Get Ready for the Corporate Transparency Act

By Michael High, Brittany Michaud, and Andrew Sweeney

January 23, 2024

 

New filing requirements for existing and newly-formed business entities (whether domestic, tribal and foreign) came into effect on January 1, 2024. Under the Corporate Transparency Act (the “CTA”) certain business entities will be required to file reports with the Financial Crimes Enforcement Network (“FinCEN”) that identify the entity’s beneficial owners and each company applicant who files the document to form or register an entity formed on or after January 1, 2024. The law expressly applies to tribally-owned entities that are created under tribal law or registered with a tribal government.

An Overview of the CTA

The CTA is sweeping legislation enacted by Congress on January 1, 2021, as part of the Anti-Money Laundering Act of 2020. The CTA is designed to identify money laundering schemes and other similar financial crimes but unfortunately it also imposes a series of new and potentially burdensome filing requirements. The CTA’s requirements are broadly applicable and principally impact small and medium sized businesses, including tribally-owned companies, that have never made federal filings outside of filings with the Internal Revenue Service. The CTA applies to any entity that is formed in the United States (or to any foreign entity that is registered to do business in the United States) by the filing of a document with the appropriate state or tribal governmental office, such as the Secretary of State of a company’s jurisdiction of organization. Thus, for example, the CTA will apply to any limited liability company or corporation that is or was formed by filing a certificate or articles with a given state’s Secretary of State or tribal filing office. Reporting companies will be required to provide information regarding their beneficial owners and company applicants. The information collected pursuant to the CTA will be stored in a non-public government database.

There are 23 narrowly defined categories of legal entities that are exempt from the reporting requirements, many of which only apply to large companies and companies that are already highly regulated by other governmental agencies (such as public companies, banks and insurance companies).

The CTA provides for penalties for failure to comply with its requirements, including a fine of $500 per day up to $10,000 and even criminal liability in certain cases.

Your Initial Filing Due Dates

  • Initial filings for entities incorporated or formed on or after January 1, 2024: The initial filing for any domestic, tribal and foreign reporting company created or registered to do business in the United States on or after January 1, 2024 must be submitted within 90 days from the date of formation (if created or registered prior to January 1, 2025) or within 30 days from the date of formation (if created or registered on or after January 1, 2025).
  • Initial filings for entities incorporated or formed before January 1, 2024: The initial filing for domestic, tribal and foreign reporting companies formed or registered to do business in the United States prior to January 1, 2024 must be submitted before January 1, 2025.

What Information Must Be Reported Under The CTA

An entity that qualifies as a “reporting company” and is not eligible for an exemption is required to file a beneficial owner information (BOI) report (BOI Report) with FinCEN. Filings are made electronically through an online portal and information is stored in a nonpublic database (referred to as the Beneficial Ownership Secure System (BOSS)).Though BOSS is non-public, FinCEN may disclose reported beneficial owner information to authorized government authorities, financial institutions (with the reporting company’s consent) and other authorized parties under limited circumstances.

Reporting companies must file information about (1) the reporting company itself; (2) each of its beneficial owners; and (3) for reporting companies formed after January 1, 2024, their company applicant(s).

A reporting company is any entity incorporated or formed by a filing (such as a certificate or articles) with the secretary of state, a tribal government or any similar governmental office, including, but not limited to, corporations, limited liability companies, limited partnerships, certain general partnerships and business trusts, that do not qualify for an exemption under the CTA.

A beneficial owner is any individual who, directly or indirectly, (i) exercises “substantial control” over the reporting company, or (ii) owns or controls 25% or more of the ownership interests of the reporting company.

  • Individuals who exercise substantial control over a reporting company include:
    • Senior officers;
    • Individuals who have authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of the reporting company;
    • Individuals who direct, determine or who have substantial influence over important decisions made by the reporting company; and
    • Individuals may directly or indirectly exercise substantial control over a reporting company in other ways (such as through ownership or control of a majority of the voting power or voting rights of the reporting company).

This definition casts a wide net.

  • Ownership Interests include:
    • Any equity, stock or similar instrument;
    • Any capital or profits interest in an entity;
    • Any instrument convertible, with or without consideration, into any share or instrument described above or any future on that instrument, whether or not characterized as debt;
    • Any warrant or right to purchase, sell, or subscribe to a share or other interest described above;
    • Any put, call, straddle, or other option or privilege of buying or selling any of the above interests without being bound to do so, except to the extent that the option or privilege is held by a third party and not known to the reporting company; and
    • Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.

A company applicant is a natural person who actually files the organizational documents with the secretary of state’s office to create or register the reporting company.

