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To prevent illicit actors from using shell companies to facilitate illicit activities such as money laundering, financing terrorism, human and drug trafficking, and securities fraud, the U.S. Congress imposed new requirements under the Corporate Transparency Act (“CTA”) effective January 1, 2024. CTA is administered by the Financial Crimes Enforcement Network (“FinCEN”), as a part of the U.S. Treasury Department.
The CTA requires Reporting Companies (defined below) to submit a Beneficial Ownership Information report (“BOI Report”) to FinCEN confirming all Beneficial Owners and possibly Company Applicants (both defined below) within the company. At no cost to the Reporting Company, BOI Reports must be submitted electronically on FinCEN’s website.
This article broadly describes the requirements for companies to comply with the new CTA requirements, which include important definitions and distinctions provided by both the CTA legislation and FinCEN.
I. REPORTING COMPANIES & EXEMPT COMPANIES. As stated above, all companies considered to be Reporting Companies must provide a BOI Report to FinCEN, therefore it is important to first understand exactly which companies are covered.
1. Reporting Company Definition: A “Reporting Company” is broadly defined as any of the following types of entities, unless exempt:
a. Corporations.
b. Limited liability companies.
c. Similar entities created by filing a document with the secretary of state or similar office in any state, territory, or federally recognized Indian Tribe.
d. Similar entities formed under the laws of a foreign country and registered to do business in the United States.
CTA describing “similar entities” as Reporting Companies is slightly ambiguous, but limited liability partnerships, limited partnerships, and certain business trusts are broadly regarded as entitles that are included under this definition. However, there are many types of companies that the CTA exempts from reporting.
2. Exempt Companies: There are 23 company types exempt from CTA reporting:
a. Companies deemed “large operating companies”, which must meet all the following:
i. Have more than 20 U.S. employees, excluding affiliated companies.
ii. Reported to the Internal Revenue Service more than $5.0 million in revenue on a consolidated basis for the previous year.
iii. Have an operating physical location in the U.S.
b. Non-profit entities, tax-exempt trusts, and political organizations.
c. Investment companies, insurance companies, banks, investment advisors, or entities that are subject to regular oversight.
d. Subsidiary companies that are owned, wholly or partially, by an exempt entity.
e. Sole Proprietorships that do not operate within an entity.
Once you have determined that your company is a Reporting Company under the CTA, the next step is to determine which individuals within your company must be reported in the BOI Report.
II. BENEFICIAL OWNERS & ACCOMPANYING DEFINITIONS. As stated above, the CTA requires that all Beneficial Owners of a Reporting Company must be reported in the BOI Report. It is crucial to understand which individuals fall under that definition.
1. Beneficial Owner Definition. A “Beneficial Owner” for a Reporting Company is an individual who meets any following criteria:
a. An individual who exercises Substantial Control (defined below) over the Reporting Company.
b. An individual who owns or controls not less than a 25% Ownership Interest (defined below) in the Reporting Company.
Since Beneficial Owners are defined as those who have certain Ownership Interests and/or exercise Substantial Control, we must understand exactly what those terms mean under the CTA.
2. Substantial Control Definition. An individual exercises “Substantial Control” over a Reporting Company if they:
a. Are a “Senior Officer”, defined as the Reporting Company’s president, chief financial officer, general counsel, chief executive office, chief operating officer, or any other officer who performs a similar function.
b. Have authority to appoint or remove the Reporting Company’s Senior Officers or most directors (or similar body).
c. Are an “Important Decision-Maker” for the Reporting Company, defined as someone who directs, determines, or has substantial influence over important Reporting Company business, finance or structure decisions.
d. Have any other substantial form of control over the Reporting Company. This is a catch-all prong and is intentionally vague to encompass special-created or unique forms of significant control that are not conventionally used in most entities.
