Overreach or not, the CTA will most likely apply to your business.
In an earlier newsletter, we advised that new reporting requirements had been mandated under the CORPORATE TRANSPARENCY ACT (“CTA”) for all companies created or registered to do business in any state.
The reporting requirements under the CTA will apply to most family businesses, professional practices, LLCs, S-Corps, companies, and partnerships. More than 30 million existing companies will be impacted. Whether the benefits sought through the CTA will outweigh the burden on U.S. private businesses and possible impact on business formation is a significant question according to our Managing Partner, Michael Macaluso.
Unless your company is already regulated and/or required to report beneficial ownership information, or is a publicly traded company, you are probably subject to the new transparency disclosures. The gathering of the data and the analysis and determinations regarding what information must be reported will require far more resources that the completion and filing of the actual report with FinCEN.
If you would like a free initial consultation to begin to sort out the impact on your private business, please send us an email at [email protected].
The title “Corporate Transparency Act” is a bit of a misnomer. The CTA applies to all kinds of business entities, not just corporations. The CTA was enacted as an attempt to combat use of small companies for money laundering and financing of terrorism. The CTA requires companies to report to the Financial Crimes Enforcement Network (“FinCEN”, a federal agency) the identity of the individuals who directly or indirectly own or control the company, so that these individual owners can no longer hide behind layers of business entities.
Unless exempt, companies will be required to disclose the identity of their individual “Beneficial Owners,” and other information about these individuals.
The reporting requirements are effective starting January 1, 2024. A reporting company created or registered to do business before January 1, 2024 will have until January 1, 2025 to file its initial beneficial ownership information report.
A reporting company created or registered on or after January 1, 2024, will have 90 days to file its initial beneficial ownership information report. This 90-day deadline runs from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier. (This deadline was recently extended from 30 days to 90 days. As of January 1, 2025, the deadline reverts to 30 days.)
FinCEN will not begin accepting beneficial ownership information reports until January 1, 2024.
Which Companies Must File Reports?
The Final Rule defines a “Reporting Company” as a corporation, LLC, or “similar entity” created by the filing of a document with a Secretary of State or Corporation Commission (or other similar state agency). Note that a statutory trust, business trust, or foundation, unless it is otherwise exempt, is a reporting company if it was created by filing a document with a secretary of state or similar office. State laws vary as to which types of entities require the filing of such a document to be created or registered.
Virtually all small businesses, including family businesses, holding companies, and professional practices, will be affected by this new reporting requirement. Even single-member LLCS and sole proprietorships must file reports, unless they fall within an exemption (see below).
The following companies are excluded from the reporting requirements:
- large businesses (those that employ more than 20 full-time U.S employees; had more than $5 million in gross receipts or sales including entities owned or operated by the company) in the preceding tax reporting year; and has an operating presence at a physical office within the U.S.
- publicly traded companies
- entities registered with the SEC, including broker-dealers, investment advisers, and investment companies
- domestic pooled investment vehicles, including funds, but only if they are operated or advised by an SEC- registered broker-dealer, investment adviser or investment company, or if the company is a private investment company exempt from registration as an investment company. (The subsidiaries and affiliates of such exempt pooled investment vehicles are not necessarily exempt, and must independently satisfy an exemption from the CTA.)
- securities exchanges and clearing agencies
- tax-exempt entities and entities that assist tax-exempt entities
- public utilities
- banks, insurance companies, credit unions, registered accounting firms, and money transmitting businesses
- businesses entities owned or controlled by one or more of the entities excluded by the Act
- inactive entities that:
- have existed since prior to January 2, 2020
- are not engaged in an active business
- are not owned directly or indirectly, wholly or partially, by a foreign person
- have not in the preceding twelve-month period changed ownership or sent or received more than $1000, and
- do not hold any assets
All other business entities created or registered with a State’s Division of Corporations or similar agency are subject to the reporting requirements.
The reporting requirements apply to both domestic companies and to foreign companies formed under the law of a foreign country that have registered to do business in the United States b the filing of a document with a state government office.
A parent company may not file a single report on behalf of its group of companies. Any non-exempt company must file its own report. However, certain subsidiaries of exempt entities may also be exempt from the reporting requirement.
What Information Must be Reported?
The reports must identify the business’ Beneficial Owners and in certain cases, their Company Applicants, and must contain information about the business entity itself. The Reporting Company must certify that the report is true, correct, and complete. The information in the report must be updated as needed, within certain timeframes, in order to keep the information current, and must correct any previous errors in the reported information.
The company must report:
- its full, legal name
- its d/b/a
- the current address for its principal place of business (or if that is outside the U.S., the primary location where it conducts business in the U.S.)
- the State or other jurisdiction where the entity first registered and
- its Taxpayer Identification Number or Employee Identification Number.
Note: This information will be accessible to authorized users, including law enforcement.[1]
Who is a “Beneficial Owner”?
A “Beneficial Owner” is any individual who, directly or indirectly, either:
1) exercises substantial control* over a reporting company, or
2) owns or controls at least 25 percent of the ownership interests of a reporting company.
