Bulletins

Written by: Chad Porter and Donald Slater, Jr.

The Corporate Transparency Act

As part of the Anti-Money Laundering Act of 2020, the Corporate Transparency Act (CTA) will take effect on January 1, 2024. Subject to some limited exemptions, this new law will require newly formed and already existing domestic corporations, limited liability companies, and similar entities formed and registered by filing with a state, territory, or Indian tribe to file Beneficial Ownership Information (BOI) reports. Foreign (non-U.S.) entities that register to do business with any U.S. state, territory, or Indian tribe will also be required to file a BOI report.  

The CTA aims to combat money laundering, tax fraud, and other illicit activities by enhancing transparency among small businesses. Beginning January 1, 2024, companies will need to file BOI reports with the Financial Crimes Enforcement Network (FinCEN). These BOI reports will disclose information regarding the company’s “beneficial owners” and, in some instances, “company applicants.” Companies that are required to file a BOI report are referred to as “reporting companies.”

To assist companies with understanding and complying with the CTA, FinCEN has released Beneficial Ownership Information Reporting FAQs[1] and a Small Business Compliance Guide[2]. We urge all companies to review any Compliance Guides, FAQs, and other materials that FinCEN may issue as they assess their CTA requirements.

We have also created these decision trees for domestic and foreign entities, which track the major steps and determinations to be made to ensure proper compliance.   

What Do I Do Now?

To ensure compliance with the CTA and BOI reporting requirements, we recommend the following steps:

1. Review the materials referenced above and the CTA to determine if any of your companies qualifies as a reporting company.
2. Determine if any such company may fall under one of the applicable exemptions discussed briefly below and in more detail in the FinCEN Compliance Guide and FAQs.
3. If not exempt, identify the individual(s) who directly or indirectly substantially control the applicable company, or own or control at least 25% of the ownership interest in such company.
4. Consider expediting the formation of your prospective companies to take effect before January 1, 2024, to allow more time to comply with the CTA.
5. Establish a method of record-keeping and tracking for BOI information to ensure all company information remains up to date and the company remains in compliance with the law.
6. Create a process for reporting any BOI changes in a timely manner.

While we strongly recommend that all companies review the CTA and the comprehensive information provided in the FinCEN Compliance Guide and FAQs to help assess reporting company status, beneficial ownership, and related matters, we have also described some key CTA components below.

What Companies are Exempt?

Even if your company is a domestic or foreign reporting company, there are twenty-three (23) types of such entities that are exempt from the reporting requirements under the CTA. Any entity that falls under an exempted category is not required to file a BOI report. Generally, the CTA has exempted banks, tax-exempt entities, publicly traded companies, and large companies, defined as entities that (i) employ more than 20 full-time employees in the United States; (ii) filed federal income tax returns in the previous year showing more than $5 million in gross receipts or sales from the United States, and; (iii) has an operating presence or physical office in the United States. However, even large companies that qualify as exempt may have subsidiaries or other entities that do not qualify for exemption and may need to report. Pooled investment vehicles formed under the laws of a foreign country are subject to a special reporting requirement.

For a complete list of reporting company exemptions, please see FinCEN’s summary table[3].

Who is a Beneficial Owner?

It is anticipated that every reporting company under the CTA will have at least one beneficial owner. A beneficial owner is an individual who, directly or indirectly, either (i) exercises substantial control over the reporting company or (ii) owns or controls at least 25% of the reporting company’s ownership interests. 

Substantial Control

An individual who exercises substantial control over a reporting company:

• is a senior officer of the company, which includes roles such as President, Chief Executive Officer, Chief Financial Officer, General Counsel, or any other officer who performs a similar function;
• any individual with the ability to appoint or remove any senior officer or a majority of the board of directors or similar body; or
• is an important decision maker for the company, which is defined as any individual who directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding the company’s:
  • Business
  • Finances
  • Structure

25% Ownership Interest

Any of the following may be an ownership interest:

• any forms of equity, stock, or similar instruments;
• any capital or profits interests;
• any instruments that may convert into profit interests or forms of equity or stock; or
• any options to sell or buy or sell equity, stock, voting rights, capital or profit interests, or convertible note.

