Note: The information provided here is current as of November 15, 2023. However, details surrounding the Corporate Transparency Act (CTA) are still evolving. We will continue to update this blog with new information and resources as they become available.
On January 1, 2024, The Corporate Transparency Act (TCA) goes into effect, impacting millions of U.S. and foreign companies. If you own or operate a business located or doing business in the U.S., it’s important to understand the actions you need to take to be compliant with this new law and its requirements. Since several terms used in this legislation are new, read on to understand their definitions and other frequently asked questions.
What is the Corporate Transparency Act?
The Corporate Transparency Act is a sweeping new federal law aimed to combat money laundering, tax fraud, and other illicit activities by mandating the disclosure of certain information related to the beneficial owners and controllers of most U.S. domestic entities and certain non-U.S. entities doing business in the United States. The act actually passed in 2021 but starts taking effect in 2024.
At the start of the new year, all applicable “reporting companies” will have a limited timeframe to submit a beneficial ownership information (BOI) report to the Financial Crimes and Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. Failure to comply can result in significant civil and criminal penalties.
Which business entities are considered a “reporting company”?
A “reporting company” is a domestic or foreign corporation, limited liability company (LLC), limited partnership (LP) or similar entity that was either formed or registered to do business in any state or jurisdiction by filing a document with a secretary of state or other similar office and which does not qualify for an exemption.
Who are beneficial owners of a company?
Identifying the applicable beneficial owners of a reporting company is the most critical aspect of the new CTA rules. Pursuant to the CTA, a beneficial owner is an individual who either directly or indirectly: (i) exercises substantial control over the reporting company or (ii) owns or controls at least 25% of the reporting company’s ownership interests.
Exercising Substantial Control
An individual can exercise substantial control over a reporting company in four different ways. If the individual falls into any of the categories below, the individual is exercising substantial control:
- The individual is a senior officer(the company’s president, CFO, general counsel, CEO, COO, or any other officer who performs a similar function).
- The individual has authority to appoint or remove certain officers or a majority of directors (or similar bodies) of the reporting company.
- The individual directs, determines, or has substantial influence over important decisions made by the reporting company (such decisions include those addressing the nature, scope, and attributes of the business, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company; the reorganization, dissolution, or merger of the reporting company; and major expenditures or investments, issuances of any equity, the incurrence of any significant debt, or approval of the operating budget of the reporting company among others).
- The individual has any other form of substantial control over the reporting company, as explained further in FinCEN’s Small Entity Compliance Guide
25% of the Ownership Interests
An “ownership interest” under the CTA is broadly defined and considers a variety of arrangements. In addition to stock and other equity interests, profits interests, put and call options, and debt instruments should also be taken into account when determining whether the 25% threshold is met. For these purposes, the total ownership interests that an individual owns or controls, directly or indirectly, is calculated as a percentage of the total outstanding ownership interests of the reporting company, and assumes all options are exercised.
There are five (5) exceptions for when an individual who otherwise would be a beneficial owner is exempt. Pursuant to the CTA, a beneficial owner does not include:
- a minor child if the information of the child’s parent or guardian is reported;
- an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual;
- an individual acting solely as an employee (but not an officer) of the entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person;
- an individual whose only interest in the entity is through a right of inheritance; or
- a creditor of the entity, unless the creditor exercises substantial control over the entity or owns or controls not less than 25% of the ownership interests of the entity.
Who is exempt from The Corporate Transparency Act?
The CTA expressly excludes 23 categories of larger, more highly regulated, and other entities that may be subject to different ownership reporting requirements from the definition of reporting company.
For example, “large operating companies” meeting all of the following criteria are exempt from submitting BOI information:
- more than 20 full-time employees in the U.S.
- an operating presence at a physical office within the U.S., and
- more than $5 million in gross receipts or sales (net of returns and allowances) reported on its filed prior year federal tax return, excluding gross receipts or sales from sources outside the U.S.
Additional categories of excluded entities include:
- federal and state credit unions
- investment companies or investment advisers
- insurance companies and insurance producers
A full list of the 23 exempt entity types can be found here.
Small and medium-sized entities will almost certainly be subject to the CTA’s requirements. Indeed, FinCEN estimates 32.6 million reporting companies will be subject to these reporting rules when they go into effect, and an additional 5 million entities will become reporting companies each year thereafter.
What information must be included in a BOI report?
BOI reports require specific pieces of information about a reporting company, its “beneficial owners,” and, in the case of a reporting company formed or registered to do business in the U.S. on or after January 1, 2024, its “company applicants”.
More specifically, a reporting company must report:
Information about the reporting company:
- Full legal name
- Any trade name or “doing business as” (DBA) name
- Complete current U.S. address
- State, tribal, or foreign jurisdiction of formation
- Taxpayer Identification Number (TIN)
Information about each beneficial owner and company:
- Full legal name
- Date of birth
- Residential address (not business)
- A unique identifying number from a (non-expired) driver’s license, passport or other state or federal-issued identification
- A copy of the document that the unique identifying number is from
Alternatively, an individual beneficial owner or company applicant can submit the above information directly to FinCEN online and obtain a “FinCEN identifier,” which is a unique identifying number assigned by FinCEN to the individual, and provide that number to the reporting company in lieu of the personally identifiable information above.
Who are company applicants?
As indicated above, information regarding company applicants must be reported by reporting companies formed on or after January 1, 2024. Reporting companies formed prior to January 1, 2024, are not required to disclose their company applicants to FinCEN.
A “company applicant” is the individual who directly files the document that forms the reporting company or registers the company to do business in the United States and the individual who is primarily responsible for directing or controlling such filing.
When utilizing a law firm to form a new entity in the U.S., both the paralegal who submits the filings and the individual who directed such filing to be made will be considered “company applicants” for CTA reporting purposes.
Deadlines for compliance with The Corporate Transparency Act
Deadlines for submitting the BOI reports are quickly approaching. Reporting companies created on or after January 1, 2024, must submit their BOI reports within thirty (30) days of their formation date. However, FinCEN has proposed to extend the initial filing deadline for BOI reports from 30 to 90 days for entities created or registered in 2024.
Reporting companies created prior to January 1, 2024, have until December 31, 2024, to submit their initial BOI reports.
Continuing Reporting Obligation
Importantly, BOI reporting is a continuing obligation under the CTA. Reports must be updated within thirty (30) days of a change to the beneficial ownership, e.g., through the sale of a business, merger, acquisition, or death, or within thirty (30) days upon becoming aware of or having reason to know of inaccurate information previously filed.
Penalties for Non-Compliance
It is unlawful for any person to willfully provide false or fraudulent beneficial ownership information to FinCEN, or willfully fail to report complete or updated beneficial ownership information to FinCEN. Any person violating the reporting requirements of the CTA is liable for civil penalties of not more than $500 for each day that the violation continues and criminal penalties of imprisonment of up to two years and fines of up to $10,000. Accordingly, it is critical that all companies assess their CTA reporting obligations and appoint an appropriate person in-house to ensure ongoing compliance.
Support for complying with The Corporate Transparency Act
The CTA imposes significant compliance burdens on domestic and foreign businesses. Determining reporting obligations and exemption eligibility is a fact-specific analysis that may require the assistance of outside accountants or legal advisors. Moreover, ongoing compliance will likely require changes to internal company policies and implementing processes for gathering, storing, and reporting BOI.
Our Corporate, Business & Banking practice is committed to understanding business compliance requirements and helping clients navigate the new CTA rules. Please reach out to our team for support.