Effective January 1, 2024, most new and existing corporate entities in the United States will be required to file reports containing information on their “beneficial owners,” “company applicants,” and “reporting companies” with the federal government as part of the Corporate Transparency Act, which is expected to impact millions of business entities. 

What is the Corporate Transparency Act?

The Corporate Transparency Act, or CTA, was enacted by Congress on January 1, 2021, as a part of the Anti-Money Laundering Act of 2020 and is intended to help prevent and combat money laundering, terrorist financing, tax fraud, corruption, and other illicit activity. The CTA requires most existing and new corporate entities in the United States to file reports with the federal government regarding their beneficial owners. Such reports will be filed with the Department of the Treasury’s Financial Crimes Enforcement Network, or FinCEN. 

Indeed, Congress believes illicit actors frequently use corporate structures such as “shell” companies, where ownership information is hidden and funds aiding criminal activity can pass through the U.S. financial system. Prior to the CTA, there were no uniform beneficial ownership information (BOI) reporting requirements in the United States, which hindered law enforcement’s ability to investigate entities being used for illegal purposes.

Who is required to file reports under the CTA?

Reports must be filed by domestic and foreign “reporting companies,” which are defined as follows:

• Domestic Reporting Companies include any corporation, limited liability company, or any other entity created through a filing with a secretary of state or a similar state or tribal office. Limited liability partnerships, limited partnerships, business trusts, and other similar non-corporate entities will likely fall under this category.

• Foreign Reporting Companies include any foreign Reporting Company that is a corporation, limited liability company, or any other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or a similar office.

Does the CTA exempt any companies or entities from the reporting requirements?

Yes, there are numerous exemptions from the definition of “reporting company.” Certain notable exemptions include the following companies or entities:

• “Large operating companies” that have 20 or more full-time U.S. employees, more than $5 million in revenue generated in the U.S., and an operating presence at a physical office in the U.S.;

• Publicly-traded companies or any other issuers registered with the Securities and Exchange Commission, or SEC;

• Companies that are already subject to reporting requirements or regulatory oversight, such as banks, credit unions, insurance companies, public accounting firms, broker-dealers, investment advisors, investment companies, certain types of pooled investment vehicles, regulated public utilities, etc.;

• Tax-exempt entities and certain related entities;

• Inactive entities that existed before January 1, 2020, are not engaged in active business, are not owned by a foreign person, have not had a change in ownership in the last 12 months, have not sent or received funds greater than $1,000 in the last 12 months, and do not hold any assets;

• Wholly-owned subsidiaries of most types of exempt companies, including Large Operating Companies.

Any companies that are subject to the CTA, and that are not exempt, are considered “reporting companies.”

Who is considered a “beneficial owner” of a Reporting Company under the CTA?

A “beneficial owner” is any individual who, directly or indirectly, either exercises “substantial control” over the entity or owns or controls at least 25% of the ownership interests of the entity.

• An individual exercises “substantial control” over an entity if the individual meets any of the following criteria: (i) serves as a senior officer of the company, such as a President, CEO, COO, CFO or General Counsel; (ii) has authority over the appointment or removal of any senior officer or a majority of the board; or (iii) directs, determines, or has substantial influence over important decisions made by the Reporting Company.   

• In applying the 25%-ownership test, the term “ownership interest” is not limited to traditional equity, such as stock, membership interests, units, capital interests, and profits interests. Instead, it also applies broadly to any instruments (including debt) that are convertible into equity, as well as options, warrants, futures, puts, calls, and other rights to buy or sell equity. It also applies to both non-voting as well as voting interests.

Are there any exceptions to the definition of Beneficial Owner?

Yes, the following are not considered to be Beneficial Owners of a Reporting Company:

• Minor children (however, the Reporting Company must report information regarding the minor child’s parent or legal guardian);

• An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual (however, the Reporting Company must report information on whom is being acted for);

• An employee of the Reporting Company, acting solely as an employee, whose substantial control over the economic benefits from the entity is derived solely from his/her employment status (provided that the person is not a senior officer of the entity);

• An individual whose only interest in a Reporting Company is a future interest through a right of inheritance;

• A creditor of the Reporting Company (unless the creditor meets the requirements of a Beneficial Owner).

Who is considered a “company applicant” of a Reporting Company under the CTA?

A “company applicant” is an individual who either directly files the document that creates a domestic Reporting Company or first registers a foreign entity to do business in the United States or is primarily responsible for directing or controlling the filing of the relevant document by another, if more than one individual is involved in the filing. 

• Often, the Company Applicant will also be a Beneficial Owner of the Reporting Company. 

• Notably, third parties, such as attorneys and paralegals, may also be considered Company Applicants if they file corporate formation documents on behalf of clients.

What are the filing deadlines for a company that meets the definition of a Reporting Company?

