The Corporate Transparency Act (“CTA”) goes into effect on January 1, 2024. Congress passed the CTA on January 1, 2021 with the primary goals of increasing the transparency of legal entities and detecting and combatting illegal activities.
At this time, it is important to determine whether the CTA applies to your company. The CTA imposes significant new reporting burdens on those companies to which it applies. Affected companies must report information about their beneficial owners to the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”).
The following is a quick primer on important information to know about the CTA and how the CTA might affect your company:
Does the CTA apply to your company?
The CTA applies to both domestic and foreign entities which meet the definition of a “reporting company” under the act. A domestic reporting company is a corporation, limited liability company, limited partnership or similar entity formed in the U.S. through a filing with a secretary of state. A foreign reporting company is an entity formed under the laws of a foreign jurisdiction that is registered to do business in U.S. through a filing with a secretary of state.
Certain types of entities are exempt from the requirements of the CTA. The exempt companies generally involve those that are already subject to substantial federal reporting requirements, including:
- Public companies
- Banks
- Securities brokers and dealers
- Insurance companies
- Registered investment companies
- Accounting firms
- Tax exempt entities
- Inactive businesses
- “Large operating companies”
Large operating companies are defined as those that:
- Have more than 20 full-time employees;
- Operate in a physical office within the U.S. (must own or lease the space; the space cannot be a personal residence or space shared with a anyone other than an affiliated entity); and
- Have a filed federal income tax return in the U.S. for the previous year showing more than $5 million in gross receipt or sales from within the U.S.
Subsidiaries that are controlled or wholly owned, directly or indirectly, by an exempt entity are also exempt from the requirements of the CTA.
Lastly, the CTA very likely does not apply to sole proprietorships, general partnerships and certain types of trusts.
What does the CTA require of reporting companies?
The CTA requires reporting companies to file a beneficial owner information report (“BOI report”) on the company and its “beneficial owners.” A beneficial owner is any individual who, directly or indirectly:
- Exercises “substantial control” over the entity; or
- Owns or controls not less than 25% of the ownership interests of the entity.
What information is required by the BOI report?
It is the reporting company’s obligation to submit the required information to FinCEN. Each person filing the report must certify that the report is accurate and complete.
Reporting companies are required to report the following:
About reporting companies: Basic information, including its full legal name, any trade names, business address and a tax identification number.
About each beneficial owner: Full legal name, date of birth, residential address, unique ID number (for example, passport or driver’s license number), and an image of the ID card with the unique ID number.
When do the BOI reports need to be filed?
- Companies formed prior to January 1, 2024, must comply with the reporting requirements of the CTA by January 1, 2025.
- Companies formed on or after January 1, 2024, but before January 1, 2025, have 90 days to comply.
- Companies formed on or after January 1, 2025 will have 30 days to comply.
For foreign reporting companies, the relevant date is the date the company registered to do business with a U.S. state.
What are the reporting procedures with FinCEN?
Individuals filing reports with FinCEN must obtain a FinCEN identifier number.
BOI report filings will occur through a filing system on FinCEN’s website.
What is a reporting company’s obligation to update or correct BOI reports?
Reporting companies must file updated reports within 30 days after the date of any change to information provided to FinCEN in a report. Reporting companies must file corrected reports within 30 days of becoming aware that any information reported is inaccurate.
What are the penalties for non-compliance?
Penalties for noncompliance include a civil penalty of $500 per day for each day the violation continues. If a person willfully provides false beneficial ownership information, or willfully fails to report complete or updated beneficial ownership information, the person could be fined up to $10,000 and imprisoned for up to two years.
Summary
This post is intended as a brief summary of the CTA and to inform readers of the significant looming requirements of the CTA. It is important to note that we have not included detailed descriptions of many aspects of the CTA that will need to be analyzed by companies. Each company will need to undertake an analysis of applicability of the CTA to the company, who the proper “Company Applicant” is for the company, and who the beneficial owners are.
Please reach out to a BFV corporate law team member for assistance with analyzing whether your company is subject to the CTA or filing the BOI Report.
Tom Sowers approaches legal issues from a businessperson’s perspective. A Shareholder at Berman Fink Van Horn, Tom’s practice focuses on representing businesses and their owners in a wide range of transactional matters and legal issues.
