In 2021, the Corporate Transparency Act (CTA) passed with bipartisan support. As part of the Anti-Money Laundering Act of 2020, the CTA is intended to help bring US law in line with safeguards in other developed countries intended to prevent the flow of illicit money through anonymous shell companies by requiring the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) to establish and maintain a national registry of beneficial owners of entities considered to be “reporting companies.” On September 29, 2022, FinCEN issued a Final Rule implementing the CTA’s beneficial ownership information (BOI) reporting requirements, which goes into effect January 1, 2024.
Among other things, the Final Rule addresses:
- which entities must report BOI and which are exempt,
- who is and is not considered a beneficial owner,
- who is a company applicant,
- what information reporting companies must provide, and
- reporting deadlines.
This article will cover basic information business entities should know about the requirement and how it might potentially affect them. Please note that this is a general overview only; for questions about your particular situation, please contact our office for a consultation.
What Is a Reporting Company?
Under 31 C.F.R §1010.380(c), a reporting company can be either domestic or foreign. A domestic reporting company is a corporation, limited liability company, or other similar entity that is created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe. A foreign reporting company is any entity that is a corporation, limited liability company, or other entity formed under the law of a foreign country and registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe. FinCEN’s broad definition of reporting companies means that a variety of business entities beyond corporations and LLCs, including limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, will be required to report BOI.
However, because the intent of the CTA is to capture BOI for legal entities whose ownership and management is not otherwise obtainable, §1010.380(c)(2) lists 23 entity-specific exemptions that cover legal entities where ownership information is either already publicly available or readily obtainable. This includes large operating companies, various types of financial institutions, tax-exempt entities, and inactive entities.
Who Is a Beneficial Owner?
A beneficial owner is any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25 percent of a reporting company, as defined in §1010.380(d). The Final Rule provides more detailed information on what constitutes substantial control and what is considered an ownership interest than was contained in the CTA but defines these terms very broadly; those who are unsure if their role in or in relation to a reporting company qualified them as a beneficial owner are encouraged to consult a qualified legal professional.
Those not considered beneficial owners according to the Final Rule are:
- a minor child (as defined under state law or Indian tribe laws where the reporting company is formed or first registered, provided the reporting company reports the required information regarding a parent or legal guardian of the minor child);
- an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
- an individual acting solely as an employee of a reporting company (excluding senior officers);
- an individual whose only interest in a reporting company is a future interest through a right of inheritance; and
- creditors of a reporting company.
Who Is a Company Applicant?
For companies formed after January 1, 2024, the CTA and Final Rule require disclosure of company applicants as well as beneficial owners to FinCEN. This means:
- the individual who directly files the document that creates a domestic reporting company,
- the individual who directly registers the document that first registers a foreign reporting company, or,
- if more than one individual is involved in the filing of such a document, the individual who is primarily responsible for directing or controlling such a filing for either a domestic or foreign reporting company.
What Information Must Reporting Companies Provide?
According to §1010.380(b)(1), the initial report of BOI includes:
For the reporting company:
- The full name of the reporting company,
- Any trade name or ‘‘DBA” name,
- The company’s business address,
- The State or Tribal jurisdiction of formation of the reporting company (or for a foreign reporting company, the State or Tribal jurisdiction where the foreign reporting company first registers), and
- A unique identifier associated with the reporting company, such as an IRS TIN or EIN.
For every individual who is a beneficial owner or company applicant:
- full legal name,
- date of birth,
- a complete current address consisting of (i) the street address of the business in the case of company applicants, or (ii) the individual’s residential street address for all other cases,
- a unique identifying number and issuing jurisdiction from (i) a nonexpired photo identification document issued to the individual by the US government, State, local government, or Indian tribe (e.g., a passport or driver’s license), or (ii) a non-expired passport issued by a foreign government if the individual does not possess any of the foregoing documents, and
- an image of the identification document described above.
When Must Information Be Filed?
Deadlines vary depending on whether a company was created or registered before the rule takes effect and whether they are filing an initial report, filing after the loss of exemption, or filing updated or corrected information.
- Existing companies – One year
Domestic reporting companies created or foreign reporting companies registered to do business in the US before January 1, 2024, must file their initial report with FinCEN no later than January 1, 2025.
- New companies – 30 calendar days
Domestic reporting companies created or foreign reporting companies registered to do business in the US on or after January 1, 2024, must file their initial report with FinCEN within 30 calendar days of the date when they are effectively created or registered.
- Companies no longer exempt – 30 calendar days
Any entity no longer meeting the criteria to remain an exempt entity must file a report within 30 calendar days of the date when it no longer meets the criteria for an exemption.
- Updates – 30 calendar days
If there is a change in the information previously reported to FinCEN, reporting companies will have 30 calendar days to file an updated report.
- Error corrections – 30 calendar days
In cases where a reporting company filed a report containing information that was inaccurate when filed, and such information remains inaccurate, the reporting company must file a corrected report within 30 calendar days of the date it becomes aware, or has reason to know, the information is inaccurate.
The Importance of Timely and Accurate Filing
Under the CTA, it is illegal to willfully fail to report completed or updated BOI or to willfully provide or attempt to provide false or fraudulent information. Multiple penalties for doing so can apply, including a civil penalty of $500 per day for each day the violation continues as well as a fine up to $10,000, up to two years in prison, or both. This makes it imperative for business entities required to file to clarify any confusion or ambiguity regarding BOI well in advance of applicable deadlines to avoid violations.
If your company needs guidance on the impact of the CTA, the experts at Bridge Law LLP are here to help. Our expertise in domestic and international business law helps us ensure your accurate compliance. To schedule a consultation, contact us here.