The Corporate Transparency Act (CTA), which entered into force on Jan. 1, 2024, requires certain entities, called Reporting Companies, to report information about themselves, personal identifying information (PII) about the individuals – called Beneficial Owners – who own 25 percent or more of the ownership interests in the entity or exercise substantial control over the entity, and for entities formed in 2024 and thereafter, the individuals (limited to two), who assist in the formation of the entity, called Company Applicants. The Reporting Company sends the foregoing information to the Financial Crimes Enforcement Network (FinCEN), a unit of the U.S. Department of the Treasury, which will maintain such information on a secure, nonpublic database for use by governmental authorities, certain financial institutions and financial regulators.
How Will the CTA Impact My Company?
The CTA will require millions of pre-2024 legal entities, as well as numerous legal entities formed in 2024 and thereafter, to file reports. Given the widespread use of special purpose limited liability companies (LLCs) and statutory trusts to hold title to aircraft and the variety of co-ownership arrangements, many aircraft owners will have Beneficial Ownership Information (BOI) filing obligations.
What Are the Deadlines for BOI Filings?
- Domestic and foreign Reporting Companies formed prior to Jan. 1, 2024, must file their initial report by Jan. 1, 2025.
- Reporting Companies formed between Jan. 1, 2024, and Dec. 31, 2024, must file their initial report within 90 days of formation of a domestic entity or registration of a foreign entity.
- Reporting Companies formed on or after Jan. 1, 2025, must file within 30 days of formation of a domestic entity or registration of a foreign entity.
Is My Company Required to Report?
Reporting Companies include both Domestic Reporting Companies (entities created by the filing of a document with a secretary of state or similar office under the law of a state or Indian Tribe (to include an LLC, corporation, statutory trust or similar entity) and Foreign Reporting Companies (entities formed under foreign law that register to do business in any state or Indian Tribe).
The CTA contains limited exceptions to reporting. The first covers entities outside the scope of the CTA and includes sole proprietorships, general partnerships, unincorporated associations, common law trusts and foreign entities not registered to do business in a state or Indian Tribe.
The second are exempt entities of which there are 23 types. These include:
- Regulated Entities. U.S. publicly traded companies, banks, broker-dealers, regulated investment companies and investment advisors, insurance companies and certain pooled investment vehicles. These entities are exempted from reporting because the federal government obtains the information it requires through regulatory reporting requirements.
- Large Operating Entities. Entities that have more than 20 full-time employees in the U.S., have physical offices; i.e., genuine operating 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. This exemption is the sole exemption applicable to for-profit, non-regulated entities.
- Subsidiaries of Certain Exempt Entities. Corporations, LLCs or similar entities wholly owned or controlled, directly or indirectly, by certain exempt entities also are exempt. This is an extremely important exemption as it can exempt numerous subsidiaries (see Common Questions below).
In determining whether an exemption applies, one must carefully review the detailed regulatory requirements for each exemption as FinCEN takes the view that exemptions should be narrowly construed.
Who Is a Beneficial Owner?
As an initial matter, a Beneficial Owner only includes individuals. A Beneficial Owner is an individual who directly or indirectly owns 25 percent or more of the ownership interests in a Reporting Company or exercises substantial control over the Reporting Company, without regard to owning any ownership interests.
The 25 percent or more ownership interest test is broader than mere equity and includes five categories of ownership interests, such as capital or profits interest in a partnership or conversion rights and options. The substantial control test includes four indicia of substantial control: 1) Senior Officers (the chief executive officer (CEO), president, chief operating officer (COO), chief financial officer (CFO), general counsel (GC) or any officer without a title who exercises similar influence), 2) an individual who has authority over the appointment or removal of Senior Officers or a majority of the board of directors, 3) a substantial decision-maker over significant decisions of the company’s structure, business, or finances, such as a manager of an LLC or an individual who exercises substantial influence over decision-making of the entity, or 4) an individual who may not have "power" to direct or determine important decisions, but plays a significant rule in the decision-making process.
There are five exceptions to an individual constituting a Beneficial Owner under the CTA. These are for 1) minor children, 2) nominees, intermediaries, custodians or agents, 3) employees who are not Senior Officers, 4) an inheritor (an individual whose only interest in a Reporting Company is a future interest through a right of inheritance) and 5) a creditor.
