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 look at what the CTA is and who it applies to. Next week we will examine the details of beneficial ownership, control, influence, and how to calculate ownership percentages for reporting purposes. The following week we will examine the reporting requirements and the steps needed to accomplish compliance and how to file your report.
What is the Corporate Transparency Act?
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.
Companies Required to Comply and Exemptions
Domestic reporting companies are corporations, limited liability companies (LLCs), or other entities created by filing a document with a secretary of state (SOS) or any similar office under the law of either:
A state of the US,
the District of Columbia,
the Commonwealth of Puerto Rico,
the Commonwealth of the Northern Mariana Islands,
American Samoa, Guam,
the US Virgin Islands, or
any other commonwealth, territory, or possession of the US.
An Indian tribe.
Foreign reporting companies are non-US entities that are:
Corporations, LLCs, or other entities.
Formed under the law of a foreign country.
Registered to do business in any state or tribal jurisdiction by the filing of a document with a SOS or any similar office under the law of a state or Indian tribe.
Exemptions
The 23 categories of exemptions are listed in both the statute and the Final Reporting Rule (31 U.S.C. § 5336(a)(11)(B) and 31 C.F.R. § 1010.380(c)(2)).
A large operating company: (i) has more than 20 full-time employees in the US; (ii) is operating at a physical office in the US; and (iii) reported more than $5 million in gross receipts or sales (net of returns and allowances and excluding gross receipts or sales from sources outside the US) on its filed prior year federal tax return (31 C.F.R. § 1010.380(c)(2)(xxi)). The operating company itself must be the employer, so full-time employees of affiliated entities do not count towards the number of full-time employees.
An inactive entity: (i) was in existence on or before January 1, 2020; (ii) is not engaged in active business; (iii) is not wholly or partially owned, directly or indirectly, by a non-US person; (iii) has not experienced an ownership change in the prior 12-month period; (iv) has not sent or received any funds greater than $1,000 in the prior 12-month period; and (v) does not otherwise hold any kind or type of assets, inside or outside the US, including an ownership interest in any corporation, LLC, or other similar entity (31 C.F.R. § 1010.380(c)(2)(xxiii)).
Subsidiaries of certain exempt entities are also exempt. These are entities the ownership interests of which are controlled or wholly owned, directly or indirectly, by one or more CTA-exempt entities (other than by a pooled investment vehicle, a money transmitting or money services business, an entity that operates exclusively to provide financial assistance to or hold governance rights over tax-exempt entities, or an inactive entity) (31 C.F.R. § 1010.380(c)(2)(xxii)). FinCEN has stated that the subsidiary’s ownership interests must be “fully, 100% owned or controlled” by an exempt entity to qualify for this exemption and the subsidiary is ineligible for the exemption if the exempt entity controls or owns less than all of the subsidiary’s ownership interests.
Highly Regulated Entity Exemptions
The CTA excludes banks, bank holding companies, savings and loan companies, credit unions, money transmittal businesses, securities brokers and dealers, securities exchanges and clearing agencies, regulated public entities and financial market utilities.
What are the mandatory disclosures to FinCEN?
A reporting company must disclose information about its beneficial owner, who is any individual who directly or indirectly: (i) exercises substantial control over the reporting company; or (ii) owns or controls 25% or more of the ownership interests of the reporting company (31 C.F.R. § 1010.380(d)).
FinCEN’s Final Reporting Rule indicates that it intends reporting companies to limit its number of company applicants to one or two individuals, depending on whether a second individual directs or controls the filing by the individual directly filing it (31 C.F.R. § 1010.380(e)). Company applicant is defined in both the statute and the Final Reporting Rule (31 U.S.C. § 5336(a)(2); 31 C.F.R. § 1010.380(e)).
Company applicants do not include: (i) state filing office employees processing formation documents in the ordinary course of their state employment; and (ii) employees of business formation services if the service is only providing software, online tools, or generally applicable written guidance and the employees are not personally involved in filing a formation document.
If one individual is responsible for overseeing the preparation and filing of a formation document or prepares a formation document (directs or controls the filing action) and another individual directly files the document (the direct filer), then both individuals must be reported as company applicants. For example, both individuals are company applicants if a law firm supervising attorney oversees the preparation and filing of the document and a paralegal directly files the document.
Assuming the company applicant information is correctly reported, a reporting company does not need to report any changes to that information (31 C.F.R. § 1010.380(b)(2)(iv)). A reporting company that was created or registered before the effective date of January 1, 2024, does not need to report information regarding its company applicants (31 C.F.R. § 1010.380(b)(2)(iv)).
What information must be reported about the Company Applicant?
As to each individual beneficial owner and company applicant, the reporting company must disclose their full legal name, date of birth, complete address, unique identification number, and an image of the document with the unique identification number. The unique identification number must come from one of the non-expired government issued documents like a US Passport, state/local/Indian tribal identification document identifying the individual, state issued driver's license, or if none of these are applicable, then the passport issued by a foreign government. YOU MUST OBTAIN A FinCEN ID if you do not wish to report this information to a company for disclosures.
What disclosures must a company report to FinCEN?
The full legal name of the company, any trade names, “dba’s” or trade names in which it conducts its business, whether it is formally registered or not.
Complete address (must be current).
Its state, tribal, or foreign jurisdiction of formation, and for a foreign reporting company, where it was first registered in the US.
The IRS taxpayer identification number, including the employer identification number (EIN).
Who does this apply to?
A reporting company that is created or becomes a foreign reporting company before the Effective Date has until January 1, 2025, to file its initial BOI report.
On or after the Effective Date 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, of the earlier of the date on which it receives actual notice that its creation or registration is effective or a SOS or similar office first provides public notice that the company has been created or registered to do business.
How often does the company have to file changes to reports?
The changes to any BOI must be reported within 30 days of it occurring and the reporting entity must correct any inaccuracies in its BOI if it becomes aware or has reason to know of the inaccuracies.
What happens if the reporting company fails to comply?
There are both civil and criminal penalties for violating the CTA, including a fine up to $10,000, imprisonment for up to two years, or both, for any person willfully providing or attempting to provide false or fraudulent BOI and/or failing to report complete or updated BOI to FinCEN. Penalties may also apply to reporting companies and individuals who cause a reporting company not to report or are senior officers of a reporting company at the time of its failure to accurately report or update BOI.
Who is a Beneficial Owner?
A beneficial owner is any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls 25% or more of the ownership interests of the reporting company. Accountants and lawyers generally do not qualify as beneficial owners due to the ordinary arm’s length advisory or third-party professional services are not considered substantial control. However, the general counsel in a reporting company is a senior officer of the company and therefore a beneficial owner.
What is considered “Substantial Control”?
An individual exercises substantial control over a reporting company if the individual serves as a senior officer of the reporting company, has authority to appoint or remove any senior officer or a majority of the reporting company's board of directors or similar body. This is a person who directs, determines, or has substantial influence over important decisions made by the reporting company and has any other form of substantial control over the reporting company.
Who is considered a “Senior Officer” of the company for reporting purposes?
Generally speaking, the President, Chief Financial Officer, General Counsel, Chief Executive Officer, Chief Operating Officer, and any other officer, regardless of the title and who performs a same or similar function.
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