The Corporate Transparency Act is Upon Us: Now What?

The Corporate Transparency Act (“CTA”) became effective on January 1, 2024 and could impact the reporting requirements for your business or company. If you are an owner, manager, director or officer of one or more business entities, you will need to be aware of the new reporting requirements. Noncompliance could result in civil and criminal penalties.

 

Starting on January 1, 2024, many companies in the United States are required to report Beneficial Ownership Information (“BOI”) to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of Treasury. A BOI report is the report of information about the reporting company and about the individuals who ultimately own or control the reporting company (i.e., the beneficial owners). In short, the design of the CTA and the BOI reporting requirement is to identify the individuals who own and/or control these reporting companies. In addition, certain information about the company applicants – those persons who are involved in filing the documents with the Secretary of State that form the entity – needs to be reported on the BOI report. Reported information will not be available to the general public; provided, however, it will be available to federal and state law enforcement agencies.

 

What entities are required to comply with the CTA’s BOI reporting requirement?

 

Entities organized both in the United States and outside the United States may be subject to the CTA’s reporting requirements. A “reporting company” is defined as an entity that was created in the United States by the filing of a document with a Secretary of State or similar office, or any other legal entity (i.e., a foreign company) that has been registered to do business in the United States by filing of a document with a Secretary of State or similar office.

 

Domestic entities required to report under the CTA include corporations, limited liability companies (“LLCs”), limited partnerships, statutory trusts or foundations or any similar entity. Foreign entities required to report under the CTA include corporations, LLCs or any similar entity. Unless an exemption applies, the BOI reporting requirement applies to all such reporting companies, including any entity formed before January 1, 2024 that is still in existence.

 

Entities that are not created by the filing of a document with a Secretary of State or similar office are not required to report under the CTA. For example, private trusts and general partnerships are not considered reporting companies, and therefore, are not required to file a BOI report under the CTA. However, even though an entity (such as a private trust) is not a reporting company, its information may still need to be reported if it owns a greater than 25% ownership interest in or possess substantial control over a reporting company.

 

What are the exemptions from the CTA’s BOI reporting requirement?

 

There are 23 categories of exemptions in total. Such exempt entities include: (1) publicly traded companies, (2) governmental entities, (3) banks and credit unions, (4) brokers or dealers in securities, (5) insurance companies, (6) public accounting firms, (7) tax-exempt entities, (8) qualifying large operating entities, and (8) qualifying inactive entities.

 

Who is a beneficial owner?

 

A beneficial owner is any individual who either directly or indirectly:

  • Exercises “substantial control” over the reporting company.
    • An individual has substantial control of a reporting company if he or she:
      • Is a senior officer (e.g., President, CEO, CFO, COO, General Counsel or another officer who performs similar functions, regardless of title).
      • An individual who may appoint or remove certain officers or a majority of directors of the reporting company.
      • An individual who is an important decision-maker (directs, determines or exercises substantial influence over important decisions of the reporting company).
      • An individual who has any other form of substantial control over the reporting company
    • There is no limit to the number of individuals who can be reported for exercising substantial control over the reporting company.
  • Owns or controls (directly or through another entity, e.g., a trust) at least 25% of the reporting company’s ownership interests.
    • The following are examples of such ownership interests: (1) equity, stock, or voting rights, (2) a capital or profit interest, (3) convertible instruments, (4) options or other non-binding privileges to buy or sell any of the foregoing and (5) any other instrument, contract, or other mechanism used to establish ownership.

Although an individual otherwise qualifies as a beneficial owner, he or she may fall within 1 of 5 exceptions for non-reporting. Such exceptions are: (1) minor child exception, (2) nominee, intermediary, custodian, or agent exception, (3) employee exception, (4) inheritor exception and (5) creditor exception.

Who are the company applicants?

 

A company that must report its company applicants will have only up to two (2) individuals who could qualify as company applicants. A company applicant is:

  • The individual who directly files the document that creates or registers the company; and
  • If more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing.

 

For example, if an attorney directs a paralegal to file a business entity, both the attorney directing the paralegal and the paralegal who files the business entity must be reported as company applicants.

 

A reporting company must report its company applicants only if it is either:

  • A domestic reporting company created on or after January 1, 2024; or
  • A foreign reporting company first registered to do business in the United States on or after January 1, 2024.

 

A reporting company formed before January 1, 2024 does not need to report its company applicants.

 

When must a reporting company file its BOI report?

 

Depending on when the reporting company is registered/formed, the initial reporting deadline is as follows:

  • Before January 1, 2024: January 1, 2025
  • January 1, 2024 to December 31, 2024: 90 days of notice of creation or registration
  • On or after January 1, 2025: 30 days of notice of creation or registration

 

What information is required to be reported for the reporting company and individuals?

 

On the BOI report, a reporting company must provide the following information:

  • The company name;
  • Any trade names or assumed names;
  • The business address (the company’s primary address – not a registered agent’s address);
  • The jurisdiction of formation; and
  • The company’s taxpayer identification number (TIN) or Employer Identification Number (EIN).

 

On the BOI report, an individual who qualifies as a beneficial owner or a company applicant (if applicable) must provide the following information:

  • The individual’s full legal name;
  • The individual’s date of birth;
  • The individual’s current residential street address (or business address for company applicants, if applicable); and
  • The individual’s unique identifying number evidenced via an image of one of the following non-expired documents: U.S. passport, state driver’s license, or identification document issued by a state or local government (i.e., a Tax ID Number).

 

Where a private trust is a beneficial owner, the above information for individuals will need to be provided for:

  • The trustee, trustees, and other parties with decision-making rights with respect to the interest in the reporting company owned by the trust, such as investment trust advisers;
  • The grantor of a revocable trust with the power to revoke or amend the trust agreement;
  • A beneficiary who is the sole permissible recipient of trust income and principal; and
  • A beneficiary who has the right to demand a distribution of or withdraw substantial assets of the trust.

 

Instead of an individual providing the above information to a reporting company, the individual can obtain and provide a FinCEN Identifier. Then, the reporting company will only need to include the FinCEN Identifier on the BOI report. A reporting company may also request to receive a FinCEN Identifier on its initial BOI report.

 

What if something changes on my BOI report?

After a BOI report is initially filed, if there is any change to the reported information or its beneficial owners, such as a change in name or change in beneficial owner information as a result of the hiring of a new senior officer, another person acquire a greater than 25% ownership interest or a change to a beneficial owner’s contact information or identifying number, the reporting company must file an updated BOI report no later than 30 days after the date on which the change occurred.

 

Changes to the company applicant’s information do not need to be reported.

 

What happens if I don’t comply with the BOI reporting requirement?

 

The failure to timely file a BOI report may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues (with no limit), or criminal penalties including imprisonment for up to 2 years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may also be held accountable for the failure.

This article is meant to be for general and informational purposes only and shall not be considered legal advice. The information in this article should not be applied to your specific facts and circumstances without consultation with competent legal counsel and other professional advisors.