Much to the dismay of many corporate/transactional law practitioners like me, the burdensome business entity reporting requirements of the recently enacted Corporate Transparency Act (the “CTA”) are here, and it would appear they are here to stay.
Under the CTA, which became effective as of January 1, 2024, most business owners will face disclosure and reporting obligations like they have never seen before. With CTA violations carrying civil penalties of up to $500 for each day of the violation (capped at $10,000) and the possibility of imprisonment for perpetrators for up to two years, preparation for compliance with the CTA is of critical importance.
Below are answers to several frequently asked questions regarding the CTA and its new reporting requirements that will impact millions of business entities and, more specifically, their owners:
Background
What is the Corporate Transparency Act?
- The CTA requires certain business entities (each defined as a “Reporting Company”) to file, in the absence of an exemption, information on their “Beneficial Owners” with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury
- The information filed will not be publicly available, but FinCEN is authorized to disclose the information to certain agencies and other entities/persons
- The persons involved in the formation of any Reporting Companies are generally referred to under the CTA as “Company Applicants”, each of whom are also subject to disclosure/reporting requirements under the CTA.
When does the CTA come into effect?
- Generally, the reporting requirements under the CTA come into effect on January 1, 2024
- While business entities formed prior to such date will have until January 1, 2025, to comply with the CTA’s reporting requirements, it is nonetheless advisable that steps be taken to prepare for and/or ensure compliance immediately
Why was the CTA enacted?
- More than 2,000,000 corporations and limited liability companies being formed in U.S. each year
- Most States do not require or maintain entity ownership information
- Congress believes illicit actors frequently use corporate structures such as shell and front companies to hide identities of illicit actors and thereby assist them with moving money through the U.S. financial system
Components of CTA
What is a “Reporting Company” subject to the CTA?
- A “Reporting Company” is any corporation, limited liability company or other entity that is:
- created by the filing of a document with the secretary of state or similar office under the laws of a state or Indian tribe; or
- formed under the law of a foreign country and registered to do business in the United States by the filing of a document with the secretary of state or similar office under the laws of a state or Indian tribe.
What is NOT a “Reporting Company” subject to the CTA?
- 20+ types of entities are exempted from the definition and therefore do not have to comply with the reporting requirements applicable to Reporting Companies
- Notable types of exempt entities:
- Many financial services companies including banks, investment companies, insurance companies, investment advisers, insurance producers subject to state regulation, credit unions, and certain accounting firms
- Several types of 501(c) organizations including churches, nonprofit organizations, and charities
- Publicly traded companies
- Public utilities
- Large private companies, defined as companies that:
- employ more than 20 employees on a full-time basis in the United States;
- file in the previous year federal income tax returns in the United States demonstrating more than $5 million in gross receipts or sales in the aggregate; and
- have an operating presence at a physical office in the United States
- Subsidiaries of an exempt entity
- Any “inactive entity” that:
- was in existence on or before January 1, 2020;
- is not engaged in active business;
- is not owned by a foreign person, whether directly or indirectly, wholly or partially;
- has not experienced any change in ownership in the preceding twelve-month period;
- has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period; and
- does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.
Who is a “Beneficial Owner”?
- “Beneficial Owner” means, with respect to an entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:
- exercises substantial control over the entity; or
*Indicators*
- Senior officers
- Authority over appointment or removal of a senior officer or majority of directors (or similar body)
- Direction, determination, or decision of, or substantial influence over, important matters of the reporting company
- owns or controls, directly or indirectly, not less than 25 percent of the ownership interests of the entity.
*Important Considerations*
- Covers all ownership interests of any class or type (including warrants, options and profits interests)
- Debt instruments could be considered if they enable the holder to exercise the same rights as one of the ordinary ownership interests, including the ability to convert the instrument into the ordinary ownership interests
Who is NOT a “Beneficial Owner” subject to the CTA?
- a minor child as defined in the state in which the entity is formed (must report
information of the parent or guardian of the minor child);
- an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual (must report information of individual whom nominee is acting);
- an individual acting solely as an employee of a reporting person and whose control over the economic benefits from such entity is derived solely from the employment status of the person (excludes “senior officers”);
- an individual whose only interest in a reporting company is through a right of inheritance; or
- a creditor of a reporting person, unless the creditor meets the requirements of a “beneficial owner” based on substantial control or ownership or control of not less than 25% of the ownership interests
What is a “Company Applicant”?
