This article is not meant to be a comprehensive review of what you need to know about compliance with the new Corporate Transparency Act (CTA). This week we examine how to calculate ownership percentages for reporting purposes, the reporting requirements, the steps needed to accomplish compliance, and how to file your report.
The Corporate Transparency Act (CTA), effective January 1, 2024 (Effective Date), is intended to aid law enforcement in combatting illicit activity conducted through anonymous shell companies. It requires certain privately held entities to report beneficial ownership information (BOI) to the US Treasury Department's Financial Crimes Enforcement Network (FinCEN). The reporting requirements are intended to apply broadly and impact small companies.
Compliance with the CTA
There are three main components to compliance: (1) Determine the individuals who are beneficial owners, (2) Timely obtain the required personal information of its beneficial owners to ensure companies can meet the CTA reporting deadlines, and (3) prompt notification of any changes in the beneficial owner’s personal information to FINCEN.
Determining Beneficial Owners
Our last posting discussed this extensively, but for a recap, a beneficial owner is:
·      An individual may indirectly own or control an ownership interest in a reporting company through ownership or control of one or more intermediary entities.
·      A reporting company with one or more entities as owners or in management (like a limited partnership (LP) with an LLC acting as its general partner) may need those entities to provide the required personal information of all the individuals who are their direct and indirect owners.
Per 31 C.F.R. § 1010.380(d)(2)(ii)(D), a reporting company may need access to the governing documents or policies of its entity members or management to determine which individuals in those entities may be beneficial owners of the reporting company through their ownership or control of the entity.
Timely Obtaining Information to Meet Deadlines
A reporting company that is created or becomes a foreign reporting company before January 1, 2024, has until January 1, 2025, to file its initial BOI report. A reporting company created or registered on or after January 1, 2024, must file its initial BOI report within 90 days if created or registered in 2024, and within 30 days if created or registered on or after January 1, 2025 (31 C.F.R. § 1010.380(a)(1)(i)-(iii)).
An exempt entity that no longer qualifies for an exemption must file an initial BOI report within 30 days after the date the exemption ceased to apply (31 C.F.R. § 1010.380(a)(1)(iv)). This means that many exempt companies must have a process in place to monitor their compliance with the exemption criteria on an ongoing basis (i.e., to confirm that an exempt entity relying on the large operating company exemption continues to have at least 21 full-time employees in the US).
A reporting company generally has 30 days to update or correct required information that was provided in a previously filed BOI report (31 C.F.R. § 1010.380(a)(2), (3)). To meet the CTA's filing deadlines, a reporting company needs to be able to promptly:
·      Obtain its beneficial owners required personal information.
·      Receive notification of any changes to that personal information.
A reporting company must decide how and when it will acquire this information from the appropriate individuals and implement appropriate policies and procedures if necessary.
Owners, management, and other persons that may need to give a reporting company personal information should be required to provide the information and updates to the information with enough time for the company to timely review and report the information. These obligations may be contained in agreements such as:
·      The reporting company's governing documents (an LLC or LP agreement or a stockholders' agreement, for example).
·      A company policy.
·      An investment, warrant, employment, equity incentive, or other agreement.
If these obligations are set out in an agreement, entity owners can also be required to provide their governing documents and the personal information of those individuals who may be beneficial owners of the reporting company.
To enforce these obligations, parties should consider including in any agreement remedies for failing to provide the required information. Depending on a reporting company's entity type and ownership structure, company-specific factors, and the applicable law in the reporting company’s state of formation, remedies to consider may include:
•       Requiring the defaulting party to indemnify the reporting company and other specified parties.
•       Specific performance.
•       A call right to repurchase the defaulting owner's ownership interests (presumably at a discount) or, if the reporting company is an LLC or LP, forfeiture of LLC or partnership interests or any bonus or incentive equity.
•       The involuntary disassociation or expulsion of a member or partner.
FINCEN takes this reporting seriously and has already earmarked funds for enforcement. Every entity subject to reporting who fails to do could be subjected to civil and criminal penalties.
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