Illicit actors often utilize shell or front companies to hide their identities and facilitate the laundering of funds or other assets through the United States. In response to this growing problem, Congress enacted the Corporate Transparency Act (the CTA) on January 1, 2021, as an expansion of anti-money laundering laws. Business owners should be aware of the sweeping requirements of the CTA and its implementing regulations, effective January 1, 2024, which require most new and existing business entities in the United States to file reports with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) regarding themselves, their Beneficial Owners, and their Company Applicants. Outlined below are a number of key questions business owners will likely have regarding the CTA, with brief answers to those questions.
Who is subject to this rule? Beneficial Ownership Information Reports must be filed by any domestic and foreign “Reporting Company,” defined as follows:
A Domestic Reporting Company is any entity that is a corporation, limited liability company, or other entity otherwise created in the United States by filing documentation with a secretary of state or any similar office under the law of a state or Indian tribe.
A Foreign Reporting Company is any entity formed under the law of a foreign jurisdiction and permitted to conduct business in any domestic jurisdiction by the filing of a document with a secretary of state or any similar office.
While the above definitions for “Reporting Companies” are broad, impacting millions of new and existing businesses, there are currently twenty-three exemptions from the definition of “Reporting Company,” generally consisting of entities already subject to increased state and federal compliance requirements. One key exemption that may apply to many existing businesses is the “large operating company” exemption, which applies to any entity that (a) directly (i.e., not on a consolidated or affiliated basis) employs more than twenty employees on a full-time basis in the United States; (b) filed in the previous year a federal income tax or information return in the United States demonstrating more than $5 million in gross receipts or sales in the aggregate (on a consolidated basis, if applicable); and (c) has an operating presence at a physical office within the United States.
What must Reporting Companies report to FinCEN? The reporting companies subject to the CTA must file a report with FinCEN identifying two categories of individuals: (1) the “Beneficial Owners” of the entity, and (2) the “Company Applicants” of the entity.
A Beneficial Owner is defined as any individual who, directly or indirectly, either (1) exercises substantial control over a Reporting Company (the “Substantial Control Test”), or (2) owns or controls at least 25% of the ownership interests of a Reporting Company (the “Ownership Test”). There is no limit on the number of reportable Beneficial Owners of a Reporting Company under the CTA.
The Substantial Control Test: An individual exercises substantial control over a Reporting Company if such individual (i) serves as a Senior Officer of the Reporting Company (e.g., any individual holding the position or exercising the authority of a President, Chief Financial Officer, General Counsel, Chief Executive Officer, Chief Operating Officer, or any other officer, regardless of title, who performs a similar function); (ii) has authority over the appointment or removal of any Senior Officer or a majority of the board of directors of the Reporting Company; (iii) directs, determines, or has substantial influence over important decisions made by the Reporting Company; or (iv) has any other form of substantial control over such Reporting Company.
The Ownership Test: An individual who owns or controls at least 25% of the ownership interests of a Reporting Company, including any equity, stock, or similar interest, any capital or profit interest, any instrument convertible into ownership interest, any option to purchase or sell ownership interests, or any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership. For purposes of the Ownership Test, all options or similar interests are deemed exercised and all ownership interests are aggregated. There are further rules for ownership interests owned by certain entities or contracts, including trusts or holding companies, that push beneficial ownership up to certain individual Beneficial Owners. Minors, intermediaries, custodians, certain employees, and holders of security interests, among others, are exempted from the definition of Beneficial Owner even if they may otherwise meet the Ownership Test.
A Company Applicant is either (i) the individual who directly files the document that creates the Reporting Company, or (ii) the individual who is primarily responsible for directing or controlling the filing of the relevant creation document by another. Only two individuals who meet the definition of Company Applicant may be included in the report to FinCEN.
The Reporting Company must include the following information in its Beneficial Ownership Information Report (BOI Report): (i) its full legal name, (ii) its trade names (if applicable), (iii) jurisdiction of formation (or registration if foreign), (iv) its taxpayer ID number, and (v) for its Beneficial Owners and Company Applicants (if applicable), their (a) full name, (b) date of birth, (c) current address, (d) unique identifying number from a passport, driver’s license, or other specified document, and (d) an image of the document used for the unique identifying number.
When must the BOI Report be filed? If a Reporting Company was created or registered prior to January 1, 2024, the deadline to submit its BOI Report is January 1, 2025. If a reporting company was created or registered on or after January 1, 2024, it must submit its BOI Report within 30 days of such creation or registration. Additionally, Reporting Companies must file updated reports to reflect any addition of new Beneficial Owners or removal of existing Beneficial Owners within 30 days of any such change.
How are the BOI Reports filed? Beginning on January 1, 2024, BOI reports shall be submitted directly through FinCEN’s new dedicated website, the Beneficial Ownership Secure System (“BOSS”). BOSS will not be accessible and BOI Reports will not be accepted prior to January 1, 2024. Additionally, there are numerous third-party vendors that may assist in the assembling and filing of these reports, such as CT Corporation and Corporation Service Company.
Are there penalties for failure to submit a BOI Report? Yes. It is unlawful for any person to willfully provide (or attempt to provide) false or fraudulent Beneficial Ownership Information or to willfully fail to report complete or updated Beneficial Ownership Information. The CTA provides for both civil and criminal penalties for any violations, including a civil penalty of up to $500 per day and a fine of not more than $10,000 and/or imprisonment for up to two years.
Due to the substantial risk posed by noncompliance, business owners should carefully approach the CTA’s new requirements and provide ample time for analysis of their applicability to their existing and newly formed entities.
Additional resources regarding the CTA and BOI Reports may be found on FinCEN’s website here.