What Information Does the Reporting Company Provide in an Initial Report?
The Reporting Company must report basic information about itself (e.g., name, dba, address, employer identification number, etc.), information about its Beneficial Owners' PII, and if an entity is formed on or Jan. 1, 2024, the PII of the individuals (limited to two) who are Company Applicants (i.e., the individuals who assist in the formation of the entity).
The PII of an individual is his or her 1) full legal name, 2) date of birth, 3) residence address,1 and 4) unique ID number and issuing jurisdiction from an acceptable ID document (a nonexpired U.S. passport, state or local ID document or a driver's license). If the individual has none of the foregoing, a nonexpired foreign passport, plus an image of the document from which the unique ID number was obtained.
Alternatively, an individual, either a Beneficial Owner or a Company Applicant, can obtain a FinCEN Identifier Number to be used in lieu of furnishing his or her PII on a report. A FinCEN Identifier is a unique numeric ID assigned by FinCEN to an individual who is submitted to a Reporting Company to be used in the report in lieu of an individual's PII.
What Is the Obligation of a Reporting Company to Update or Correct a Report?
A Reporting Company must within 30 days file an Updated Report when a Reporting Company's information or a Beneficial Owner's PII previously submitted on a Report changes.2 Note, if an individual obtains a FinCEN Identifier, the individual, rather than the Reporting Company, has the obligation to update FinCEN. A Reporting Company also must file a Corrected Report within 30 days of becoming aware or having a reason to know of inaccuracies in an earlier Report.
Are There Penalties for Noncompliance?
The CTA imposes civil and criminal penalties for willful noncompliance. These penalties may be imposed on the Reporting Company, an entity or an individual who causes a Reporting Company not to report and on Individuals who are Senior Officers of a Reporting Company at the time a Reporting Company fails to accurately and completely report or update/correct its report.
Common Questions
What Should Owners and Their Advisors Be Doing Now About Entities Formed Pre-2024?
Given the Jan. 1, 2025, deadline, it is critical to start the review process now to determine if your entities are Reporting Companies and if any exemptions apply. Identifying Beneficial Owners and obtaining information for the BOI filing can take considerable time. Individuals may be concerned about disclosing personal information, and although optimally each individual easily can obtain a FINCEN Identifier Number, an individual in this regard must consider whether he or she should do so, as there currently is no way to deactivate a FinCEN Identifier to eliminate the requirement to update FinCEN for changes (although FinCEN is assessing options to remedy this issue).
Has the CTA Been Found Unconstitutional?
A federal district court in Alabama has found the CTA to be unconstitutional.3 The constitutionality of that case was argued before a Circuit Appeals Court on Sept. 26, 2024, and we await the decision.4 Whatever the outcome, the losing party may appeal the decision to the U.S. Supreme Court. In addition, there have been a number of complaints filed in federal district courts around the country challenging the constitutionality of the CTA, and some of those courts might find the CTA constitutional, thereby creating a split in Circuit Court decisions, which only would be resolvable by the Supreme Court.
It is important to understand that at this stage, compliance with CTA reporting obligations is required by all persons except those plaintiffs in the Alabama case.
Does My Special Purpose Company Fall Under the Subsidiary Exception?
To qualify for the subsidiary exemption, a subsidiary's ownership interests must directly or indirectly be 100 percent owned or controlled by one or more entities that are exempt other than an exempt entity that is 1) a money transmitting or money services business, 2) a pooled investment vehicle, 3) an entity assisting a tax-exempt entity or an inactive entity.
Importantly, if an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary does not qualify to be exempted.5 Further, in that regard, FinCEN has not provided guidance as to the term "control," so nuanced determinations have to be made about whether 100 percent control exists as well as with respect to ownership interests.
Does My Aircraft Trust Need to File?
Many aircraft operators use registration trusts to register aircraft with the Federal Aviation Administration (FAA). This structure is used for a number of reasons, including to facilitate financing and leasing, privacy and to meet the citizenship requirement of the FAA. The analysis of filing requirements for trusts is nuanced and highly fact-dependent.
For example, if the aircraft is owned by a statutory trust, which is a trust formed with a state filing, the trust itself is likely a Reporting Company. The individual(s) who indirectly own or are beneficiaries6 in the trust or are senior officers of the trustor are likely the Beneficial Owners reported in the BOI filing, unless an exemption applies.
