iBeginning on January 1, 2024, the Corporate Transparency Act (the “CTA”) requires each domestic and foreign entity that qualifies as a “reporting company” to file a Beneficial Ownership Information Report (“BOIR”) with the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”), which discloses information about the reporting company, the reporting company’s beneficial owners, and the individuals who prepared and filed the formation/registration documents of the reporting company with the Secretary of State (if formed/registered on or after January 1, 2024).
On March 1, 2024, Judge Liles C. Burke of the United States District Court, Northern District of Alabama permanently enjoined enforcement of the CTA against the plaintiffs in the case in an action that challenged the constitutionality of the CTA. Non-exempt reporting companies outside the Northern District of Alabama that are not plaintiffs in this case are unaffected by the ruling and remain obligated to comply with the CTA BOIR requirements.
Please be aware of the following important deadlines for CTA compliance:
• All reporting companies in existence prior to January 1, 2024, have a full year to comply with the CTA – the BOIR must be submitted prior to January 1, 2025.
• Reporting companies that are formed/registered on or after January 1, 2024 and before January 1, 2025, will have 90 days from the date of formation/registration to submit the BOIR.
• Reporting companies that are formed/registered after January 1, 2025, will only have 30 days from the date of formation/registration to submit the BOIR.
• Reporting companies must also update or correct a BOIR within 30 days if the information included on a filed BOIR changes or the reporting company becomes aware or has reason to know of an inaccuracy.
Introduction to the CTA
The CTA was enacted as part of the Anti-Money Laundering Act of 2020, which sought to promote transparency of certain business entities in an effort to combat money laundering, terrorist financing, and other illicit activities. There are civil and criminal penalties for persons who do not comply with the reporting requirements of the CTA. These penalties include civil monetary penalties of up to $500 for each day a violation continues or criminal penalties of up to $10,000 in fines and two (2) years of imprisonment.
Reporting Companies
Subject to certain exemptions that are listed in Appendix A, an entity is a “reporting company” if it is (1) any corporation, limited liability company, or other entity created by filing a formation document with a Secretary of State within the U.S., or (2) any foreign company that is registered with a Secretary of State or similar office to do business in the U.S.
Notable exemptions include certain entities which already report to the federal government (such as banks and Securities and Exchange Act issuers), tax-exempt entities, wholly-owned subsidiaries of certain entities, inactive entities, and large operating companies (“LOC”). An entity is an LOC if it (1) employs more than 20 full-time employees in the U.S. (independent contractors, leased employees, or, for an S corporation, any shareholder owning two percent (2%) or more ownership does not count as employees), (2) generates more than $5,000,000 in annual gross receipts (as reported in the federal income tax returns of the year prior), and (3) has an operating presence at a physical office in the U.S.
Importantly, if a company determines it is not a reporting company under the CTA, it does not have to report that it is exempt to FinCEN. If at a later time it loses its exemption, it must file a BOIR within 30 days of losing that exemption and becoming a reporting company.
FinCEN’s Small Entity Compliance Guide includes helpful information about each of the 23 exemptions FinCEN has outlined and checklists to help you determine whether a company qualifies for an exemption. Please carefully review the qualifying criteria and each of the exemptions before concluding that a company is exempt from CTA reporting.
BOIR Disclosures
If it is determined that the company is a reporting company under the CTA, the company must provide the following disclosure items in its BOIR to FinCEN: (A) Company Information; (B) Beneficial Ownership Information; and (C) Company Applicant Information (if formed/registered on or after January 1, 2024).
A. Company Information
A reporting company must disclose its name, all trade names or DBAs, the current address of its principal place of business in the U.S., its state of formation or registration, and its IRS Taxpayer Identification Number or tax number issued by a foreign registration.
B. Beneficial Owner Information
A reporting company must disclose all of its beneficial owners and provide certain required personal identifying information and corresponding documents for each beneficial owner.
The CTA defines a “beneficial owner” as an individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25% of the ownership interests of a reporting company.
- Substantial Control: An individual has “substantial control” if he or she serves as a senior officer of the company, holds authority over the appointment or removal of senior officers or a majority of the board, or has substantial influence over important decisions of the company.
- Senior Officers: Senior officers include the President, Chief Executive Officer, Chief Financial Officer, General Counsel, Chief Operating Officer, or any other officer who performs a similar function, and expressly excludes any ministerial positions such as a Corporate Secretary or Treasurer.
- Substantial Influence Over Important Decisions: An individual has substantial influence over important decisions if he or she has substantial influence over: (a) the nature, scope, and attributes of the company including the sale, lease, mortgage, or other transfer of principal assets, (b) any reorganization, dissolution, or merger, (c) the selection or termination of business lines or ventures, (d) any compensation schemes or incentive programs for senior officers; or (e) the entry into or termination of significant contracts.