FinCEN has also identified five (5) exemptions to the definition of beneficial owner that may cause an individual who is otherwise a beneficial owner not to be disclosed if certain conditions are met. These exemptions relate to minor children, nominees, intermediaries, custodians, agents, certain employees, certain inheritors, and creditors.

Who is a Company Applicant?

A company applicant is any individual who directly files the document(s) that create the reporting company or registers a foreign reporting company. This includes the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing. No reporting company will have more than two (2) company applicants.

A reporting company is not required to report its company applicants if it is either a:

• domestic reporting company created before January 1, 2024, or
• foreign reporting company first registered to do business in the United States before January 1, 2024.

When Do I Need to File a Report?

Companies required to report that were formed prior to January 1, 2024, will have until January 1, 2025, to file their initial BOI report.

Companies required to report that are formed or registered to conduct business on or after January 1, 2024, will have 90 days after receiving notice of the Company’s registration to file the initial BOI report.

Companies required to report that are formed or registered to conduct business on or after January 1, 2025, will have 30 days after receiving notice of the Company’s registration to file the initial BOI report.

What Information Needs to be Reported?

The report required to be filed with FinCEN must include the following for each beneficial owner and, if applicable, company applicant:

• full legal name;
• date of birth;
• current address (business address for a company applicant who registers companies in the course of their business, such as paralegals); and
• identifying number and image from a U.S. Passport, state driver’s license, or identification document issued by a state, local government, or tribe. If an individual does not have any of the previously listed documents, a foreign passport.

The report must also include the reporting company’s:

• full legal name;
• any trade name or “doing business as” (DBA) name;
• current U.S. address;
• formation jurisdiction, or, for a foreign reporting company, the state or tribal jurisdiction where the company first registered; and
• the company’s TIN or EIN.

Who Will Have Access to the Disclosed Information?

FinCEN is authorized, under the CTA, to disclose reported information to:

1. U.S. federal agencies engaged in national security, intelligence, and law enforcement activities;
2. state, local, and tribal law enforcement agencies with court authorization;
3. U.S. Department of the Treasury;
4. financial institutions using beneficial ownership information to conduct legally required customer due diligence obligations;
5. federal and state regulators assessing financial institutions for compliance with legally required customer due diligence obligations; and
6. foreign law enforcement agencies and certain other foreign authorities who submit qualifying requests for the information through a U.S. federal agency.

Under the CTA, the Secretary of the Treasury is required to maintain the beneficial owner information in a secure, nonpublic database, using rigorous information security methods and techniques that the Federal Government typically uses to protect non-classified yet sensitive information systems at the highest security level. Regular auditing will be conducted to ensure that government authorities accessing beneficial ownership information do so only for authorized purposes consistent with the CTA.

These reports will not be accessible to the general public and are not subject to requests made pursuant to the Freedom of Information Act.

Penalties for Non-Compliance

Failing to comply with the CTA or willfully providing false or misleading information in a report can result in penalties and fines up to $500 per day (up to $10,000) or, more severely, criminal penalties such as imprisonment for up to two years in federal prison. Individual employees who prepare and submit reports may be held personally liable for false reporting. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.

If a person has reason to believe that a report filed with FinCEN contains inaccurate information, they will have 90 days from the filing deadline of the original report to voluntarily submit a report correcting the information.

Preparing for and Making the Filing

Reporting companies can submit the reports directly via FinCEN’s E-Filing system and/or an Application Programming Interface, which is currently under development by FinCEN. Reporting companies who prefer not to file directly can also take advantage of a number of third-party service providers who have and are creating systems to submit the BOI reports. While there will be a fee associated with the use of these third-party service providers, they are likely to offer several advantages over filing directly with FinCEN, including having access to historical filings and simplifying future updates.

We are also happy to assist you in assessing how the CTA will impact your companies and help you ensure compliance therewith. If you need any assistance or have any further questions specific to your needs, please reach out to your regular Burns & Levinson attorney.

[1] Beneficial Ownership Information Reporting FAQs

[2] Small Business Compliance Guide

[3] FinCEN’s summary table of exempt companies.