New Reporting Regime for Businesses Under the Corporate Transparency Act

On Jan. 1, 2024, the Corporate Transparency Act (“CTA”) went into effect, ushering in a new regime of reporting obligations for many U.S. businesses. The CTA imposes an obligation on certain “reporting companies” to file a report with the Financial Crimes Enforcement Network of the US Department of the Treasury (“FinCEN”). These reports are intended to help prevent and combat certain money laundering and other illicit activities by providing transparency to the U.S. government with respect to the ownership of certain U.S. entities.

Which Entities Are Reporting Companies?

The CTA requires filing Beneficial Ownership Information Reports (“BOI Reports”) by any entity that qualifies as a “reporting company” and that does not meet one of 23 exemptions. A “reporting company” includes (1) domestic reporting companies — any corporation, LLC, limited partnership or similar entity created by filing a document with any U.S. state, territory or Indian tribe and (2) foreign reporting companies — entities formed outside of the U.S. and registered to do business with a U.S. state, territory or Indian tribe.

The key characteristic of a “reporting company” is that the entity is formed (domestic entities) or registered to do business (foreign entities) by filing a document with the Secretary of State (or similar office). Thus, most partnerships and all sole proprietorships are not subject to the provisions of the CTA.

Which Entities Are Exempt From the CTA?

There are 23 separate types of entities exempt from the CTA. The majority of these exempt entities are already subject to reporting requirements through other laws and therefore the application of the CTA would be duplicative. Examples of entities exempt from the CTA include governmental entities, publicly traded companies, banks, credit unions, SEC-registered broker-dealers, investment advisers, investment companies, certain pooled investment vehicles and certain wholly owned subsidiaries of these exempt entities.

There is also an exemption for large operating companies, which are generally defined as companies that (1) have more than 20 full-time employees in the U.S., (2) have an operating presence at a physical office in the U.S., and (3) have filed a federal income tax or information return in the U.S. showing more than $5 million in gross receipts or sales.

When Must Action Be Taken?

CTA compliance timelines fall into two separate categories. First, entities created on or after Jan. 1, 2024 (“new entities”) must file their initial BOI Report within 30 days of their creation. For entities created during the calendar year 2024, however, the deadline was extended to 90 days to allow companies to acclimate to the new requirements. Second, entities that were formed before Jan. 1, 2024 (“existing entities”) must file their initial BOI Report by January 1, 2025. The CTA does not mandate an annual filing requirement. Once a reporting company has filed its initial BOI Report it only needs to file again if it is required to update or correct previously filed information (discussed below).

 What Information Must Be Provided in the BOI Report?

Each reporting company must provide information in its BOI Report related to the entity itself, its “beneficial owners,” and for new entities only, its “company applicants.”

Each reporting company must provide in its BOI Report its legal name, any trade names or d/b/a’s, its current address, its jurisdiction of formation (or registration for foreign entities) and its EIN (or foreign identifier if a foreign entity does not have an EIN). Single-member LLCs that are considered disregarded entities may not be required to have an EIN — in that case, the SSN (for individual owners) should be used.

Each reporting company will have at least one “beneficial owner” and may have several depending on its ownership structure and / or its allocation of decision-making authority. A beneficial owner is any person who directly or indirectly either (1) exercises substantial control over the reporting company or (2) owns or controls 25% or more of the ownership interests of the reporting company.

A person will be considered to exercise substantial control over a reporting company if they (1) serve as a senior officer or perform a similar function; (2) have authority over the appointment or removal of a senior officer or a majority of the board of directors; (3) direct, determine or have substantial influence over important decisions such as the sale / lease of principal assets, major expenditures, the issuance of equity, the incurrence of significant debt, approval of the operating budget, approval of compensation arrangements for senior officers; (4) have the ability to enter into or terminate significant contracts or amend any governance documents; or (5) by having any other form of substantial control over the reporting company. Suffice it to say that the test for whether an individual exercises substantial control is a broad one.

An individual is also considered a “beneficial owner” if they own or control 25% or more of the ownership interests of the reporting company. The definition here is broad as well, as the ownership of stock, capital or profits interests, any instrument convertible to an ownership interest, any warrant or right to purchase, any put, call, straddle, or other option and any other instrument used to establish ownership will be considered an “ownership interest” under the CTA. This list of potential ownership interests is not exhaustive, and the particular circumstances of each entity must be carefully analyzed to determine who its beneficial owners are.

