As part of our ongoing effort to keep you informed about important legal developments that may impact your business, we wanted to bring your attention to a critical piece of legislation which may require you to take actions over the coming months to protect your business.
The Corporate Transparency Act (“CTA”) presents a significant change in corporate disclosure requirements. Although originally enacted in 2021, its reporting requirements become effective January 1, 2024.The CTA, a part of the Anti-Money Laundering Act of 2020, was enacted with a stated goal of preventing money laundering, terrorist financing and other illicit activities. The CTA and associated regulations are intended to provide information to law enforcement, national security agencies, and others to prevent criminals, terrorists, etc. from hiding illicit money or other property in the United States. Essentially, the CTA will expand transparency in corporate ownership and allow the federal government to see the “real people” behind every corporation, limited liability company and numerous other legal entities.
The CTA is administered by the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the United States Treasury Department tasked with combatting financial crimes. In addition to setting up and administering the reporting process, one of FinCEN’s directives is to educate the public on the new law. However, recent discussions with our clients and community partners suggest there is a general lack of public awareness of these new reporting requirements. Below, we have provided a comprehensive guide to the CTA and its potential impact on you and your business.
Who Needs to Report?
The CTA places obligations on “reporting companies.” A reporting company is a corporation, limited liability company, or any similar business entity that is created by filing a document with a secretary of state (or similar office) or Indian Tribe[1]. While there are twenty-three exemptions to this general definition of a reporting company, including highly regulated industries such as banks, public accounting firms, tax-exempt entities, public companies, and insurance companies, the most significant exemptions are:
- Large operating companies that employ more than 20 employees, have a principal place of business in the United States, and have filed a federal income tax return demonstrating more than $5 million in gross receipts or sales within the United States, and
- Dormant companies that were in existence on or before January 1, 2020, are not engaged in an active business, are not owned by a foreign person, and do not own any assets.
FinCEN estimates 32.6 million companies will have a reporting requirement, and expects that 5 million new reporting companies will be formed each year.
What Gets Reported?
Under the CTA, all reporting companies are required to file beneficial ownership information (“BOI”) reports. This report includes information about the reporting company, the beneficial owners, and the applicants. The BOI report contains the address of the principal place of business, the jurisdiction of formation, and the IRS TIN (usually an EIN).
The CTA also requires that all beneficial owners must be named in the BOI report. A beneficial owner is an individual who exercises substantial control over the reporting company or owns at least a 25% ownership interest in the entity. This can be a senior officer of the company, a board member, someone who has a majority or control of voting power, an owner of significant convertible debt of the company, and more. It is a broad, sweeping definition, and practitioners are still grappling with who needs to be included on the BOI report; however, the current view is that the majority of companies may have a significant number of beneficial owners to report.
It is important to note that, while trusts themselves typically are not reporting companies, when a trust would be considered a beneficial owner, the trustee must report their personal information and the personal information of certain beneficiaries (again, with the purpose of the law being to see the “real people” behind the ownership and control of companies). It is also unclear whether certain other fiduciaries, such as trust protectors or even agents under a power of attorney, will have a similar requirement. Practitioners are eager for further guidance from FinCEN over the coming weeks and months.
Finally, companies formed after January 1, 2024 will also need to disclose the company’s applicant. The applicant is the individual who was physically responsible for directing or controlling the filing of the organizational document with the secretary of state.
Beneficial owners and company applicants will need to include their full legal name, date of birth, residential street address, a unique identifying number from a passport, driver’s license, or similar document, and an image of that identifying document. Companies can report this information directly to FinCEN and would be obligated to update any changes. Alternatively, if the beneficial owner or company applicant obtains a FinCEN identifier (by submitting all required information themselves instead of having the company submit it on their behalf), the reporting company can simply submit the FinCEN ID and then the beneficial owner or company applicant would be obligated to make updates when their own information changes.
When Do I Need to Report? And What if I Fail to Report?
Existing companies (those formed on or before December 31, 2023) that are required to report under the CTA will have one year, until January 1, 2025, to file the initial BOI report in compliance with the CTA. However, companies formed after January 1, 2024, will have only 90 days from formation to file the file an initial BOI report. Companies formed after January 1, 2025 will only have 30 days to file.
In addition to the initial report, all reporting companies must also report any changes to submitted information within 30 days of that change. This includes a change of the company’s information or any of the information provided regarding the beneficial owners, even for matters such as changing an address.
There are serious penalties for willful non-compliance, currently including a $500 fine per day if the BOI report is not filed, and possible imprisonment for up to two years. Penalties for non-compliance may be imposed on senior officers of the reporting company.
How Do I Report?
FinCEN expects to stand up a web-based reporting portal ahead of the January 1, 2024 reporting window. However, there is little to no publicly available information on how or when this portal will be set up, and there are many questions about the technical sustainability of a recently launched government website, as well as security concerns for the sensitive information collected.
Some of the information necessary to complete a BOI report will be easily ascertainable; however, there are some questions, particularly those surrounding who will be deemed a “beneficial owner,” that will require more sophisticated analysis. It may be advisable to contact legal counsel for advice before finalizing any report.
Who Sees my Information?
As the goal of the CTA is to aid law enforcement in uncovering financial crimes, the information may be disclosed to federal agencies engaged in national security, intelligence, or law enforcement. State and local agencies can obtain the information for use in criminal investigations with court authorization. Foreign law enforcement agencies can request information through a United States Federal agency. Additionally, the IRS will have access for tax administration purposes.
New Developments and Recommendations
For more information about CTA, including reporting requirements and FAQ, please visit FinCEN online at www.fincen.gov/boi.
At Davis, Agnor, Rapaport & Skalny, we remain dedicated to protecting your business’ rights and interests in a dynamic legal landscape. We will continue to monitor further developments to the CTA and assess the impact to you and your business. Due to the impending deadlines for filing, it is advisable for businesses to begin taking steps now to determine how the CTA will impact you, and how you can prepare.
Contact our attorneys to learn more.
[1] In the case of a foreign company, it is a company created in a foreign country and registered to do business in the U.S. by filing a document with a secretary of state (or similar office) or Indian Tribe.