3. Ownership Interest Definition. FinCEN describes an “Ownership Interest” as any arrangement that establishes ownership rights in the Reporting Company. These arrangements include:
a. Shares of equity stock, voting rights, or units.
b. Other capital or profit interests.
c. Options, including any put, call, straddle, or other option or privilege of buying or selling ownership interest.
d. Convertible instruments.
e. Any other mechanism used to establish ownership in the Reporting Company. Again, this is a catch-all prong to encompass any unconventional types of ownership in a Reporting Company.
Having defined “Beneficial Owners,” it is important to note that CTA provides certain exclusions to those who would otherwise need to report as a Beneficial Owner.
4. Beneficial Owner Exclusions.
a. Minor children, so long as their parent or guardian is reported in the BOI Report.
b. An individual acting as an intermediary or agent on behalf of another.
c. An individual whose control over a Reporting Company derives solely from their employment.
d. An individual whose only interest in a Reporting Company is through a right of inheritance.
e. A Reporting Company creditor, so long as they do not otherwise qualify as a Beneficial Owner.
Beneficial Owners may have other capacities within a BOI Report that would require them report. For example, a Beneficial Owner may also qualify as a Company Applicant.
III. COMPANY APPLICANTS. The last type of individual who may need to be reported in a BOI Report are Company Applicants. A “Company Applicant” is an individual who meets any of following criteria:
1. An individual who directly files the document that creates or registers the Reporting Company, such as articles of incorporation or articles of organization (each a type of “Creation Document”).
2. An individual responsible for directing or controlling the filing of the Creation Document by another.
It is important to understand that professional service providers will also qualify as Company Applicants in most cases. Most notably, accountants and lawyers who assist with entity formations often meet at least one of the two prongs listed above. Furthermore, assistants to professionals, like a paralegal at a law firm, may directly file the Creation Document at the professional’s request. In that case, both the professional and the assistant are considered Company Applicants for the Reporting Company.
IV. REQUIRED INFORMATION. As stated above, in a BOI Report a Reporting Company must report information regarding the Reporting Company itself, its Beneficial Owners, and possibly its Company Applicants. The required information specifically pertaining to each is as follows:
1. Required Company Information. A Reporting Company must report its own:
a. Legal name, trade names, or d/b/a names.
b. Principal place of business (street address).
c. State of registration or incorporation.
d. Taxpayer I.D., such as a TIN or EIN.
2. Required Beneficial Owner Information. A Reporting Company must report all following information regarding each of its Beneficial Owners:
a. Full name.
b. Date of birth.
c. Current residential address.
d. A unique identifying number from an acceptable form of identification. Acceptable forms of identification are as follows:
i. A non-expired U.S. driver’s license (including any driver’s licenses issued by a commonwealth, territory, or possession of the United States).
ii. A non-expired identification document issued by a U.S. state or local government, or Indian Tribe.
iii. A non-expired passport issued by the U.S. government.
iv. A non-expired passport issued by a foreign government, but only if the Beneficial Owner cannot provide any of the three above.
e. An image of the acceptable form of identification where the unique identifying number was obtained. Usually this means supplying a good quality color scan of the document.
3. Required Company Applicant Information. If the Reporting Company was formed after January 1, 2024, then it will need to report the same information regarding each of its Company Applicants that it would for its Beneficial Owners listed above. However, if a Company Applicant works in corporate formation, like a business attorney or accountant, then the Reporting Company must report that Company Applicant’s business address instead of their residential address.
V. TIMELINE FOR INITIAL FILINGS & RULES FOR SUBSEQUENT FILINGS. Now that we have covered both who needs to be reported in a BOI Report, and what specific information needs to be reported, we will now focus on the CTA’s initial report filing deadlines and rules pertaining to subsequent filings.
1. Initial Filing. A Reporting Company’s initial reporting deadline to comply with the CTA depends on when the Reporting Company was formed. There are three different deadlines to consider.
a. Reporting Companies formed before January 1, 2024, have until January 1, 2025 to file their first BOI Report with FinCEN.
b. Reporting Companies formed on or after the January 1, 2024, but before January 1, 2025, have 90 days after formation or registration with the Secretary of State to file the BOI Report.
c. Reporting Companies formed on or after the January 1, 2025, have 30 days after formation or registration with the Secretary of State to file the BOI Report.
