The Corporate Transparency Act (CTA), enacted by Congress as part of the Anti-Money Laundering Act of 2020, for the first time under federal law, requires the establishment of a centralized, national beneficial ownership information (BOI) registry. The purpose of the registry is to combat the proliferation of anonymous shell companies that facilitate the flow and sheltering of illicit money in the United States to assist law enforcement to curb money-laundering, terrorism financing, corruption, tax fraud and other criminal activity.
What Does the CTA Require?
The CTA requires in-scope existing and newly formed entities (Reporting Companies) to file a report with the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) identifying their individual beneficial owners. For Reporting Companies formed prior to 2024, reports require information about the Reporting Company and its beneficial owners. For Reporting Companies formed Jan. 1, 2024, or thereafter, reports require information about the Reporting Company and its beneficial owners, as well as its company applicant (i.e., the individual who directly files the document that creates the Reporting Company and the individual who is primarily responsible for directing or controlling the filing, if more than one individual is involved in the filing).
The CTA Is a Big Deal
FinCEN has estimated that there are more than 32 million preexisting entities (created prior to 2024) and approximately 5 million new entities per year (formed Jan. 1, 2024, and thereafter) that will be Reporting Companies and required to furnish BOI reports under the CTA.
Will Beneficial Ownership Information Be Public?
No. Unlike corporate registries in some countries, BOI will be accessible only to federal agencies engaged in national security, intelligence and enforcement, state and local law enforcement, foreign law enforcement, financial regulators and, subject to a Reporting Company's consent, to financial institutions for purposes of customer due diligence.
What Are the Timelines for Filing and Implementation?
The CTA becomes effective Jan. 1, 2024. Currently, entities created on or after this date will have 30 days after creation to file an initial BOI report. Entities created prior to Jan. 1, 2024, will have until Jan. 1, 2025, to file an initial BOI report. However, as FinCEN is somewhat behind schedule in implementing the CTA, it is possible that the filing deadline for entities created in 2024 may be extended.
In addition to the initial BOI reports, an updated report is required to be filed within 30 days of a change in information previously submitted to FinCEN related to the Reporting Company or its beneficial owners, but is not required for changes with respect to company applicants. A corrected report is required to be filed within 30 days of a Reporting Company becoming aware, or having a reason to know, of inaccuracies in an earlier report.
What Entities Are Considered Reporting Companies That Need to File Under the CTA?
Reporting Companies can be domestic or foreign. A domestic Reporting Company is an entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe. A foreign Reporting Company is an entity formed under foreign law that registers to do business in any state or Indian tribe. In general, Reporting Companies are smaller, privately held, nonregulated entities.
What Entities Are Out of Scope?
Sole proprietorships, general partnerships, unincorporated associations, common law trusts and foreign entities not registered to do business in a state or Indian tribe are not Reporting Companies and have no reporting obligation.
- Though common law trusts are out of scope for now, Delaware and Wyoming statutory trusts, commonly used for owner trusts, will generally be Reporting Companies, but may be exempt if owned by an exempt entity. It remains unclear whether certain business trusts will be treated in a similar manner as statutory trusts.
- Whether a filing obligation would arise if a foreign entity should have registered to do business in a particular state, but failed to register is unclear. FinCEN has not provided guidance as to whether the entity is required to file. It can be difficult to determine whether an entity has an active business in a state, and business registration requirements vary from state-to-state.
What Entities Are Exempt from Reporting?
There are 23 exemptions that would relieve an entity from the CTA's reporting obligation, including:
- Large Operating Entities: Entities that have more than 20 full-time employees in the United States, have physical offices (leased or owned) in the United States (not merely an agent) and have filed federal income tax returns for the prior year demonstrating more than $5 million in gross receipts from U.S. sources.
- Regulated Entities: U.S. publicly traded companies, banks, broker-dealers, regulated investment companies and investment advisors, insurance companies and certain pooled investment vehicles.
- Other Exempt Entities: Governmental authorities, tax-exempt entities and inactive entities meeting certain requirements.
- Subsidiaries of Certain Exempt Entities: Corporations, limited liability companies (LLCs) or similar entities owned or controlled by exempt entities also are exempt. For example, if a publicly traded company has a wholly owned subsidiary that owns the aircraft, that entity would be exempt.
In determining whether an exemption applies, it is important to carefully review the detailed regulatory requirements for each exemption.
Who Is a Beneficial Owner?
There are two tests for beneficial ownership: the Substantial Control Test and the 25 Percent Ownership Test.
An individual is a beneficial owner if the individual, directly or indirectly, 1) exercises substantial control (irrespective of whether the individual has an ownership interest) over the Reporting Company or 2) owns or controls at least 25 percent of the ownership interest in the entity.
Persons with substantial control include 1) senior officers, such as the CEO, chief operating officer (COO), chief financial officer (CFO), general counsel (GC) or managers of LLCs, 2) persons who have authority over the appointment or removal of senior officers or a majority of the board of directors, 3) persons who have substantial influence over decision-making of the entity or 4) persons who play a significant role in decision-making of the entity.
Ownership interests generally refer to arrangements that establish ownership rights in the Reporting Company, such as shares of stock or more complex instruments.