Importantly, the CTA includes a catch-all provision to clarify that substantial control can take additional forms not specifically listed. Additionally, substantial control also includes control exerted by any parent or intermediary entities or individuals within those entities.
- Senior Officers: Senior officers include the President, Chief Executive Officer, Chief Financial Officer, General Counsel, Chief Operating Officer, or any other officer who performs a similar function, and expressly excludes any ministerial positions such as a Corporate Secretary or Treasurer.
- Ownership Interest: An ownership interest includes, but is not limited to: (a) equity, stock, or voting rights, (b) a capital or profit interest, (c) convertible instruments, or (d) options or other non-binding privileges to buy or sell any such interests.
Even if an individual would otherwise be a beneficial owner, he or she may qualify under one of the CTA’s exemptions that modifies the reporting company’s disclosure requirements with respect to that individual. For example, reporting companies should not include minor children in their BOIR, but should disclose the minor’s parent or guardian’s information instead. Further beneficial owner exemptions include: future inheritors; nominees, intermediaries, custodians, agents; certain creditors; and employees who are not senior officers but who exercise substantial control over the reporting company solely by virtue of their employment.
FinCEN’s Small Entity Compliance Guide includes detailed checklists for each of the beneficial owner exemptions that may help determine whether an individual needs to be disclosed on a reporting company’s BOIR. Reporting companies should carefully review the qualifying criteria before concluding that an individual is exempt.
C. Company Applicant Information
Reporting companies formed on or after January 1, 2024 must disclose a minimum of one (1) and a maximum of two (2) company applicants on their BOIR and include the required personal identifying information and corresponding documents for each company applicant.
The CTA defines a “company applicant” as an individual that either (1) directly filed the document that created or registered the entity with the Secretary of State, or (2) is primarily responsible for directing or controlling the filing of the formation or registration documents by another.
Personal Identifying Information and Corresponding Documentation
The personal identifying information and documentation that must be disclosed for each beneficial owner and company applicant includes his or her (1) full legal name, (2) date of birth, (3) residential street address (this cannot be a company address), (4) ID number and issuing jurisdiction of a non-expired US passport, driver’s license, or other government-issued ID, and (5) an image/photocopy of such ID. A significant amount of the information a reporting company must collect and report may qualify as personal data under state and federal privacy laws. Entities governed by these laws must take various measures to comply with privacy laws while ensuring their reporting obligations.
If a beneficial owner or company applicant provides this information to FinCEN directly, he or she can obtain a “FinCEN ID” to be provided on a BOIR in lieu of the items above. Individuals can apply for a FinCEN ID at https:// fincenid.fincen.gov/landing.
Filing a BOIR and Important Deadlines
Reporting companies should submit their BOIRs to FinCEN’s Beneficial Ownership Secure System (“BOSS”). A reporting company may submit a PDF BOIR through BOSS or submit a BOIR prepared directly through the BOSS online form. Reporting companies can access BOSS to file a BOIR at https://boiefiling.fincen.gov/. FinCEN assures reporting companies that filing a BOIR is simple, secure, and free of charge.
All reporting companies in existence prior to January 1, 2024 must submit their BOIR prior to January 1, 2025. Reporting companies that are formed/registered on or after January 1, 2024, and before January 1, 2025, must submit their BOIR within 90 days from the date of formation/registration. Finally, reporting companies that are formed/ registered after January 1, 2025, must submit their BOIR within 30 days from the date of formation/registration.
A reporting company must also update or correct a BOIR if the information included on a filed BOIR changes or the reporting company becomes aware or has reason to know of an inaccuracy. In the case of an update, the reporting company must submit an updated BOIR within 30 days of the change. Note that an updated BOIR is not required upon any change to a company applicant’s identifying information. In the case of a correction, a reporting company must submit a corrected BOIR within 30 days after becoming aware or having reason to know of such inaccuracy.
Certification
Each individual submitting a BOIR on behalf of a reporting company (or an application for a FinCEN ID) must certify under criminal penalty that the report or application is true, correct, and complete. Although individual beneficial owners and company applicants must provide their own identifying information and documentation to the reporting company, the reporting company is responsible for submitting its own BOIR and must certify the accuracy and completeness of such BOIR.
Conclusion
We strongly encourage that you consider whether your business entities are reporting companies under the CTA and establish sufficient systems and procedures to identify, retain, and update pertinent information to enable you to promptly submit a BOIR.
Additional information about the CTA requirements can be found at the following FinCEN websites:
FinCEN’s website regarding beneficial ownership information
FinCEN’s brochure introduction to BOIRs