2. Subsequent Filings. A Reporting Company does not need to file a BOI Report on an annual basis, but only in the following circumstances:
a. There is a change to the Required Company Information (see Section IV.1 above).
b. There is a change to the Required Beneficial Owner Information (see Section IV.2 above).
In either case, a Reporting Company must file an updated BOI Report no later than 30 days after the date of the change.
3. Examples of Typical Changes. Examples of common occurrences that would require an updated BOI Report are:
a. A Reporting Company registers a new business name or declares a new principal place of business.
b. A Reporting Company hires a new CEO “or other person with Substantial Control.
c. A sale occurs where an owner of a Reporting Company crosses the threshold of owning at least 25 percent in the Reporting Company.
d. There is a change to a Beneficial Owner’s name, address, or unique identifying number.
Now that we have covered the relevant deadlines for reporting and re-reporting, we will discuss how the CTA handles violations of its requirements and deadlines.
VI. PENALTIES & LIABILITY FOR VIOLATING CTA; SAFE HARBOR. Violating CTA’s requirements can result in significant civil and criminal penalties. If an individual submits a BOI Report with false or inaccurate information to FinCEN, or fails to report or update an existing BOI Report with complete information, they can be fined up to $10,000 (limited to $500 per day) and imprisoned up to two years.
Individuals that cause violations or were Reporting Company officers at the time of the violations, can be held liable under the CTA. However, the CTA provides a safe harbor from civil and criminal liability for submission of inaccurate or incomplete information. If the individual or individuals who submitted the BOI Report voluntarily correct the inaccurate information within 90 days of the submission of the inaccurate BOI Report, no penalty is imposed.
VII. STORAGE AND USE OF REPORTED INFORMATION. Many people may be concerned about who can access the information they report in their BOI Reports. FinCEN stores the collected information required by the CTA in a secure private database which is not available to the public. However, the information submitted will be made available in the following ways to the following parties:
1. By request to federal law enforcement agencies.
2. By request and court order to state, local, or tribal law enforcement agencies.
3. By request and pursuant to international agreement to federal agencies requesting on behalf of foreign countries.
4. By request and authorization by the reporting company to financial institutions for customer due diligence purposes.
Additionally, the CTA has several security and confidentiality requirements that must be satisfied by the domestic agencies that request information provided in BOI Reports.
VIII. RULING CTA IS UNCONSTITUTIONAL & ONGOING COMPLIANCE. Recently, it has been nationally reported that the CTA was ruled unconstitutional. Although that is nominally correct, compliance with the CTA is still required for nearly everyone who is otherwise required to comply.
On March 1, 2024, a federal district court in Alabama ruled that the CTA is unconstitutional. However, it appears for now the judgement only extends to the individual plaintiffs in that case, and Reporting Companies are still required to comply with the law and file BOI Reports.
The Justice Department, on behalf of the Department of the Treasury, filed a Notice of Appeal on March 11, 2024, and during this ongoing litigation FinCEN will continue to implement the CTA. Thus Reporting Companies should continue to comply with all the requirements.
IX. KEY TAKAWAYS.
• CTA went into effect on January 1, 2024.
• Reporting Companies must submit a BOI Report to FinCEN.
• BOI Report must contain the required information regarding the Reporting Company itself, its Beneficial Owners, and possibly its Company Applicants.
• Reporting Companies formed before January 1, 2024, have until January 1, 2025 to report.
• Reporting Companies formed on or after the January 1, 2024, but before January 1, 2025, have 90 days after their formation or registration to report.
• Reporting Companies formed on or after the January 1, 2025, have 30 days after their formation or registration to report.
• Reported information is not available to the public, but in certain circumstances can be requested by certain domestic agencies pursuant to the CTA’s security and confidentiality requirements.
• CTA was ruled unconstitutional in a federal district court in Alabama, but all Reporting Companies must still comply with the CTA except for the plaintiffs in that case.