What You Need to Know
- The New Year’s Day deadline is fast approaching for companies formed before January 1, 2024, to report beneficial ownership information under the Corporate Transparency Act.
- Begin reviewing now to determine whether your company is exempt and, if not exempt, to determine beneficial ownership and which stockholders or directors may exert “substantial control.”
- Reports can be filed directly with FinCEN or through third-party vendors.
As we previously reported, the Corporate Transparency Act (CTA) requires a broad class of legal entities (referred to as “reporting companies”) to identify and report beneficial ownership information to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
For entities formed before January 1, 2024, and which are not otherwise exempt from the CTA’s reporting requirements (more info available here), the deadline to file their initial Beneficial Ownership Information Report (BOIR) is January 1, 2025. In this alert, we highlight key aspects of the CTA requirements to help guide companies in preparing their BOIR for submission to FinCEN.
Important Reminders
Deadline for Initial Reports: Companies formed before January 1, 2024, have until January 1, 2025, to file their BOIR. The BOIR can be accessed here.1 Alternatively, companies may file the BOIR with the assistance of a third-party vendor.
Determining Beneficial Owners: Generally, a reporting company must list the following as its beneficial owners:
- Owners of 25% or more of a company’s ownership interests;
- Senior officers (defined as a company’s president, chief financial officer, general counsel, chief executive office, chief operating officer, or any other officer who performs a similar function); and
- Other persons with “substantial control.”
Company Applicants: Reporting companies formed before January 1, 2024, are not required to provide information for Company Applicants in their BOIR.
Ongoing Obligations to Update the BOIR: After the initial BOIR filing is submitted, changes to the information reported, including personal information about a beneficial owner, must be updated by filing a new report within 30 days. If a reporting company discovers an error in its previous submission, the company is required to file a new report with FinCEN within 30 days to correct the previously filed report.
Additional Resources: FinCEN provides guidance on the CTA reporting requirements, including a regularly updated FAQ guide and a separate guide for small business owners.
Key Considerations for Preparing the BOIR
Beneficial Ownership Considerations—25% Ownership: Ownership interests are broadly defined under the CTA, which sets forth specific calculation guidelines in 31 C.F.R. § 1010.380(d)(2)(iii). FinCEN’s Small Entity Compliance Guide also provides step-by-step details on calculating ownership interests.
Beneficial Ownership Considerations—Substantial Control:
- Review for Substantial Control Rights: Reporting companies should review their corporate documents, including any stockholder agreements, to determine whether any stockholder or director has rights that would enable them to (i) approve the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body), or (ii) direct, determine, decide or have substantial influence over, important matters affecting the reporting company, as these rights would constitute having “substantial control.”
For example, for venture-backed startup companies, a preferred stockholder’s customary approval right over a change of control/deemed liquidation event or a preferred director’s customary approval right over the company’s annual budget, would likely qualify as “substantial control” under the CTA (especially to the extent such stockholder or director controls the vote on any such point).
- Treatment of Members of the Board of Directors: A member of a reporting company’s board of directors is not a de facto beneficial owner under the CTA. The reporting company would only need to report a director as a beneficial owner if the director also qualified as a 25% owner or had other rights demonstrating “substantial control.” Please refer to our prior alert for further discussion on the definition of “substantial control.”
Beneficial Owner Information Required for the BOIR: In its BOIR, a reporting company must disclose the following regarding each of its individual beneficial owners:
- Current residential address (which cannot be a PO box)
- A copy of the individual’s U.S. passport, state driver’s license, or other identification document issued by a state, local government, or tribe
Alternatively, the reporting company may submit the FinCEN identifier of each beneficial owner. Please refer to our prior alert for more information on the identifier and how to obtain one.
Vendor Support in CTA Compliance: For additional support, there are third-party vendors providing CTA-related services, including filing the BOIR on your company’s behalf, helping collect beneficial ownership information, and providing tools to ensure ongoing compliance. When using any of these third-party vendors, it is important for your company to ensure that it can obtain copies of any reports filed on its behalf and confirmation that any filing (or amended filing) has been made by the vendor for your company’s records.
With the initial filing deadline approaching, consult experienced counsel with questions you may have as you work through these new requirements, including completing the initial BOIR, maintaining ongoing compliance with the CTA and/or whether you may be exempt from reporting under the CTA altogether.
*Elizabeth Mandle contributed to this alert.
Footnotes
1Entities formed after January 1, 2024 have 90 days following the date of formation to submit their initial BOIR to FinCEN. Beginning January 1, 2025, newly formed entities will have 30 days following the date of formation to submit their initial BOIR to FinCEN.