Each new reporting company will also have one or two individuals who are considered “company applicants.” A company applicant is the individual who directly files the document that creates or registers the reporting company. If more than one person is involved in filing the document that creates or registers the reporting company, then the individual primarily responsible for directing or controlling the filing of the relevant document is also a company applicant. For example, if an attorney directs the filing of incorporation documents for a reporting company but a paralegal submits the actual filing, both the attorney and paralegal are company applicants.

Entities must report the same information with respect to its company applicants and beneficial owners, including the individual’s full legal name, date of birth, complete current address, unique identifying number and a copy of the document from which the identifying number was taken. The unique identifying number can be taken from a passport, driver’s license or other state-issued identification document.

How Do I File a BOI Report?

BOI Reports are filed electronically through FinCEN’s online portal system. Individuals and entities can obtain a FinCEN number by providing the information that will go into the BOI Report. This FinCEN number can then be provided in lieu of the personal information that goes in the BOI Report. This will be especially beneficial for attorneys and individuals who have interests in multiple entities — both for convenience and privacy.

Updates + Corrections

Reporting companies must update their reports within 30 calendar days after any change in the information previously provided in a BOI Report related to the company or its beneficial owners. Information related to company applicants is not required to be updated.

If a BOI Report is filed with an error, a corrected report must be filed within 30 days after the date that the reporting company became aware or had reason to know of the inaccuracy. The CTA includes a safe harbor if a corrected report is filed within 90 calendar days after the date on which an inaccurate report is filed.

Tracking when an updated BOI Report needs to be filed could prove difficult under the CTA. If a sole owner of a company changes her address, then the need for an update is clear and the change is simple. However, due to the broad definition of “beneficial owner,” there are many transactions and circumstances under which an updated BOI Report may be required due to a change in the identity of a reporting company’s beneficial owners.

For example, a key employee’s promotion that includes increased responsibilities could elevate their status to that of a beneficial owner due to their newfound ability to exercise substantial control over the reporting company. Other changes that could affect a change in a reporting company’s beneficial owners include a merger, an asset or stock sale, receipt of an inheritance, a trust amendment or distribution, amendments to a company’s bylaws or operating agreement or a distribution pursuant to a divorce. The triggering transactions are myriad and a careful analysis of a transaction’s potential effect on a company’s reporting obligations under the CTA must be undertaken.

Penalties

The CTA provides civil and criminal penalties for willful “reporting violations” and for knowing “unauthorized disclosure or use” violations. Reporting violations can result in civil penalties of up to $500 per day, a separate criminal fine of up to $10,000, and up to two years in prison. Unauthorized disclosure or use violations can result in civil penalties of up to $500 per day, criminal fines of up to $500,000, and up to 10 years in prison. It is imperative that companies familiarize themselves with their obligations under the CTA.

Access to BOI Reports

BOI Reports will be held in a secure non-public database called BOSS (Beneficial Ownership Secure System) using information security systems at the highest security level. While the database is non-public, FinCEN is authorized to disclose BOI information upon receipt of request by (a) a U.S. federal agency engaged in national security, intelligence or law enforcement activities (and only in furtherance of those purposes); (b) the Treasury Department for purposes of tax administration; (c) a state, local, or tribal law enforcement agency, if proper court authorization is received; and (d) a financial institution subject to CCD requirements, with consent of the reporting company, to facilitate compliance with CCD requirements.

What Steps Should My Company Take?

Any reporting company created during 2024 and beyond will need to file a BOI Report unless it meets an exemption to the CTA. Existing companies should analyze existing entities within its structure to determine if they will need to file a BOI Report by Wednesday, Jan. 1, 2025.

For both new and existing reporting companies, steps should be taken to identify their beneficial owners and obtain the required individual information. For new entities (or law firms assisting in their creation), consider limiting the pool of “company applicants,” to minimize compliance costs and risk. Companies should also identify whether they will file their own BOI Reports or outsource the filing.

Perhaps most importantly, companies need to ensure systems are in place and resources are available to identify when an update to a previously filed BOI Report is required. The triggering events for a requirement to update are many.

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