Beginning on January 1, 2024, a new law, the Corporate Transparency Act (CTA), requires certain business entities for the first time to disclose beneficial ownership information (BOI) to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Because the CTA applies to entities created before, on, and after January 1, 2024, all companies covered will need to determine whether they are subject to the CTA’s new disclosure requirements. FinCEN has adopted a Rule implementing the CTA (Rule) and we expect that it will issue additional rules and guidance in the coming months, as many interpretive questions remain. This alert provides a brief overview of the CTA and Rule and should not be solely relied upon in determining the application of the CTA and Rule to your company. You should contact Allen Matkins if you have questions regarding the application of the CTA and Rule to your company.
WHICH ENTITIES WILL BE SUBJECT TO THE NEW BOI DISCLOSURE REQUIREMENTS?
The Rule describes the various entity types, or “reporting companies,” which the CTA requires to disclose BOI to FinCEN. Given the breadth of entity types considered reporting companies, FinCEN anticipates the reporting companies will include most common entity types. There are two types of reporting companies under the Rule: domestic and foreign reporting companies. Legal entities which are not created by filing any formation documentation with the secretary of state or similar offices are excluded from the definitions of domestic and foreign reporting companies. Anticipated reporting company entity types, in all cases subject to the applicability of specific exemptions, include:
- business trusts
- corporations
- limited liability companies
- limited liability limited partnerships
- limited liability partnerships
- limited partnerships
WHICH ENTITIES WILL BE EXEMPT FROM THE NEW BOI DISCLOSURE REQUIREMENTS?
The Rule expressly exempts 23 categories of legal entities from the CTA’s BOI reporting requirements. In many cases, these exempted entities are larger, more highly regulated, or subject to different ownership reporting requirements. Allen Matkins can assist you in determining if an entity is exempt from compliance with the Rule.
WHO/WHAT CONSTITUTES A “BENEFICIAL OWNER”? AND WHAT IS A COMPANY APPLICANT?
Generally, a “beneficial owner,” with respect to any reporting company, is an “individual who, directly or indirectly, either exercises substantial control over the reporting company (including senior officers) or owns or controls at least 25% of the ownership interests of the reporting company.” An individual with no ownership interests in the reporting company may nevertheless be a “beneficial owner” under the Rule if the individual exercises substantial control over the reporting company. The Rule further defines “substantial control” and “ownership interests”, includes specific provisions dealing with the calculation of total ownership, and excludes certain individuals from the definition of “beneficial owner.” Allen Matkins is available to assist in identifying a reporting company’s beneficial owner(s).
Reporting companies will also be required to file certain information about their “company applicant(s).” Under the Rule, a reporting company can have up to two company applicants. A company applicant must be an individual person, not an entity. The company applicants of a reporting company include:
- the individual who is directly responsible for the creation or registration of the reporting company, and
- the individual primarily responsible for directing or controlling the creation or registration of the reporting company, if applicable.
WHAT INFORMATION MUST BE REPORTED?
A reporting company’s BOI report must include information regarding:
- the reporting company itself
- the reporting company’s beneficial owners
- the reporting company’s company applicants (reporting companies created or registered on or after January 1, 2024 are required to report company applicant information)
A reporting company must provide the following information about itself:
- full legal name
- trade name(s)
- current address
- jurisdiction of formation
- IRS reporting information
A reporting company must also provide the following information about both its beneficial owners and company applicants:
- full legal name
- date of birth
- current address
- unique identifying number
- image of unique identifying number document
In each case, the Rule sets forth more specific requirements regarding what information a reporting company is required to report.
DOES A BOI REPORT HAVE TO BE UPDATED?
Yes, a reporting company has only 30 calendar days to file updated or corrected information to its previously filed BOI report. For instance, if an exempted entity experiences a change which causes it to no longer qualify for an exemption, the entity must file a BOI report within 30 calendar days after the date it no longer qualifies for any exemption. FinCEN has made clear that there is no materiality threshold with respect to the Rule and determining whether a change must be reported. Thus, it will be necessary for reporting companies to monitor and report any and all changes to information in a previously filed BOI report.
WHEN IS A REPORTING COMPANY’S INITIAL BOI REPORT DUE?
The deadline for reporting companies to file BOI reports depends on the date the reporting company was created (or registered, in the case of foreign reporting companies). The deadlines are as follows:
- a reporting company existing or registered before January 1, 2024, must submit an initial BOI report within one year of the Rule’s effective date, by January 1, 2025,
- a reporting company created or registered on or after January 1, 2024, and before January 1, 2025, must submit an initial BOI report within 90 calendar days following actual or public notice that the company’s creation or registration is effective, and
- a reporting company created or registered on or after January 1, 2025, must submit an initial BOI report within 30 calendar days following actual or public notice that the company’s creation or registration is effective.
ARE THERE PENALTIES FOR VIOLATING THE CTA?
Yes, the CTA imposes both criminal and civil penalties on persons who violate the Rule, including on any person who willfully: (i) provides or attempts to provide false or fraudulent BOI with respect to a reporting company, its company applicant(s), and/or beneficial owners, or (ii) fails to report complete or updated BOI to FinCEN. Penalties may be levied against reporting companies and individuals who: (i) cause a reporting company not to report, or (ii) individuals who are senior officers of a reporting company at the time of its failure to accurately report or update said reporting company’s BOI. In addition, the CTA sets forth civil and criminal penalties for any person who knowingly discloses or mishandles BOI reported to FinCEN. In limited instances, a safe harbor may be available to a reporting company which has reason to believe its BOI report contains inaccuracies.
WHO WILL HAVE ACCESS TO THE INFORMATION CONTAINED IN A BOI REPORT?
On December 21, 2023, FinCEN published guidance regarding access to the information contained in a reporting company’s BOI report. Generally, the information in a reporting company’s BOI report is confidential. Starting in February 2024, however, FinCEN will begin to provide access to BOI in phases to authorized government agencies and financial institutions, including:
- US federal, state, local, or tribal law enforcement agencies;
- other federal agencies on behalf of a non-US law enforcement agency, foreign prosecutor or judge;
- financial institutions subject to customer due diligence requirements; and
- officers and employees of the U.S. Treasury Department.
WHAT’S NEXT?
While the Rule took effect on January 1, 2024, there are a number of outstanding questions that have yet to be answered by FinCEN. As noted above, FinCEN has issued additional guidance as recently as December 2023. In the coming months, FinCEN will likely continue to issue additional rules and guidance with respect to the Rule.
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