- 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.
Compliance
What information is required to be reported?
- A Reporting Company must report the following information for each Beneficial Owner and each Company Applicant:
- full legal name;
- date of birth;
- current, as of the date on which the report is delivered, address;
- the unique identifying number from an acceptable identification document (i.e., a state issued ID) or a FinCEN identifier issued in accordance with the CTA; and
- image of the identification document (i.e., the state issued ID) used to provide unique identification number.
*Notable exceptions*
- Reporting Companies formed before January 1, 2024 do not need to report Company Applicant information
- No Reporting Company needs to update its Company Applicant information
- A “Reporting Company” must report the following information about the Reporting Company:
- legal name (and any trade names);
- address of principal place of business (can’t be PO Box or office of formation/registered agent);
- state/jurisdiction of formation; and
- IRS taxpayer identification number.
What information needs to be reported on a Beneficial Owner that is an exempt entity?
- Only the name of the exempt entity.
When is information required to be reported?
- For any Reporting Company that has been formed or registered before January 1, 2024: not later than 1 year after the effective date of Treasury regulations (or January 1, 2025)
- For any Reporting Company formed or registered in calendar year 2024: information must be reported not later than 90 days after formation (i.e. the filing of the Certificate/Articles with the applicable Secretary of State’s office)
- For any Reporting Company formed or registered in calendar year 2025 or afterwards: not later than 30 days after formation (i.e. the filing of the Certificate/Articles with the applicable Secretary of State's office)
Are updates required to be made to the reported information?
- Reporting Companies must update changes in Beneficial Ownership not later than 30 days after change
- Exempt entities that are no longer exempt are required to submit to FinCEN the otherwise required information not later than 30 days after their exemption ceases
Who can use/access the information reported to FinCEN?
- Federal agencies engaged in national security or law enforcement
- State, local and tribal law enforcement
- Foreign law enforcement
- Financial institutions subject to CDD rules
- Treasury Department and other regulatory agencies
What are the penalties for non-compliance?
- Civil penalties of up to $500 for each day that a violation continues or has not been remedied, capped at $10,000
- Possible imprisonment of up to 2 years for any person who willfully (1) provides, or attempts to provide, false or fraudulent beneficial ownership information or (2) fails to report complete or updated beneficial ownership information to FinCEN
- There are also civil and criminal penalties for unauthorized use of Beneficial Owner information reported to FinCEN by the parties entitled to use/access the information (mentioned above)
How do companies report?
- FinCEN developed a Beneficial Owner Information (BOI) E-Filing System where the reports may be submitted online. Reports may be prepared and submitted via the BOI E-Filing System at the following link: https://boiefiling.fincen.gov/fileboir. Filers have the option to upload a separately prepared BOI Report in PDF format (by following the “File PDF BOIR” guidelines) or to simultaneously prepare and file a BOI Report online (by clicking the “Prepare & Submit BOIR” link under the “File Online BOIR” guidelines). It is my experience that the online filing process is much more streamlined and user-friendly.
How should companies prepare?
- Companies should consider including the following types of contractual provisions in governing corporate documents:
- A representation by each shareholder, member or partner, as applicable, that the applicable party will be in compliance with, or exempt from, the CTA;
- A covenant by each shareholder, member or partner, as applicable, requiring continued compliance with and disclosure under the CTA (or to provide evidence of exemption from its requirements);
- An indemnification agreement by each shareholder, member or partner, as applicable, to the company and its other shareholders, members or partners, as applicable, for such party’s failure to comply with the CTA or for such party’s provision of false information; and
- A consent by each disclosing party for the company to disclose identifying information regarding such party to FinCEN, to the extent required by law.
- As the CTA is now in effect, business entities and their owners should promptly start collecting the information required to be reported/disclosed for Reporting Companies and their Beneficial Owners and thereafter shall promptly prepare and submit their BOI reports in order to comply with the reporting/disclosure obligations of the CTA as outlined herein.
If you have any questions regarding the CTA’s applicability to your business entity or its owners, including whether any such parties might be exempt from some or all of the CTA’s sweeping reporting/disclosure requirements, please do not hesitate to reach out to me at brennan.block@brownwinick.com or 515-242-2441 or Ellen Hames at ellen.hames@brownwinick.com or 515-242-2423.
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.
This blog was updated as of January 9, 2024.