*Substantial control is indicated by:
- Service as a senior officer (but corporate secretaries and treasurers are excluded if they have only ministerial functions and little control);
- Authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body); and
- Direction, determination, or decision of, or substantial influence over, important matters affecting a reporting company (including “undisclosed principals” such as those who have been sanctioned and therefore cannot overtly participate in an industry).
Essentially, Beneficial Owners are the company principals, the individuals who “run the company,” even if they operate behind the scenes, as well as those who hold control as a result of company ownership. There are some exceptions to the definition, including minor children, agents, custodians, and creditors, under certain circumstances. [2]
Who is a “Company Applicant”?
A “Company Applicant” is the individual who files the document that creates the entity, or the individual who is primarily responsible for directing or controlling that filing. For a business, an individual who actually makes the filing could be an administrative or support staff person, but the person responsible for directing and controlling the filing is the “Company Applicant”.
Note that only Reporting Companies created or registered on or after January 1, 2024 will need to report their Company Applicants.
What Information Must be Reported?
With regard to Beneficial Owners, the reporting company must provide:
- the full legal name of the individual;
his or her date of birth;
- a complete and current residential address;
- an identifying number from a list of acceptable documents, which includes a non-expired passport or a non-expired driver’s license, along with the name of the issuing state or jurisdiction of the identification document; and an image of the unique identifying document.
The required information for Company Applicants is:
- Full legal name
- Date of birth
- Complete current street address of company applicant; if the Company Applicant works in corporate formation, then the Reporting Company must report the Company Applicant’s business address. Otherwise, the Reporting Company must report the Company Applicant’s residential address.
- An identifying number and the issuing jurisdiction, just as for beneficial owners; and
- An image of the document
The Reporting Company itself must disclose:
- its full, legal name
- its d/b/a or any trade names
- the current address for its principal place of business (or if that is outside the U.S., the primary location where it conducts business in the U.S.)
- the State or other jurisdiction where the entity first registered and
- its Taxpayer Identification Number or Employee Identification Number.
Annual Reporting Requirement?
There is no annual reporting requirement. Instead, Reporting Companies must file an initial report and then file updated or corrected reports as needed. Any changes must be reported in an updated report no later than 30 days after the date of the change.
Examples of the kinds of changes that would require an updated Beneficial Ownership Information Report include: any change to the business information (such as a name change); a change in beneficial owners, such as a new CEO, or any transfers that change the 25% ownership interest threshold; or any change to the required reporting information for a beneficial owner, such as a change of address, name change, or copy of new identifying document (e.g. new driver’s license).
What Happens if a Company Fails to Report?
Statutory penalties for failure to comply include:
- $500 per day for each day the violation continues or has not been remedied; or
- No more than $10,000, imprisonment for up to two years; or
- Both fines and imprisonment.[3]
- Additional sanctions apply to anyone who misuses information taken from such reports.[4]
- If a mistake or omission is corrected within 90 days of the deadline for the original report, penalties may be avoided.
How Can a Company Report?
As of this date, the form is not yet available. Once available, information about the form will be posted on FinCEN’s beneficial ownership information webpage, at https://www.fincen.gov/boi There will be no fee for filing. The filing will be submitted electronically through a secure filing system, currently under development. FinCEN reports that the system will be available before reports must be filed.
Reporting Companies may use third-party service providers to submit Beneficial Ownership Information Reports. Third-party service providers will have the ability to submit the reports via FinCEN’s E-Filing system and/or an Application Programming Interface (API). Technical specifications for the API will be made available at a later date.
FinCEN Identifier
A “FinCEN Identifier” is a unique identifying number that FinCEN will issue to an individual or Reporting Company upon request after the individual or Reporting Company provides certain information to FinCEN. FinCEN Identifiers are not required. They are optional.
Individuals may request a FinCEN identifier on or after January 1, 2024, by completing an electronic web form, that will require the individual to provide their full legal name, date of birth, address, unique identifying number, and issuing jurisdiction from an acceptable identification document, and an image of the identification document. If a reporting company wishes to request a FinCEN identifier after submitting its initial beneficial ownership report, it may submit an updated beneficial ownership information report requesting a FinCEN identifier, even if the company does not otherwise need to update its information.
A Reporting Company may request a FinCEN identifier by checking a box on the Beneficial Ownership Information Report when they submit the report. After the Reporting Company submits the report, the company will immediately receive a FinCEN identifier unique to that company.
- Individuals must report any change to the information they submitted to obtain a FinCEN identifier no later than 30 days after the date on which the change occurred.
- If there is any inaccuracy in this information, an individual must correct the information no later than 30 days after the date the individual became aware of the inaccuracy or had reason to know of it.
- Reporting Companies with a FinCEN identifier must update or correct the company’s information by filing an updated or corrected Beneficial Ownership Information Report, as appropriate.
An individual or Reporting Company may only receive one FinCEN identifier. When an individual who is a Beneficial Owner or Company Applicant has obtained a FinCEN identifier, reporting companies may report the FinCEN identifier of that individual in the place of that individual’s otherwise required personal information on a beneficial ownership information report. The use of FinCEN identifiers is the subject of ongoing rulemaking, and additional guidance will be provided when the rulemaking is finalized.
