As of January 1, 2024, most new and existing corporate entities in the United States are required to file reports containing information on their “beneficial owners,” “company applicants,” and “reporting companies” with the federal government as part of the Corporate Transparency Act (the “CTA”), which is expected to impact millions of business entities.
As always, the best interests of our clients are at the forefront of everything we do; the CTA is no exception, and we stand ready to help each client ensure compliance and avoid the potentially steep penalties for non-compliance.
What is the Corporate Transparency Act?
The CTA was enacted by congress on January 1, 2021, as a part of the Anti-Money Laundering Act of 2020. It is intended to help prevent and combat money laundering, terrorist financing, tax fraud, corruption, and other illicit activity. The CTA requires most existing and new corporate entities in the US to file reports with the federal government regarding their beneficial owners. Such reports will be filed with the Dept. of Treasury’s Financial Crimes Enforcement Network (FINCEN).
Who is required to file reports under the CTA?
Reports must be filed by domestic and foreign “reporting companies,” which are:
Domestic Reporting Companies include any corporation, LLC, or any other entity created through a filing with a secretary of state or a similar state or tribal office. LLPs, LPs, business trusts, and other similar non-corporate entities will likely fall under this category.
- Foreign Reporting Companies include any foreign Reporting Company that is a corporation, LLC, or any other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or a similar office.
Does the CTA exempt any companies or entities from the reporting requirements?
Yes. There are numerous exemptions from the definition of “reporting company.” Certain notable exemptions include the following entities or companies:
“Large operating companies” that have 20 or more full-time U.S. employees, more than $5M in revenue generated in the U.S., and an operating presence at a physical office in the U.S.;
Publicly traded companies or any other issuers registered with the SEC.
Companies that are already subject to reporting requirements or regulatory oversight, such as banks, credit unions, insurance companies, public accounting firms, broker-dealers, investment advisors, investment companies, certain types of pooled investment vehicles, regulated public utilities, etc.;
Tax-exempt entities and certain related entities;
Inactive entities that existed before January 1, 2020, are not engaged in active business, are not owned by a foreign person, have not had a change in ownership in the last 112 months, have not sent or received funds greater than $1,000 in the last 12 months, and do not hold any assets;
- Wholly owned subsidiaries of most types of exempt companies, including Large Operating Companies.
Any companies that are subject to the CTA, and that are not exempt, are considered “Reporting Companies.”
Who is considered a “Beneficial Owner” of a Reporting Company under the CTA?
A beneficial owner is any individual who, directly or indirectly, either exercises “substantial control” over the entity or owns or controls at least 25% of the ownership interests of the entity.
An individual exercises “substantial control” over an entity if the individual meets any of the following criteria: (i) serves as a senior officer of the company, such as President, CEO, COO, CFO, or General Counsel; (ii) has authority over the appointment or removal of any senior officer or a majority of the board; or (iii) directs, determines, or has substantial influence over important decisions made by the Reporting Company.
- In applying the 25%-ownership test, the term “ownership interest” is not limited to equity, such as stock, membership interests, units, capital interests, and profits interests. Instead, it also applies broadly to any instruments (including debt) that are convertible into equity, as well as options, warrants, futures, puts, calls, and other rights to buy or sell equity. It also applies to both voting and non-voting interests.
Are there any exceptions to the definition of Beneficial Owner?
Yes, the following are not considered to be Beneficial Owners of a Reporting Company:
Minor children (the Reporting Company must report information regarding the minor child’s parent or legal guardian);
An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual (the Reporting Company must report information on whom is being acted for);
An employee of the Reporting Company, acting solely as an employee, whose substantial control over the economic benefits from the entity is derived solely from his/her employment status (as long as they are not a senior officer of the entity);
An individual whose only interest in a Reporting Company is a future interest through an inheritance;
A creditor of the Reporting Company (unless the creditor meets the requirements of a Beneficial Owner).
Who is considered a “company applicant” of a Reporting Company under the CTA?
A “company applicant” is an individual who either directly files the document that creates a domestic Reporting Company or first registers a foreign entity to do business in the U.S. or is primarily responsible for directing or controlling the filing of the relevant document by another, if more than one individual is involved in the filing.
Often, the Company Applicant will also be a Beneficial Owner of the Reporting Company.
Notably, third parties, such as attorneys and paralegals, may also be considered Company Applicants if they file corporate formation documents on behalf of clients.
What are the filing deadlines for a company that meets the definition of a Reporting Company?
- A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial BOI report;
A reporting company created or registered in 2024 will have 90 calendar days to file after receiving actual or public notice that its creation or registration is effective;
- A reporting company created or registered on or after January 1, 2025, will have 30 calendar days to file after receiving actual or public notice that its creation or registration is effective.
What needs to be included in a Reporting Company’s Report?
A Reporting Company’s report must include information about (i) each of the Reporting Company’s Beneficial Owners and Company Applicants, and (II) the Reporting Company. Notably, Reporting Companies formed before January 1, 2024, DO NOT need to report Company Applicant information.
Information about individual Beneficial Owners and Company Applicants must include:
Full legal name;
Date of birth;
Current address, as of the date on which the report is delivered;
Unique identifying number from an acceptable identification document (i.e., state-issued driver’s license or U.S. Passport), or a FinCEN identifier issued in accordance with the CTA, which may be obtained after an initial filing or at any time thereafter; and
Image of the identification document (i.e., driver’s license or passport) used to provide the unique identification number.
Information about the Reporting Company must include:
Full legal name (and any trade names or “doing business as” (d/b/a) names);
Address of the principal place of business (cannot be a PO Box or office of formation/registered agent);
State or jurisdiction of formation; and
- IRS tax identification number.
Is a Reporting Company required to make updates to reported information?
Yes, if there is any change with respect to information previously reported, the Reporting Company is required to file an updated report within 30 calendar days after the date on which the change occurs. Examples of changes that would require an updated report include the following:
Change(s) of Beneficial Owners (e.g., due to transfers of ownership or sales of ownership interests);
A Reporting Company becomes exempt from the reporting requirements;
Any changes to an identifying document previously submitted (e.g., changes in name, address, or identifying number).
In addition, if a Reporting Company consents, FinCEN may also disclose certain information to financial institutions to assist in their anti-money laundering compliance activities.
What are the penalties for violating CTA?
Any person who willfully provides false or fraudulent information to a Reporting Company or willfully fails to file a complete initial or updated report with FinCEN will be subject to a $500-per-day fine up to $10,000 and imprisonment for up to 2 years.
Any person who, without authorization, knowingly discloses or uses beneficial ownership information (BOI) is liable for a $500-per-day penalty up to $250,000 and up to 5 years’ imprisonment.
Notably, persons subject to these penalties include not only the Reporting Company and its senior officers, but also any individuals, including attorneys and paralegals, or other entity responsible for filing the report, and any person who provides BOI to another person for inclusion on a report.
How should entities prepare for the CTA?
As of January 1, 2024, entities created and operating in the United States will need to be extremely diligent and punctual in reporting their BIO to FinCEN. These entities, as well as any other individuals including attorneys and paralegals responsible for filing, must be masterful as maintaining, updating, and reporting the BOI to FinCEN so as not to run afoul of expensive civil or severe criminal penalties.
While existing entities formed before January 1, 2024, have until January 1, 2025 to submit their BOI to FinCEN, complicated ownership structures may delay reporting abilities. Business owners should familiarize themselves and/or reach out to attorneys to begin helping them prepare for the new various reporting requirements of the CTA.
Reach out to us at info@assetprotectionattorneys.com or call the Firm at (561) 953-1050 to assist with your filings!
