be filed electronically on the FinCEN portal at https://fincen.gov/boi. Reporting companies can submit reports indicating that they were unable to obtain all necessary information but will be considered incomplete and noncompliant. Reports must be completed with all necessary information for full compliance.
Exemptions For CTA Reporting Requirements
Specifically excluded from reporting under the CTA are tax-exempt entities; entities assisting tax-exempt entities; subsidiaries of exempt entities; investment companies and investment advisors; venture capital fund advisors; public companies; inactive entities; and “large operating companies.” Please see below the full list of 23 exempt companies included in the FinCEN FAQ.
- Securities reporting issuer
- Governmental authority
- Bank
- Credit union
- Depository institution holding company
- Money services business
- Broker or dealer in securities
- Securities exchange or clearing agency
- Other Exchange Act registered entity
- Investment company or investment adviser
- Venture capital fund adviser
- Insurance company
- State-licensed insurance producer
- Commodity Exchange Act registered entity
- Accounting firm
- Public utility
- Financial market utility
- Pooled investment vehicle
- Tax-exempt entity
- Entity assisting a tax-exempt entity
- Large operating company
- Subsidiary of certain exempt entities
- Inactive entity
Large operating companies are entities that (1) employ more than 20 full-time employees in the U.S. (part-time employees do not count toward the 20 full-time employee threshold); (2) have an operating presence at a physical office the U.S.; and (3) have filed in the previous year a federal income tax return or information return reporting more than $5 million in gross receipts of sales in the U.S. in the aggregate (including the gross receipts of other entities owned by the entity and other entities through which the entity operates).
A newly organized company will not qualify as a large operating company as it will not have a previous year’s federal income tax return, so newly formed companies, regardless of their projected size, will not be able to take advantage of this exemption. It should also be noted that even if a company is exempt, it may enter into transactions or ventures that would require beneficial ownership disclosure under the CTA.
Final Impressions
The new reporting requirements under the CTA are complex and potentially punitive. It is highly recommended that reporting companies existing prior to January 1, 2024, immediately contact beneficial owners to obtain all the required information to be reported well before the January 1, 2025, deadline, as well as setup an internal notification system for purposes of updating information with FinCEN on an ongoing basis.
For all newly formed businesses, it is extremely important to timely notify a company applicant to ensure compliance with the CTA and avoid imposition of additional penalties.
There have already been and will continue to be many scammers sending fraudulent notices requesting information under the guise of the CTA. FinCEN will not send unsolicited requests for information. Many less reputable businesses will attempt to offer these services as well. It is advisable to seek the services of a reputable accounting or legal firm to ensure full and continual compliance with the CTA.
We have been advised by our malpractice carrier that completing the BOI is the practice of law, and not covered by our insurance. Therefore, while we will notice you that this form may be required, and try to make sure that you are in compliance, you should either complete this form internally, or ask your lawyer to assist you.
If you have any questions on new reporting requirements under the CTA and how this may impact you or your business, please do not hesitate to reach out to us for assistance.