Reporting Companies must timely meet the following CTA reporting deadlines:

• January 1, 2024: If the Reporting Company is created on or after January 1, 2024, then the initial report is due within 30 calendar days after its formation (i.e., the filing of the Certificate/Articles with the applicable Secretary of State’s office);

• January 1, 2025: If the Reporting Company was formed before January 1, 2024, then the initial report is due no later than January 1, 2025.

Essentially, effective January 1, 2024, newly formed Reporting Companies will have to file their initial reports within 30 days of their creation. Reporting Companies already in existence on January 1, 2024, have until January 1, 2025, to file their reports.

What needs to be included in a Reporting Company’s report?

A Reporting Company’s report must include information about (i) each of the Reporting Company’s Beneficial Owners and Company Applicants, and (ii) the Reporting Company. Notably, Reporting Companies formed before January 1, 2024, do not need to report Company Applicant information.

Information about individual Beneficial Owners and Company Applicants must include:

• Full legal name;

• Date of birth;

• Current address, as of the date on which the report is delivered; 

• Unique identifying number from an acceptable identification document (i.e., state-issued driver’s license or U.S. Passport), or a FinCEN identifier issued in accordance with the CTA, which may be obtained after an initial filing or at any time thereafter; and

• Image of the identification document (i.e., state-issued driver’s license or U.S. Passport) used to provide the unique identification number.

Information about the Reporting Company must include:

• Full legal name (and any trade names or “doing business as” (d/b/a) names);

• Address of the principal place of business (cannot be a PO Box or office of formation/registered agent);

• State or jurisdiction of formation; and

• IRS tax identification number.

Is a Reporting Company required to make updates to reported information?

Yes, if there is any change with respect to information previously reported, the Reporting Company is required to file an updated report within 30 calendar days after the date on which the change occurs. Examples of changes that would require an updated report include the following:

• Change(s) of Beneficial Owners (e.g., due to transfers of ownership or sales of ownership interests);

• A Reporting Company becomes exempt from the reporting requirements;

• Any changes to an identifying document previously submitted (e.g., changes in name, address, or identifying number).

In addition, if a Reporting Company becomes aware of or has reason to know of a mistake or inaccuracy in a report that has already been filed, it must file a corrected report within 30 calendar days after such date.

Who has access to the information reported to FinCEN?

Reports filed with FinCEN will not be accessible to the public and are not subject to requests under the Freedom of Information Act. However, the following government agencies will have access to the information:

• Federal agencies engaged in national security, intelligence, law enforcement, and tax administration;

• State, local, and tribal law enforcement agencies, but only with a court order.

If a Reporting Company consents, FinCEN may also disclose certain information to financial institutions to assist in their anti-money laundering compliance activities.

How will Reporting Companies file their reports? 

FinCEN is developing a Beneficial Ownership Secure System (BOSS) where Reporting Companies’ reports will be submitted electronically through an online interface. This system is not yet available, and reports will not be accepted prior to January 1, 2024.

• When filing a report, a Reporting Company (or an agent filing on its behalf) must certify under penalties of perjury that its report is true, correct, and complete.

• FinCEN will publish reporting forms and guidance documents that Reporting Companies will use to comply with their obligations under the CTA in advance of the date the reports are due. 

• FinCEN intends to issue further regulations governing who may access the information and what safeguards will be necessary to ensure the information is secured.

What are the penalties for violating the CTA? 

Penalties for violating the CTA include the following:

• Any person who willfully provides false or fraudulent information to a Reporting Company or willfully fails to file a complete initial or updated report with FinCEN will be subject to a $500-per-day fine up to $10,000 and imprisonment for up to 2 years.

• Any person who, without authorization, knowingly discloses or uses beneficial ownership information (BOI) is liable for a $500-per-day penalty up to $250,000 and up to 5 years’ imprisonment. 

Notably, persons subject to these penalties include not only the Reporting Company and its senior officers, but also any individuals, including attorneys and paralegals, or other entity responsible for filing the report, and any person who provides BOI to another person for inclusion on a report.

How should entities prepare for the CTA? 

Starting January 1, 2024, entities created and operating in the United States will need to be extremely diligent and punctual in reporting their BOI to FinCEN. These entities, as well as any other individuals including attorneys and paralegals responsible for filing, must be masterful at maintaining, updating, and reporting the BOI to FinCEN so as not to run afoul of expensive civil or severe criminal penalties. 

While existing entities formed before January 1, 2024, have until January 1, 2025, to submit their BOI to FinCEN, complicated ownership structures may delay reporting abilities. Business owners should familiarize themselves and/or reach out to attorneys to begin helping them prepare for the new various reporting requirements of the CTA.

This blog is for general informative purposes only, is not a comprehensive statement of The Corporate Transparency Act or any other law or regulation and should not be construed or relied upon as legal advice.