Unveiling the Corporate Transparency Act: New Business Reporting Requirements

12.29.2023

Introduction:

Effective January 1, 2024, many companies will be required to report information to the United States government about who owns and controls them. The Corporate Transparency Act’s (the “CTA” or “Act”) stated goal is to strengthen the United States’ defenses against illicit financial activities such as money laundering, tax fraud, and terrorism financing. The Act introduces a detailed reporting system that requires certain business entities, referred to as “Reporting Companies”, to submit their beneficial ownership information (“BOI”) to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury.

Entities Subject to Reporting:

Under the CTA, a Reporting Company is broadly defined to include: (i) any corporation, limited liability company, or similar entity that is either created by filing a document with a secretary of state or similar office in any U.S. state or territory; or with a federally recognized Native American tribe , or (ii) a corporation, limited liability company, or other entity formed under foreign law and registered to do business in the United States or in any U.S. territory by the filing of a document with a secretary of state or similar office under the law of any U.S. state or territory, or Indian tribe. See 31 CFR Sec. 1010.380(c)(1).

The Act provides for twenty three (23) exemptions to CTA reporting obligations.  The exemptions generally apply to certain entities that are already subject to stringent regulations. Notable exemptions include entities such as banks, publicly traded companies, investment vehicles operated by investment advisors, accounting firms, tax exempt entities, inactive entities, and governmental authorities. Additionally, entities that employ more than twenty full time employees in the United States, have filed a federal income tax return showing over $5 million in gross receipts or sales, and have an operating presence at a physical office in the United States are exempt as large operating companies.  Subsidiaries of certain exempt entities may also be exempt. See 31 CFR Sec. 1010.380(c)(2).

What Information Must be Reported?

The CTA requires that information be reported to FinCEN regarding (i) the Reporting Company, (2) the Reporting Company’s Beneficial Owners, and (3) if the Reporting Company was formed or was registered to do business in a U.S. state or territory after January 1, 2024, the Reporting Company’s Company Applicant(s).

            Reporting Company Information

Information that must be reported regarding the Reporting Company itself generally includes the company’s legal name and any trade names/fictitious business names, the company’s address, its state of formation, and its taxpayer identification number. 

            Beneficial Owner Information

The initial report must also include information regarding the Beneficial Owners of each Reporting Company.  Information to be reported regarding Beneficial Owners includes the Beneficial Owner’s legal name, date of birth, and current address, identification number and issuing jurisdiction, along with an image of, the Beneficial Owners’ driver’s license, passport or similar identification document issued by a state, local government, or tribe. 

The Act defines a Beneficial Owner as an individual who, directly or indirectly, exercises substantial control over a Reporting Company or owns or controls at least 25 percent of the Reporting Company’s ownership interest . The CTA’s broad definition of “indirect control” appears to target informal arrangements that may have historically allowed individuals to direct a company’s operations from behind the scenes. Among the enumerated examples of indirect control, the CTA clarifies that an individual can be considered to be exercising substantial control over a Reporting Company by way of “[a]rrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees” or “any other contract, arrangement, understanding, relationship, or otherwise”. 31 CFR Sec. 1010.380(d)(1)(ii)(E)&(F).

Substantial  control is the ability to make significant decisions within the Reporting Company, including appointing or removing senior officers or influencing other major decisions, such as compensation schemes and incentive programs for senior officers. That being said, certain individuals are excluded from the definition of beneficial ownership, such as minors (with parental or guardian information reported), intermediaries, employees whose control is solely employment-based, individuals with interest through inheritance, and creditors without substantial control or equity ownership.

A Reporting Company will always have at least one person that falls under the substantial control prong of the Beneficial Owner test. Note that an individual who exercises substantial control over a Reporting Company is a beneficial owner for CTA reporting purposes, regardless of whether or not the individual owns or controls 25 percent or more of the Reporting Company’s ownership interests, unless an exception applies. See FinCEN Small Entity Compliance Guide, December 2023.

Company Applicant Information

For Reporting Companies created or registered to do business in a state after January 1, 2024, information regarding “Company Applicants” must be reported under the Act. The information to be reported for Company Applicants is similar to that required for Beneficial Owners.  Notably, Reporting Companies created or registered before January 1, 2024 are not required to report any information with respect to a Company Applicant. 31 CFR Sec. 1010.380(b)(2)(iv).

Company Applicants are:

1. The individual who directly files the document to establish or register the Reporting Company to do business in a U.S. state; and
2. The individual who primarily oversees or controls the filing process, in cases where more than one person is involved in the filing.

Storage and Use of Reported Information:

FinCEN is obligated to securely store the information collected under the CTA in a private database. This database cannot be accessible to the general public. Access to Beneficial Ownership information is restricted and, generally, will only be disclosed to:

1. A federal law enforcement agency;
2. A state, local, or tribal law enforcement agency, if authorized by a court order;
3. A federal agency on behalf of a foreign country, pursuant to an international agreement; or
4. A financial institution for customer due diligence purposes, with authorization from the Reporting Company.

Reporting Deadline:

The reporting deadline varies depending on whether the entity is existing or newly formed.

• Newly formed Reporting Companies created on or after January 1, 2024 and before January 1, 2025 will need to file the initial report within ninety (90) days of the date on which the Reporting Company receives notice (either actually or through public notice) that the Reporting Company has been created or registered to do business.
• Reporting Companies created prior to January 1, 2024 must file an initial report with FinCEN by January 1, 2025.
• Reporting Companies created or registered after January 1, 2025 must file an initial report with FinCEN within thirty (30) days of the entity’s creation or registration date.

Reporting Companies must update their information within thirty (30) days of any changes to beneficial ownership.

Penalties for Violating CTA:

Entities subject to the CTA must be aware of the severe penalties for willful non-compliance. Providing false information to FinCEN or willfully failing to disclose complete information or to update information can result in civil penalties of up to $500 each day that the violation continues, or criminal penalties of imprisonment for up to two years and/or a fine of up to $10,000. However, the Act offers a safe harbor from civil and criminal liability for those who voluntarily and promptly correct inaccurate information within 90 days of submission.

Conclusion:

The CTA introduces a sophisticated framework of reporting requirements, exemptions, and definitions, signifying a move towards increased transparency and oversight. As the Act continues to evolve, businesses must stay alert to ongoing changes and engage the services of skilled legal advisors. Additional information about the CTA and guidance materials are available from FinCEN at www.fincen.gov/boi. As always, the attorneys in AALRR’s Corporate, Business, and Tax practice are here to help with guidance and expertise to support you and your business. Adopting a forward-thinking strategy will ensure that businesses are primed to adapt to the changing regulatory environment and avoid the consequences of non-compliance.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. AALRR is not responsible for inadvertent errors that may occur in the publishing process.   

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