On January 1, 2024, the Corporate Transparency Act (the “CTA”) became effective and imposes reporting obligations which impact millions of small businesses across the United States. Although the CTA is currently the subject of several court challenges, it is critical for business owners to understand the CTA reporting requirements since a failure to comply can result in both civil and criminal penalties (unless the CTA is deemed unenforceable in one of the pending court matters). If you own a company, we urge you to familiarize yourself with the CTA to ensure that you comply (or are prepared to comply) with its reporting requirements.
What is the CTA?
On January 1, 2021, the United States Congress enacted the CTA in an effort to increase national security and assist law enforcement in combatting financial crimes such as money laundering, tax fraud, terrorism financing, and other illicit activity conducted through shell companies.
The CTA requires certain entities to:
- Report certain beneficial ownership information (“BOI”) to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”);
- Disclose information about who created the entity or registered it to do business in the U.S.; and
- Report any change to reported information to FinCEN within a specified period of time.
Who does the CTA apply to?
The ownership reporting obligations under the CTA apply to entities that fall under the definition of either a domestic or foreign “Reporting Company”, and do not fall under one of the twenty-three (23) categories of exemptions.
A Domestic Reporting Company includes corporations, limited liability companies (LLCs) or any other entities created by the filing of a document with a secretary of state or similar office under the law of any U.S. state, commonwealth, territory, or tribal jurisdiction.
A Foreign Reporting Company includes non-U.S. corporations, LLCs, or other entities that are formed under the law of a foreign country, and registered to do business in any U.S. state, commonwealth, territory, or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.
Exemptions:
While the definitions of Domestic and Foreign Reporting Companies are clearly broad, the CTA includes twenty-three (23) categories of exemptions that exclude entities that are generally more heavily regulated based on their size and structure, or already subject to separate ownership reporting requirements. Public companies, as well as other companies in more highly regulated industries such as banking, insurance, accounting, investment advisors, financial brokers, and credit unions are generally exempt.
The most important exemption is for “Larger Operating Companies” – defined as an entity that has:
- more than 20 full-time employees in the U.S.;
- an operating presence at a physical office within the U.S.; and
- reported more than $5 million in gross receipts or sales (net of returns and allowances) on its filed prior year federal tax return.
Reporting Requirements:
CTA Reporting Companies are required to report information about the entity’s Beneficial Owners, as well as additional information about the entity itself.
The term “Beneficial Owner” means any individual who, directly, or indirectly, (i) exercises substantial control over a reporting company, or (ii) owns or controls 25% or more of the ownership interests of a reporting company.
Whether or not an individual exercises “Substantial Control” over a reporting company can be determined by whether the individual:
- Serves as a “Senior Officer” of a reporting company (i.e., president, chief financial officer (CFO), chief executive officer (CEO), chief operating officer (COO), general counsel, etc.);
- Has authority over the appointment or removal of a Senior Officer (or a majority of the board of directors, board of managers, or other body); or
- Directs, determines, or has substantial influence over important decisions made by a company, including, but not limited to the sale or lease of principal assets, major expenditures or investments, issuing equity, incurring debt, approving operating budgets, entering into contracts on behalf of the reporting company, or any other decisions that may demonstrate substantial control of the reporting company.
- Full legal name
- Date of birth
- Complete current address
- Unique identifying number from one of the following nonexpired documents issued to the individual and the issuing jurisdiction:
– US passport;
– state, local government, or Indian tribal identification document issued for the purpose of identifying the individual;
– state-issued driver’s license; or
– if an individual does not have any of the above-listed documents, a nonexpired passport issued to them by a foreign government.
· An image of the identification document from which the unique identification number was obtained.
- Full legal name of the Reporting Company
- Any trade names or doing business as (d/b/a) names through which the Reporting Company conducts business (whether or not formally registered)
- Complete current address consisting of:
– in the case of a Reporting Company with a principal place of business in the U.S., the street address of its principal place of business; or
– in all other cases, the street address of the primary location in the U.S. where the Reporting Company conducts business.
*A reporting company may not list a P.O. box or the address of any third-party, including a corporate formation agent.
- The Reporting Company’s state, tribal, or foreign jurisdiction of formation, or, for a foreign Reporting Company, the state or tribal jurisdiction where it first registered in the U.S.
- The Reporting Company’s IRS taxpayer identification number (“TIN”), including an employer identification number (“EIN”)
Filing BOI Reports:
A domestic Reporting Company that was formed prior to January 1, 2024 (the “Effective Date”), or a foreign entity that becomes a Reporting Company before the Effective Date, must file an initial BOI report by January 1, 2025.
A Reporting Company that is created in 2024 must file an initial BOI report within ninety (90) days of the earlier of:
- The date the entity receives actual notice that its creation or, in the case of a foreign Reporting Company, registration to do business has become effective; or
- A secretary of state or similar office first provides public notice, that the domestic Reporting Company has been created or, in the case of a foreign Reporting Company, registered to do business.
However, for a Reporting Company that is created on or after January 1, 2025, the initial BOI report must be filed within thirty (30) days (rather than ninety (90) days) of the earlier of the two triggering events.
Further, all Reporting Companies are required to update BOI reports if any required information changes, as well as to correct any mistakes that are identified in previously filed reports. All changes to such information must be reported to FinCEN within thirty (30) days.
Potential Penalties:
The CTA provides for both civil and criminal penalties for any person who (i) provides or attempts to provide false or fraudulent BOI, or (ii) fails to report complete or updated BOI to FinCEN. Such penalties include fines of up to $10,000.00, imprisonment for up to two (2) years, or both.
Takeaways:
Despite the numerous exemptions discussed above, it is estimated that over 32 million entities need to file BOI reports under the CTA. Given that the exemptions focus on larger, more regulated businesses, a majority of Reporting Companies are smaller private businesses. From a practical standpoint, not every small business owner will have this information readily available, and it may not be easy for them to compile the requisite information and get it ready for filing. Further, not every small business is equipped with the staff or infrastructure needed to monitor changes to its BOI.
For these reasons, it is critical that all business owners take measures to comply with the CTA by:
- Determining whether their business entity is a Reporting Company; and if so
- Gathering the required Beneficial Ownership Information;
- Filing each Reporting Company with FinCEN; and
- Developing internal procedures for monitoring changes to BOI in order to update FinCEN filings in a timely manner.
For more information about the CTA and to find out if your business is a Reporting Company, please visit the FinCEN website at https://www.fincen.gov/boi