The information required to be filed for the reporting company is:

  1. its legal name;
  2. any trade names or DBA names;
  3. the address of its principal place of business in the United States;
  4. its jurisdiction of formation;
  5. for a foreign reporting company, the United States jurisdiction where it first registered; and
  6. its Internal Revenue Service issued taxpayer identification number.

For each “beneficial owner” or “company applicant,” the reporting company must report:

  1. the individual’s legal name;
  2. date of birth;
  3. residential address (or, for a company applicant who formed or registered a reporting company in the course of his or her  business, the individual’s business address);
  4. an identifying number from the individual’s driver’s license, passport or other approved identification document;
  5. the issuing jurisdiction of the identification document from which the identifying number was obtained; and
  6. an image of such identification document.

Notably, beneficial owners and company applicants can apply directly to FinCEN for a FinCEN identifying number that the reporting company can then list on its BOI Report instead of collecting the personal information for the particular beneficial owners or company applicants. A FinCEN identifier is a unique identifying number that individuals or entities may obtain from FinCEN by submitting the above information to FinCEN (akin to the process for obtaining an EIN).

Ongoing Reporting Obligations Under the CTA

While reporting companies do not need to file BOI reports annually, a reporting company must update its report within 30 calendar days of such entity’s knowledge of any change to information regarding such reporting company, any change in its beneficial owners or any of the information reported with respect to its beneficial owners. A change in name, address or unique identifying number on a document would trigger the requirement to file an updated report. In addition, reporting companies must correct any information that a reporting company becomes aware or has reason to know was inaccurate when the report in question was made within 30 days of discovery. Changes to reportable information for a company applicant only need to be reported if such information was inaccurate in the reporting company’s initial report.

Exemptions

There are 23 narrowly defined exemptions from the CTA reporting requirements. An entity that qualifies for any of these exemptions is not considered a “reporting company” and is thus exempt from filing BOI Reports to FinCEN. Some of these exemptions include, but are not limited to:

  • large operating companies with more than 20 full-time employees in the United States, that reported more than $5 million in gross receipts or sales on their filed prior year United States federal income tax return (net of returns and allowances, excluding gross receipts or sales from sources outside the United States, but including the receipts or sales of other entities owned by the entity and through which the entity operates), and that have an operating presence at a physical office in the United States;
  • public companies;
  • government authorities;
  • SEC-registered investment companies or advisors;
  • certain other highly regulated financial services companies, like banks, credit unions,
    and registered securities;
  • brokers or dealers;
  • public accounting firms;
  • public utilities;
  • pooled investment vehicles operated by certain exempt entities; and
  • tax exempt entities.

Please note that an exempt entity that ceases being qualified for an exemption (for example, a company relying on the large operating company exemption that ceases to have 20 employees) must file a BOI Report within thirty (30) calendar of its change in status.

What Next?

Entities that are subject to the CTA should develop in-house compliance policies detailing how reporting will be handled, monitored and updated, who in the organization will be responsible for the reporting and updates for ongoing compliance (including, perhaps, the appointment of a CTA compliance office), how beneficial owners and those with substantial control will be identified and what information will be needed for compliance with the CTA. Reporting companies must require that beneficial owners advise the person responsible for CTA compliance if there is any change in the information that has been reported, for example, if a beneficial owner moves or gets a renewed ID document or there is an ownership change (including a death or if a minor turns 18), the reporting company must update its filing. Reporting companies should also update their offer letters, employment agreements, limited liability company or shareholder agreements to require beneficial owners to supply and update all required information. If someone is uncomfortable providing such personal information, as noted above, they can obtain a FinCEN identifying number directly from FinCEN. The individual can then provide that FinCEN identifying number to the entity that must include the number in its filing.

We would be glad to help our clients regarding the CTA. In general, however, Drummond Woodsum will not be responsible to make filings (including updates) required under the CTA unless we expressly agree to do so in writing. In many cases it will be more efficient for you to work directly with a third-party vendor that specializes in government filings, such as CT Corporation, Corporation Service Company (CSC), SingleFile, and Cogency.

Conclusion

The CTA presents an entirely new regulatory regime that many of our small to mid-sized clients will need to comply with, some in the very near term. Two things are certain, however: The CTA will increase the burden on many small businesses, which are least able to absorb additional record-keeping and reporting obligations, and whether you have the time to deal with it or not, the CTA is here and all reporting companies must comply with its requirements. It would be prudent for companies that are subject to the CTA to begin developing the compliance policies and procedures described above. Meanwhile, if you have any questions or would like more information on the issues discussed in this Client Alert, please reach out to your contact at Drummond Woodsum who can coordinate with the firm’s CTA experts to provide discrete advice tailored to your needs.

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