In contrast, other registration trusts are not created by a filing with a state, and hence would generally not, themselves, be considered Reporting Companies.
It should be noted that registration trusts are almost universally grantor trusts7 in which the trustee's duties and power are very limited. In particular, generally the trustee does not have the authority to dispose of the assets of the trust or take other significant actions except as directed by the trustor. Hence, generally, the Trustee should not be viewed as exercising exercise "substantial control."8 Rather one would look at the Beneficial Owners of the Trustor.
Is My Aircraft Management Company or Chief Pilot a "Beneficial Owner"?
Generally, no. A management company would not be Beneficial Owner. However, if an individual within the management company exercised substantial control over the Reporting Company, that individual could be a Beneficial Owner. In practice, however, while such individuals may direct day-to-day aircraft operations as an agent for the company, they do not have authority to make substantial decisions on behalf of the company.9
Similarly, unless the chief pilot is also a senior officer of the Reporting Company, it is likely that he or she is not a Beneficial Owner because that individual would not exert substantial control over the Reporting Company, or alternatively, the individual may be an exempted from Beneficial Owner status based on the fact that the individual is employee that only derives control and economic benefit by virtue of his or her employment.10
Should I Be Thinking About These CTA Reporting Requirements in Structuring Ownership and Operations of Aircraft?
Existing considerations regarding tax planning, liability protection and FAA regulatory compliance generally outweigh the relatively modest additional requirements of BOI reporting and 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 Do I Do if Beneficial Owner Is Not Supplying Information Needed to File?
In some cases, individuals have ignored requests to provide information, putting their trustees, company applicants, etc. in a difficult position. You should consider:
- Advising the individual of their potential individual civil or criminal liability, in particular, both individuals and corporate entities can be held liable for willful violations. For example, senior officers of an entity that fail to provide information may be held liable for the willful failure to file, and a person who willfully causes a company not to file a required BOI report or to report incomplete or false information to FinCEN may be also held liable.11
- FINCEN has not given clear guidance on how to file in situations where the Reporting Company cannot obtain or verify BOI. Advisers have suggested various approaches, but, in any event, the Reporting Company should contemporaneously document the steps taken to try and comply with the CTA.
Where Can I Get More Information?
FinCEN's BOI website contains guidance, including a Small Entity Compliance Guide (in several languages), FAQs and "how-to" guides with respect to reporting and FinCEN Identifiers.
Holland & Knight has established a Corporate Transparency Act Team, composed of attorneys knowledgeable about the CTA in general as well of the issues arising in discrete transactional areas, such as corporate, finance, aviation and real estate, among others, to advise clients on the impact of, their exposure to, and their compliance with, the CTA (including assistance with preparation of, but not the actual filing of the report). For more information on the CTA's specific impact on you or your organization, please contact the authors.
Notes
1 A Company Applicant reports his or business address if in the business of forming companies, such as an attorney.
2 Note, Company Applicant information is not updated.
3 Nat'l Small Bus. United v. U.S. Dep't of the Treasury, Case No. 24-10736.
4 Interestingly, in the opinion and order dated Sept. 20, 2024, denying injunctive relief in the case Firestone v. Yellen, Case No. 3:24-cv-1034-SI, the federal district court judge rebuts the points made in the Alabama decision.
5 See FINCEN BOI FAQ L.6.
6 Whether a beneficiary is reportable is somewhat unclear. A beneficiary is a Beneficial Owner if he or she 1) is the sole permissible recipient of income and principal from the trust or 2) has a right to demand a distribution of, or withdraw, substantially all the assets from the trust. FinCEN also has stated that there may be other situations where individuals associated with a trust are Beneficial Owners (see below), however, it is not entirely clear when the beneficiaries of a trust with multiple beneficiaries might be reportable.
7 Note, a grantor or settlor is a Beneficial Owner if such individual has the right to revoke the trust or otherwise withdraw the assets of the trust.
8 See FINCEN BOI FAQ D.15.
9 See FINCEN BOI FAQ D.8 and FINCEN BOI Small Entity Compliance Guide § 2.4.
10 FINCEN BOI Small Business Entity Guide § 2.4 (Exemption #3).
11 See FINCEN BOI Small Entity Guide, § 1.3.
