In January 2021, Congress passed the Corporate Transparency Act (CTA) in an effort to prevent the use of shell entities in money laundering, tax fraud, and other illicit activity. The CTA, which became effective January 1, 2024, imposes disclosure duties on most new and existing business entities, and each entity that meets the CTA’s definition of a “Reporting Company” will be required to file a report with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) via the Beneficial Ownership Secure System (BOSS) electronic reporting system. While the first reports will not be due until the end of March 2024, businesses and individuals should begin to familiarize themselves with the requirements and prepare for compliance.
- Under the CTA, Reporting Companies must file Beneficial Ownership Information (BOI) reports with FinCEN that disclose information regarding their “Beneficial Owners” and “Company Applicants,” as those terms are defined by the CTA.
- The CTA identifies two types of Reporting Companies: domestic and foreign.
- A domestic Reporting Company is an entity formed by filing a document with a secretary of state or similar office under the laws of a state or Tribal jurisdiction. For example, a limited liability company formed by filing articles of organization with the Virginia State Corporation Commission is a Reporting Company under the CTA absent an applicable exemption.
- A foreign Reporting Company is an entity formed under the laws of a foreign country that registers to do business in a U.S. state by filing a document with a secretary of state or similar office.
- The CTA exempts 23 categories of entities from the definition of Reporting Company, including regulated financial services companies, Securities and Exchange Commission reporting companies, insurance companies, tax-exempt entities, accounting firms, and certain inactive entities formed before January 1, 2020.
- In addition, large companies are exempt if the company (1) employs more than 20 employees in the U.S., (2) operates with a physical office in the U.S., and (3) filed a tax return in the previous year with over $5 million in U.S. gross receipts or sales.
- Subsidiaries of certain exempt entities also are exempt.
- The above exemptions primarily apply to entities that already are highly regulated, which means that most small businesses not otherwise subject to federal or state ownership reporting requirements will be subject to the CTA.
- Subject to applicable exemptions, corporations, limited liability companies, limited partnerships, and business trusts are Reporting Companies.
- Generally, a trust is not formed by filing a document with a secretary of state or similar office and thus would not be a Reporting Company. However, subject to applicable exemptions, a trust such as a business trust that is formed by filing a document with a secretary of state or similar office is a Reporting Company.
- There is no exemption for family offices generally, although the above exemptions may be applicable to some family offices.
- A Beneficial Owner is any individual who, directly or indirectly, either (1) exercises “Substantial Control” over a Reporting Company, or (2) owns or controls 25% or more of the ownership interests of a Reporting Company, i.e., stock, membership interests (capital or profits interests), convertible instruments, options, voting rights, or any other contract, arrangement, or understanding used to establish ownership.) A Reporting Company may have multiple Beneficial Owners, and there is no maximum number of Beneficial Owners who must be reported.
- Under the CTA, individuals with Substantial Control over a Reporting Company include anyone who serves as a senior officer or has authority to make important decisions on behalf of the Reporting Company. The following examples illustrate a few ways in which an individual may exercise Substantial Control over a Reporting Company:
- The individual is a senior officer (the Reporting Company’s president, chief financial officer, general counsel, chief executive officer, chief operating officer, or similar officer.)
- The individual has the authority to appoint or remove senior officers or a majority of the board of directors or managers.
- The individual is an important decisionmaker for the Reporting Company (i.e., a person who directs, determines, or has substantial influence over important decisions, including decisions regarding the Reporting Company’s finances (e.g., approval of major expenditures or the budget), business (e.g., selection or termination of business lines, entry into significant contracts), or structure (e.g., reorganization, dissolution, or merger, or amendment of governance documents.)
- Substantial Control may be direct or indirect (i.e., as a trustee of a trust that is an owner of a Reporting Company may indirectly have Substantial Control over the Reporting Company.)
- If a trust exercises Substantial Control over a Reporting Company or owns 25% or more of a Reporting Company, then the beneficial ownership reporting requirements may be triggered for the trustee, or in some cases, the beneficiaries or settlor. The terms of a trust may require review by an attorney to determine who is required to report beneficial ownership information on behalf of the trust. For example, a grantor who has the right to revoke a trust or otherwise withdraw assets from a trust that owns 25% or more of a Reporting Company will be deemed to have Substantial Control over the Reporting Company.
- Individuals exempt from the definition of Beneficial Owner include minor children, future beneficiaries of a trust that holds an interest of 25% or more in a Reporting Company, agents or other individuals acting on behalf of a Beneficial Owner, employees, and creditors of a Reporting Company.
- If an individual merely acts on behalf of a Beneficial Owner as the Beneficial Owner’s agent, then the individual likely will qualify for an exemption. This includes professionals who perform advisory services, such as accountants or attorneys.
- The CTA defines a Company Applicant as (1) the individual who directly files the document that forms a domestic Reporting Company, or in the case of a foreign Reporting Company, the document that first registers a foreign Reporting Company to do business in a U.S. state, and (2) the individual who is responsible for directing the filing.