In the case of common law trusts, a trustee would be required to be reported if such person exercises substantial control over a Reporting Company. Where the trustee is a corporate trustee, FinCEN has yet to provide guidance as to whether the corporate trustee, as well as the trust officer(s) who work on the trust for the corporate trustee, would be required to be reported. In addition, beneficiaries of trusts with certain powers generally would be deemed to exercise substantial control and would be reportable, as well as settlors or grantors who have the right to revoke the trust or otherwise withdraw trust assets.
What Information Does the Reporting Company Need to Report in an Initial Report?
The Reporting Company is required to report:
- Company Information: Basic information regarding the entity itself (e.g., name, d/b/a, address, employer identification number, etc.).
- Beneficial Owners: Personal identifiable information (PII) about its beneficial owners (i.e., full legal name, date of birth, current residential address, a unique ID number and the issuing jurisdiction of an acceptable ID document, such as a current driver's license or passport, and an image of the document from which the unique ID number was obtained).
- Company Applicant: The Company Applicant is an individual who is primarily responsible for directing or controlling the creation of the entity, and the individual who actually does the filing. There cannot be more than two reportable Company Applicants. For example, if a law firm creates an LLC for a client, both the attorney who oversees the formation and the paralegal who makes the filing would be a "Company Applicant." It is common practice for attorneys to sign formation documents as organizer, incorporator, etc., depending on the type of entity and state.
Note that Company Applicants only have to be reported on an initial report if the Reporting Company was formed on or after Jan. 1, 2024 (and no updated or corrected reports would be required to be filed provided the information in the initial report was correct). No reporting of a Company Applicant for entities formed prior to 2024 is required.
What Is a FinCEN Identifier?
To protect PII and to streamline submissions for individuals who would be identified on multiple reports, FinCEN will allow individuals (whether beneficial owners or Company Applicants) to submit their PII to FinCEN and obtain a unique ID number that can be used in lieu of providing their PII on each report.
If My Company Is Exempt from CTA filings, Am I Off the Hook?
Yes and no. While an entity may be exempt from BOI reporting requirements, it is anticipated that financial institutions may require an entity to certify that it is not a Reporting Company. In some circumstances, financial institutions or counterparties may require evidence (such as a legal opinion letter) that the company is not a Reporting Company under the CTA. Further, an updated report would be required if the entity were to cease to be an exempt entity (or if a nonexempt entity subsequently were to qualify for exemption).
Should I Be Thinking About These CTA Reporting Requirements in Structuring Ownership and Operations of Aircraft?
In general, it is expected that existing considerations regarding tax planning, liability protection and Federal Aviation Administration (FAA) regulatory compliance should outweigh the relatively modest additional requirement (in most cases) of reporting under the CTA; as such, structuring to avoid filing may be counterproductive. For example, if an individual decided to own an aircraft in his or her own name, rather than through a special purpose entity to avoid CTA requirements, the individual's name would appear on the FAA registry, a publicly available database, and in addition, the individual would be exposed to unnecessary liability risks.
However, parties may decide to structure the management or ownership of the Reporting Company so as to limit the number of individuals who are in substantial control or who own 25 percent or more of the entity.
What Should Owners and Their Advisors Be Doing to Prepare for CTA Implementation?
- Gather the facts and make an initial determination as to whether the entity is 1) out of scope, 2) exempt or 3) is a Reporting Company. Expect teething pains during the initial implementation of the CTA, both by FinCEN and by financial institutions and counterparties who may be overly aggressive in requiring information on filings or proof that your entity is exempt.
- Conduct entity hygiene, whether you are a filer or not. This may include the following:
- Ensure that you have all the reportable information. Review and update information on beneficial ownership and officers/managers of the Reporting Company as ownership of entities may change for tax or other reasons, and managers or officers also may change. Also, ensure that information on file with the FAA or trustees/banks regarding beneficial ownership is current to avoid any inconsistencies.
- Review organizational and transactional documentation. Consider amending operating agreements of existing entities (or forms for new entities) to require compliance with the CTA, and for the member/shareholder to provide information necessary for the Reporting Company to comply with the CTA and if not, to provide sanctions; in addition, given that the CTA will require the Reporting Company to obtain PII, privacy concerns should be addressed.
- In advance of the Jan. 1, 2024, effective date, if existing Reporting Companies have multiple officers/managers that do not have actual control, it may be advisable to remove them before Jan. 1, 2024, so as to minimize PII collection and streamline reporting.
- Verify that the Reporting Company is in good standing in the state of incorporation and in any state where it is registered to do business.
- Given the duty to update or correct information reported to FinCEN within the applicable 30-day period, if you have a Reporting Company, ensure that your attorneys and accountants are aware of the filing/requirements, so that if changes were to occur in the future, information can be updated timely and correctly.
- If you are an aviation attorney or advisor, think about how you will reach out to clients to alert them of this imminent reporting requirement.
Where Can I Get More Information or Help to Prepare for the Implementation of the CTA?
FinCEN's website contains background, guidance, frequently asked questions (FAQs) and rulemaking issued to date.
Please note: This alert provides a summary of the CTA based on regulations and guidance published to date for general guidance and should not be construed as legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this alert. The FinCEN regulations are complex and evolving. Impacted persons should seek legal advice regarding their obligations and responsibilities under the CTA, based on their specific facts and circumstances.
