Companies have new reporting requirements beginning January 1, 2024.  The Corporate Transparency Act (CTA) passed as part of an anti-money laundering regime. The CTA requires a government-maintained registry of beneficial ownership information (BOI) for certain entities registered or formed to do business in the U.S. The CTA requires that those entities report their BOI to the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department.

The reporting requirements of the CTA are effective on January 1, 2024. Companies existing before January 1, 2024 will have until January 1, 2025 to submit BOI reports. However, new reporting companies formed on or after January 1, 2024 must comply with CTA’s 90-day reporting deadline.

Who Needs to Report?

Any corporation, limited liability company, or other similar entity that is (i) created by the filing of a document with a Secretary of State or a similar office under the law of a State or Indian Tribe or (ii) formed under the law of a foreign country that is registered to do business in the United States must report, unless the entity is exempt.  In addition, most partnerships (LPs, LLPs, and LLLPs) are reporting companies under the CTA because such entities are generally formed with a filing through the Secretary of State or other similar office.  Sole proprietorships, certain types of trusts and general partnerships that are not created with a filing through the secretary of state or other similar office may fall outside the CTA’s definition of a reporting company.

Exempt companies include public companies, banks, credit unions, insurance companies and insurance producers, entities registered with the SEC (such as broker dealers), registered investment advisers and investment companies, venture capital fund advisers, public accounting firms, tax-exempt entities and others.

The exemption likely to have the broadest impact on reporting requirements is the large private company exemption. Companies will not be subject to the CTA’s reporting requirements if it:

  • Has more than 20 employees on a full-time basis;
  • Reports gross receipts or sales of more than $5 million in the previous year’s tax returns (including subsidiaries and operating affiliates); and
  • Has a physical presence in the U.S.

Another important exemption is the pooled investment vehicle exemption. This exemption applies to certain pooled investment vehicles when they are operated or advised by certain other exempt entities, such as banks, credit unions, brokers or dealers in securities, federally registered investment advisers, or venture capital fund advisers.

A common misconception is that small entities do not need to report.  However, even though the CTA includes numerous exemptions, its impact will be felt broadly by many small businesses, including certain special purpose entities, which are generally unlikely to fall within the scope of its exemptions as they currently stand.

Who is a Beneficial Owner?

The CTA defines a beneficial owner to mean, with respect to an entity, an individual who (i) directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise exercises “substantial control” over the entity or (ii) owns or controls not less than 25% of the “ownership interests” of the entity.

An individual can be a beneficial owner of a reporting company even if that person does not own any equity of the reporting company but exerts substantial control.  Under the CTA, an individual exercises substantial control if the individual serves as a senior officer (meaning the president, CFO, GC, CEO, COO, or any other officer performing a similar function, regardless of title). An individual’s title itself is not determinative of senior officer status under the CTA. Instead, the determination will be based on whether the individual exercises authority or performs the functions of a senior officer- in other words, if the individual exercises substantial control.

Unless an exemption applies, a reporting company must identify all individuals who meet the beneficial owner definition, While the number of individuals identified will vary from company to company, all reporting companies should identify at least one individual with substantial control.

Who is a Company Applicant?

A company applicant is an individual who directly files the formation documents for a domestic reporting company or first registers a foreign reporting company, or where more than one individual is involved in the filing process, is primarily responsible for directing or controlling the filing of the relevant document(s) by another.

A reporting company created or registered before January 1, 2024, does not need to report information regarding its company applications and does not need to report any change to the required information about its company applicants as long as the information regarding the company applicants was correct when first reported.

Information Reported

Under the CTA, a reporting company must disclose information in its BOI report about itself and its beneficial owners and, in the case of a reporting company created or registered after January 1, 2024, its company applicants.

Reporting Company

The reporting company must disclose the following information:

  • Full legal name of the reporting company (including any trade names, d/b/a names, or t/a names whether formally registered);
  • Complete current street address (no P.O. boxes, registered agent addresses, mail forwarding/virtual office addresses) for the principal place of business for a domestic reporting company or the primary location where a foreign reporting company conducts business;
  • The state, tribal, or foreign jurisdiction of formation; and
  • The IRS TIN, including an EIN. If a foreign reporting company has not been issued a TIN, it may provide a tax identification number issued by a foreign jurisdiction and the name of the issuing jurisdiction as an alternative.