- The individual who directly files the document is the individual who physically or electronically files the document with the secretary of state or similar office.
- The individual who directs or controls the filing is the individual who was primarily responsible for directing or controlling the filing of a document that forms or first registers a Reporting Company. This individual is a Company Applicant even though the individual did not actually file the document with the secretary of state or similar office.
- For example, if an individual uses a law firm to form a limited liability company, then the attorney (or paralegal) at the firm who filed the formation or first registration document is one Company Applicant and the individual who requested the formation of the limited liability company is the other Company Applicant.
- The proposed beneficial ownership information submission form contemplates up to two Company Applicants for each Reporting Company.
- Company Applicant information does not need to be reported for Reporting Companies formed prior to January 1, 2024.
Contents of Beneficial Ownership Information Reports
- A Reporting Company must provide the following information in its BOI report:
- The full legal name of the Reporting Company;
- Any trade or “doing business as” (dba) name;
- The current street address of the Reporting Company’s principal place of business in the U.S.;
- The state or jurisdiction of the Reporting Company’s formation; and
- The Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (i.e., the Employer Identification Number (EIN) of the domestic Reporting Company, or for a foreign Reporting Company, the tax identification number issued by the applicable jurisdiction.)
- For each individual who is a Beneficial Owner or Company Applicant of a Reporting Company, the Reporting Company’s BOI report must include the following information:
- The full legal name of the individual;
- The individual’s date of birth;
- The current residential street address, or business street address in the case of a Company Applicant who forms or registers a Reporting Company in the course of the Company Applicant’s business;
- A unique identifying number from a valid passport, state ID, or driver’s license; and
- An image of the individual’s passport, state ID, or driver’s license.
- A Reporting Company formed or registered before January 1, 2024, has one year (until January 1, 2025) to file its initial BOI report with FinCEN. A Reporting Company formed or registered after January 1, 2024, and before January 1, 2025, must file its report within 90 days after forming or registering the Reporting Company with a secretary of state or similar office. A Reporting Company formed or registered after January 1, 2025, will have 30 days from its formation or registration to file its BOI reports with FinCEN.
- A Reporting Company has 30 days to report changes to the information in its previously filed BOI report (e.g., a change in Beneficial Ownership due to a gift or sale) and must correct inaccurate information in previously filed reports within 30 days of when it becomes aware or has reason to know of inaccurate information in an earlier report.
- Individuals (either Beneficial Owners or Company Applicants) have 30 days to update changes to their personal information, such as a new address or a new driver’s license.
Penalties for Noncompliance
- The willful failure to report complete or update beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information, may result in civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of a Reporting Company that fail to file a required BOI report may be held accountable for that failure.
- Additionally, a person may be subject to civil and/or criminal penalties for willfully causing a Reporting Company not to file a required BOI report or to report incomplete or false beneficial ownership information to FinCEN. For example, a Beneficial Owner or Company Applicant might refuse to provide information to a Reporting Company, knowing that the Reporting Company would not be able to provide complete beneficial ownership information to FinCEN without it. Also, an individual might provide false information to a Reporting Company, knowing that information is meant to be reported to FinCEN.
Access to FinCEN’s Beneficial Ownership Information Database
- FinCEN issued the final rule (Access Rule) governing access to and protection of beneficial ownership information obtained under the CTA in December 2023. Under the Access Rule, beneficial ownership information is limited to the following entities and individuals: (1) federal agencies engaged in national security, intelligence, or enforcement activities; (2) state, local and Tribal law enforcement agencies with court authorization; (3) financial institutions with customer due diligence requirements and their supervising regulators, and certain self-regulatory organizations (e.g., FINRA) to facilitate customer due diligence compliance reviews; (4) foreign law enforcement agencies or judicial or prosecutorial authorities in certain foreign countries and certain foreign requesters in accordance with international treaties, agreements, or conventions; and (5) U.S. Treasury officers and employees whose official duties require beneficial ownership information inspection or disclosure or for tax administration.
- Beneficial ownership information may not be obtained through Freedom of Information Act (FOIA) requests.
Next Steps and Additional Resources
- If you own a business, if you formed an entity to hold property, or if your business entity is held by a trust, you should begin to review FinCEN’s materials and make plans to ensure compliance with the CTA.
- To assist Reporting Companies and relevant stakeholders in understanding the CTA and its reporting requirements, FinCEN has published a Small Entity Compliance Guide.
If you have any questions about the new CTA beneficial ownership reporting requirements, please reach out to your usual OFP lawyer.
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- DISCLAIMER: This summary is made available by Odin Feldman Pittleman for informational purposes only. It does not provide any specific legal advice, create an attorney-client relationship, or express an opinion from any of the attorneys or the firm as to the applicability of the matters herein with regard to any individual circumstance. OFP makes no representations or warranties of any kind, express or implied, as to matters herein.