The Corporate Transparency Act (CTA) goes into effect on January 1, 2024, and it is anticipated that more than 30 million businesses (including single member LLCs) will be subject to this reporting requirement.
The law requires certain companies to disclose “beneficial ownership” information (“BOI”) to the Financial Crimes Enforcement Network (“FinCEN”). The intent of the BOI reporting requirement is to help United States law enforcement combat money laundering, the financing of terrorism and other illicit activity. However, it could also open the door to the inspection of family offices, investment angels and other private individuals who have generally been shielded from scrutiny in the past.
WHAT STEPS CAN YOU TAKE TODAY REGARDING THE CTA?
We recommend reviewing your entity structure with your legal counsel to determine if you may have a filing requirement.
Importantly, the CTA is neither part of the Tax Code, nor is it administered by the Internal Revenue Service (“IRS”). Instead, it is a part of the Bank Secrecy Act and is being administered by FinCEN.
Due to the nature of the CTA, this should be addressed by legal counsel. Accordingly, we assume no responsibility for advising you on the legal or regulatory aspects of the CTA, including, but not limited to, determinations of BOI. In addition, we assume no responsibility for the preparation of or the submission of any reports to FinCEN or otherwise monitoring compliance.
The balance of this communication is limited to providing you with some information as you approach the implementation period for this new reporting requirement. This information is meant to be general-only and should not be applied to your specific facts and circumstances without consultation with your legal counsel.
WHAT IS BENEFICIAL OWNERSHIP?
In brief, beneficial ownership refers to individuals who ultimately own or control a company, either directly or indirectly, and either exercise “substantial control” over the company or own and control at least 25% of the company’s ownership interests.
An individual has substantial control of a reporting company if they:
- Are a senior officer of the company;
- Have authority over the senior officers or a majority of the company’s board;
- Have substantial influence over the company’s important decisions; or
- Have any other type of substantial control over the company.
This generally includes individuals who are directly related to ownership interests in the company, but indirect control may also result in classification as a beneficial owner.
Individuals who are not treated as beneficial owners of a reporting company under the CTA include:
- Someone acting as a nominee, intermediary, custodian or agent on behalf of a beneficial owner;
- An employee of the reporting company who has substantial control over the entity’s economic benefits because of their employment status (but only if the individual is not a senior officer of the entity);
- An individual whose only interest in a reporting company is a future interest through a right of inheritance;
- Any creditor of the reporting company (unless the creditor exercises substantial control or has a 25% ownership interest in the reporting company); or
- A minor child.
However, for minor children, the reporting company must report information about each child’s parent or legal guardian.
The CTA also requires reporting companies to provide identifying information about their company applicants. A company applicant is someone who is:
- Responsible for filing the documents that created the entity (for a foreign entity, this is the person who directly files the document that first registers the foreign reporting company to conduct business in a state); or
- Primarily responsible for directing or controlling filing of the relevant formation or registration document by another individual.
This rule often encompasses legal personnel acting in a business capacity.
OTHER CTA REPORTING REQUIREMENTS
The CTA’s reporting requirements are extensive. Specifically, the report to FinCEN must include the following information:
- The legal name of the entity (or any trade or doing-business-as name);
- The address of the entity;
- The jurisdiction where the entity was formed;
- The entity’s Taxpayer Identification Number; and
- The name, address, date of birth, unique identifying number information of each beneficial owner (such as a U.S. passport or state driver’s license number) and an image of the document that contains the identifying number.
FILING REPORT REQUIREMENTS AND EXEMPTIONS
The requirement to submit reports extends to both domestic and foreign “reporting companies,” inclusive of single member LLCs, which are defined as follows:
- Domestic Reporting Company: any entity that is a corporation, a limited liability company or otherwise created by filing a document with a secretary of state or similar office.
- Foreign Reporting Company: any entity created under the law of a foreign country and registered to do business in any U.S. state by filing a document with a secretary of state or similar office.
However, there are 23 different exemptions that would relieve an entity from the CTA filing requirements. The complete list of entities that are exempt from the reporting rules is too lengthy to include here — ranging from government units to not-for-profit organizations to insurance companies and more, with two notable exemptions stated below:
- Entities that employ more than 20 full-time employees in the U.S., have an operating presence at a physical office in the U.S. and demonstrate more than $5 million in gross receipts or sales on their federal income tax return (excluding receipts/sales from sources outside the U.S.); and
- Inactive entities that existed before January 1, 2020, that are not engaged in active business, are not owned by a foreign person, have not had a change in ownership in the last 12 months, have not sent or received funds greater than $1,000 in the last 12 months and do not hold any assets.
If an entity initially qualifies for the large operating company exemption but subsequently falls short, it must then file a BOI report. On the other hand, an entity that might not currently qualify can update its status with FinCEN if it later does and obtain an exemption.
Note that reports filed with FinCEN are not available to the general public. However, certain government agencies will have access to the information, including those involved in national security, intelligence and law enforcement, as well as the IRS and the U.S. Treasury Department.
FILING REPORT DEADLINE
- New entities created in 2024 will have 90 days to file a report.
- Entities already in existence on January 1, 2024 have until January 1, 2025 to file a report.
- Entities that are created or registered in 2025 and beyond will have 30 days to file their reports.
Updates to reports must be made within 30 days after there is a change to previously reported information or a reporting company becomes aware that previously reported information is inaccurate.
Failure to comply with the CTA’s reporting requirements, which require a certification that the reported information is “true, correct and complete,” may result in civil and criminal consequences.
This includes a potential civil fine of up to $500 per day (capped at $10,000) and the possibility of imprisonment for a maximum of two years.
JURISDICTION PARITY WITH THE CTA
At least one state (New York State) has passed a similar law which is waiting for the Governor’s signature.
TAKING THE NEXT STEPS
What should your company do now to ensure compliance? Evaluate your current situation with legal counsel. If you determine that your business must meet these obligations, collect the required information, update and refine internal policies for accurately reporting the data, and establish a system for monitoring the reporting processes.