Reporting companies, like company applicants and beneficial owners, may opt to obtain a FinCEN identifier by checking a box on its BOI report during submission.

Beneficial Owners and Company Applicants

Each reporting company must disclose the following information regarding each of its beneficial owners and – where the entity was created or registered after January 1, 2024 – its company applicants:

  • Full legal name,
  • Date of birth,
  • Current address,
  • Unique identification number from an unexpired passport, driver’s license, other acceptable identification document, or FinCEN identity number, and
  • An image of the identification document from which the unique identification number was obtained.

Instead of reporting the above information for beneficial owners or company applicants, an individual may obtain a FinCEN identifier. The reporting company may then report the individual’s FinCEN identifier on its BOI report as opposed to the specific information regarding that individual. This may be a good option for individuals who prefer to provide their information directly to FinCEN rather than through disclosing information to the reporting company and for individuals who are likely to be identified as beneficial owners or company applicants for multiple reporting companies.

Although the information contained in the BOI report will not be publicly accessible, it will be available to federal, state and international law enforcement agencies as well as financial institutions for customer due diligence.

Initial Reports

FinCEN will not accept any BOI reports before January 1, 2024. Reporting companies that were created before January 1, 2024, will have until January 1, 2025 to file their initial BOI report.

However, entities formed on or after January 1, 2024, must file their initial BOI reports with FinCEN within 90 days of the earlier of the date on which the reporting company:

  • Receives actual notice that its creation (or in the case of a foreign reporting company registration to do business) has become effective; or
  • A Secretary of State, or similar office, first provides public notice that the company has been created (or in the case of a foreign reporting company registered to do business).

Reporting companies that no longer qualify for one of the exemptions listed in the CTA after January 1, 2024 must file their initial BOI report within 30 days from the date on which the applicable exemption ends.

Updated and Corrected Reports

If the information regarding the reporting company or its beneficial owners previously reported changes, the reporting company must update the previously filed report within 30 days, even if the change is small or immaterial. There is no materiality threshold or qualifier regarding a reporting company’s obligation to report and update any changes to a previously filed BOI report. The reporting company must report all changes to the required information, unless the change is due to the termination or dissolution of the reporting company.

With regard to any inaccuracies contained in a reporting company’s BOI report, if the reporting company becomes aware, or has reason to know, that any of the information contained in its previously filed report was inaccurate when filed, the reporting company must file a correct report within 30 days of such time to fix any inaccuracies. The CTA does provide a safe harbor from liability for filing a false BOI report if the reporting company files a corrected report within 90 days of the submission of an incorrect report.

Liability Under the CTA

Compliance with the CTA may be cumbersome, but the penalty for non-compliance is extremely costly.  The CTA includes both civil and criminal penalties for violations and noncompliance.  The civil penalty may be up to $500/day for each day a violation continues. There is a criminal fine of up to $10,000 and potential imprisonment for up to two years, or both, for any person who willfully provides or attempts to provide false or fraudulent BOI or who fails to report complete or updated BOI to FinCEN. Penalties may also apply to reporting companies and individuals who cause a reporting company not to report or who are senior officers (based on the substantial control rules) of a reporting company at the time of its failure to fulfill its obligation or to accurately report or update BOI.

Further, the CTA allows civil penalties and a criminal penalty of up to $250,000 in fines or up to 5 years imprisonment, or both, for any person knowingly disclosing or using the BOI contained in a reporting company’s BOI report in an unauthorized manner.

The CTA does include a safe harbor of up to 90 days for correction of inaccuracies.  But, the safe harbor does not extend to inaccuracies that were made for the purpose of evading the reporting requirements or were known to the person submitting the report at the time the report was submitted.

The CTA carries significant potential liability for violations along with its substantial reporting obligations. As such, reporting companies should begin to identify applicable obligations and implement compliance processes to monitor and report changes to the information required to be reported in order to avoid penalties.

Looking Ahead

Reporting companies should develop policies and procedures to avoid penalties. These requirements could represent a significant change to a company’s current internal operations, with the broadened scope of who is required to report and bringing previously existing entities into compliance.  The CTA may have a significant impact on your business; Winthrop & Weinstine, P.A.’s attorneys can assist in reviewing that impact and how to comply with the CTA’s obligations.

December 6, 2023