ABOUT THE CORPORATE TRANSPARENCY ACT

January 2024

WHAT YOU NEED TO KNOW AND HOW TO COMPLY

Effective January 1, 2024, the Corporate Transparency Act (CTA) requires many companies formed or operating in the United States to report information about their beneficial owners to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

WHAT IS THE CORPORATE TRANSPARENCY ACT?

On September 29, 2022, the Financial Crimes Enforcement Network (FinCEN) issued a final rule implementing Section 6403 of the Corporate Transparency Act (CTA) and establishing Beneficial Ownership Information Reporting Requirements (BOI Rule). The CTA and BOI Rule create significant reporting requirements for many companies formed or operating in the United States, including corporations and LLCs. This unprecedented collection of information by the federal government is intended to avoid malign actors from using corporations, LLCs, or other similar entities in the U.S. from concealing their ownership to facilitate illicit activity, including money laundering, the financing of terrorism, proliferation financing, tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud and acts of freight corruption, and harming the national security interests of the U.S. and its allies. As such, the CTA aims to combat such illicit activities by creating a new federal reporting obligation about the beneficial owners of companies to FinCEN.

WHO DOES THE CTA AFFECT?

The practical result of the BOI Rule is that any entity formed or registered in the U.S. that is not already subject to federal or state regulation, or otherwise required to disclose its beneficial ownership information to a government authority, will now be required to report such information to FinCEN. As a result, the CTA and BOI Rule have the effect of targeting smaller businesses. Companies required to report under the CTA are identified as either domestic or foreign.

Domestic Reporting Companies: Domestic reporting companies are corporations, limited liability companies (LLCs), limited liability partnerships (LLPs), or other entities created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.

Foreign Reporting Companies: Foreign reporting companies are a corporation, LLC, LLP or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. Sole-proprietoships that do not use a single-member LLC are not considered a reporting company, and therefore not subject to the reporting requirements of the CTA.

Exemptions: The CTA identifies various entities that are exempt from reporting requirements; however, most of these exemptions are unlikely to apply to the typical small business. Instead, the exemptions mainly relate to entities that are already subject to regulation, including, for example, banks, insurance companies, and other publicly traded companies that already have existing oversight and reporting requirements. There is also an exemption for what is referred to as “large operating companies.” In order to qualify for this exemption, the company must (1) employ more than 20 employees on a full-time basis in the U.S., (2) have an operating presence at a physical office located in the U.S., and (3) generate more than $5 million in annual gross receipts or sales. Wholly owned or controlled subsidiaries of exempt organizations are also considered exempt under the CTA.

WHAT NEEDS TO BE REPORTED UNDER THE CTA?

The CTA requires that reporting companies file reports with FinCEN containing basic information, including information about the company’s beneficial owners and company applicants.

Who is Considered a “Beneficial Owner”? The CTA defines “beneficial owners” as any individual who directly or indirectly (i) exercises substantial control of a reporting company or (ii) owns or controls at least 25% of the ownership interest in a reporting company.

Substantial Control An individual is considered to exercise “substantial control” when the individual: (1) serves as a senior officer of the reporting company, (2) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body), or (3) directs, determines, or has substantial influence over “important decisions.” The CTA states that “important decisions” include decisions regarding:

• The nature, scope and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company
• The reorganization, dissolution, or merger of the reporting company
• Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company
• The selection or termination of business lines or ventures, or geographic focus, of the reporting company
• Compensation schemes and incentive programs for senior officers
• The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts, or
• Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures.

Exemptions of a “Beneficial Owner” Exempted from the definition of a beneficial owner are the following:

• Minor children
• Individuals acting as a nominee, intermediary, custodian or agent
• Employees of a reporting company, acting solely as an employee, whose substantial control over, or economic benefits from, such entity is derived solely from the employment status of the employee, provided such person is not a senior officer
• Individuals whose only interest in a reporting company is a future interest through a right of inheritance
• Creditors

Who is Considered a “Company Applicant”? The CTA defines “company applicants” as individuals who directly file the document that creates the reporting company and the individual who is primarily responsible for directing or controlling such filing If more than one individual is involved in the filing of the document. Notably, if a reporting company was created or registered before January 1, 2024, the reporting company shall report that fact, but is not required to report information with respect to any company applicant.