Traps for the Unwary
- “Ownership”- An ownership interest is generally an arrangement that establishes ownership rights in the Reporting Company. Any mechanism used to establish ownership could qualify as an ownership interest. Stock and shares in a company obviously represent ownership, but ownership interests could include:
- units
- debt
- options, warrants, puts, calls, straddles, unless created and held by others without the knowledge or involvement of the Reporting Company
- profits interests
- convertible instruments
- voting trust certificates
- subscription agreement
- interest in a joint venture
- futures
To make things even more complicated, such ownership interests could be owned jointly or through a trust, or another indirect arrangement.
Therefore, best practices for potential Reporting Companies would be to have counsel review all governance documents, securities, and debt instruments issued by the company, and ancillary agreements with third parties, to be sure any potential control interests are not overlooked.
- “Substantial Control”- An individual can exercise substantial control in four different ways. This individual is exercising substantial control if the individual:
- is a senior officer (president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any officer who performs a function similar to one of the above officers)
- has authority to appoint or remove certain officers or a majority of directors (or similar body) of the Reporting Company
- directs, determines, or has substantial influence over important decisions for the company (What is “substantial influence”?)
- has any other form of substantial control over the company
What is an “important decision” for the company? Examples provided include decisions concerning:
- the nature, scope, or attributes of a business
- the selection or termination of business lines or ventures, or geographic focus
- the entry into, or termination of, significant contracts
- the fulfillment or non-fulfillment of significant contracts
- the sale, lease, mortgage, or other transfer of any principal assets
- major expenditures
- Major investments
- Issuances of equity
- Incurrence of significant debt
- Approval of the operating budget
- Compensation arrangements and incentive programs for senior officers
- Reorganization, dissolution, or merger
- Amendments of substantial governance documents of the company, including the articles, bylaws, operating agreements, and significant policies or procedures
However, there is no bright line definition of “substantial,” “significant,” “major,” or “important” to guide analysis here. FinCEN indicates that different corporate structures may have different “indicators of control.”
FinCEN guidance provides that “substantial control” can derive from contracts, arrangements, understandings, relationships, or otherwise. Moreover, control can be indirect, if an individual exercises such control through control of one of more intermediary entities that separately, or collectively, exercise “substantial control” over a Reporting Company. Control could also be indirect if an individual exercises ‘substantial control” via arrangements or relationships with other persons, including joint ownership of interests, ostensible nominee-relationships, intermediary relationships, custodial arrangements or agency relationships.
This broad-brush approach to defining “substantial control” could result in future, and unforeseeable, challenges to a Reporting Company’s determinations as to who is a “Beneficial Owner.” A company should review all formal and informal relationships and arrangements with other individuals and entities to evaluate whether someone who appears to be an outsider could nevertheless fall within the ambit of a determination of “substantial control.” Even if the nature of “control” is simply de facto, with no formal title, contract, employment agreement, or other governing documentation, the individual may have sufficient control to be a Beneficial Owner.
- Enforcement Within a Reporting Company and Liability of Outside Advisors and CPAs
Entities should include policies and procedures designed to ensure that reports filed are accurate and complete. If an individual provides false information to the company or if someone is uncooperative and refuses to provide information, the Reporting Company must have appropriate sanctions in place. And potential liability must be addressed. Tax return preparers, attorneys, and other professional advisers may be exposed to responsibility for CTA compliance.
If you would like a free initial consultation to begin to sort out the impact on your private business, please send us an email at [email protected].
[1] FinCEN will permit Federal, State, local, and Tribal officials, as well as certain foreign officials who submit a request through a U.S. Federal government agency, to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will also have access to beneficial ownership information in certain circumstances, with the consent of the reporting company. Those financial institutions’ regulators will also have access to beneficial ownership information when they supervise the financial institutions. FinCEN is developing the rules that will govern access to and handling of beneficial ownership information. Beneficial ownership information reported to FinCEN will be stored in a secure, non-public database using rigorous information security methods Updated: November 16, 2023 2 and controls typically used in the Federal government to protect non-classified yet sensitive information systems at the highest security level. FinCEN will work closely with those authorized to access beneficial ownership information to ensure that they understand their roles and responsibilities to ensure that the reported information is used only for authorized purposes and handled in a way that protects its security and confidentiality. BOI_FAQs_Q&A_11.15.23_508C
PDF (www.fincen.gov)
[2] BOI_Small_Compliance_Guide_FINAL_Sept_508C
PDF (www.fincen.gov)
[3] 31 U.S.C. § 5336(h)(1), (h)(3)(A). Corrective action taken within 90 days may constitute a safe harbor under 31 U.S.C. § 5336(h)(3)(C)
[4] 31 U.S.C. § 5336(h)(2), (h)(3)(B). Corrective action taken within 90 days may constitute a safe harbor under 31 U.S.C. § 5336(c)(3)(C).