What Information Needs to be Reported?

Reporting companies must report:

• the company’s full legal name
• any trade name (d/b/a, fictitious name, or key names under which the company’s business is conducted)
• the company’s current address (street address of principal place of business in U.S. or primary location in the U.S. where business is conducted)
• jurisdiction (e.g., the state) of formation or registration, and
• its taxpayer identification number issued by the IRS (or tax ID issued by a foreign jurisdiction and name of jurisdiction if a foreign entity has not been issued a U.S. taxpayer ID)

Reporting companies must also report the following information about their beneficial owners and company applicants:

• full legal name of individual
• date of birth
• current residential address (company applicants may use office or residential address)
• a non-expired U.S. identification document (if not available, a foreign passport), including an image of such document

WHEN DOES THE INFORMATION NEED TO BE REPORTED?

If the company required to report under the CTA was formed on or after January 1, 2024 and before January 1, 2025, the report with FinCEN must be filed within 90 calendar days of (1) receipt of notice that the entity is effective or registered to do business or (2) when the secretary of state or similar office provides public notice that the reporting company was created or registered to do business, whichever is earlier. Entities created or registered on or after January 1, 2025, must file their report with FinCEN within 30 calendar days of the earlier date on which it receives actual notice that it has been registered to do business or the date on which a secretary of state or similar office first receives public notice that the reporting company has been created. Any company required to report under the CTA that was created before January 1, 2024 or that became a reporting company prior to January 1, 2024, shall file a report with FinCEN not later than January 1, 2025. Companies that no longer meet the criteria for exemption under the CTA, shall file a report with FinCEN within 30 calendar days after the date it no longer meets the criteria for an exemption. If there is any change with respect to required information previously submitted to FinCEN concerning a reporting company or its beneficial owners, including any change with respect to who is a beneficial owner or information reported for any particular beneficial owner, the reporting company shall file an updated report within 30 calendar days after the date on which the change occurs.

ARE THERE ANY PENALTIES FOR VIOLATION OF THE CTA?

Penalties for violation of the CTA’s reporting requirements can result in stiff penalties. For example, the CTA provides that certain reporting violations such as willful reporting of false information, or willful failure to submit a report may result in fines of up to $500 per day for each day a violation is outstanding, up to a maximum of $10,000. Criminal penalties include a maximum of two years imprisonment. Additionally, the regulations under the CTA include broad language which states that any person who causes the reporting company to fail to report or is a senior officer of the reporting company at the time of the failure to report may be personally liable for reporting violations. However, FinCEN does not expect that an inadvertent mistake by a reporting company acting in good faith after diligent inquiry would constitute a willfully false or fraudulent violation. The CTA provides a safe harbor to any person that has reason to believe that any report submitted by the person contains inaccurate information and voluntarily and promptly, and consistent with FinCen regulations, submits a report containing corrected information no later than 90 days after the date on which the person submitted the inaccurate report. The CTA is clear that the safe harbor is only available to reporting companies that file corrected reports no later than 90 days after they are filed, even if a reporting company files a correction promptly after becoming aware or having reason to know the correction is needed. In addition, there is no good faith or other standard regarding the requirements to update or correct reports. The CTA places the reporting responsibility on reporting companies, and this responsibility includes the obligation to report accurately. The CTA also requires reporting companies to update information when it changes.

FINAL THOUGHTS

You should be aware of the CTA and the BOI Rule and how they may apply to companies you own, control or operate. Given this is a new federal legislation, there still are many open questions concerning the implementation of the CTA. As a result, FinCEN is periodically providing guidance on this issue. If you have any questions regarding whether the CTA creates new reporting obligations for any company owned, controlled or operated by you and how you can maintain compliance, please contact us.

About the author: Jenny Torres is a commercial litigator and experienced trial lawyer which has extensive experience with contract disputes and business torts. Jenny has represented corporate entities and individuals in state and federal courts at both the trial and appellate levels. She also has experience in litigating matters for international clients in state courts and arbitral institutions.