This article seeks to provide a primer of the reporting requirements and penalties of the Corporate Transparency Act which is set to take effect on January 1, 2024.
Background
The Corporate Transparency Act (“CTA”) was enacted on January 1, 2021, as part of the National Defense Authorization Act for the Fiscal Year 2021, with the goal of protecting and safeguarding U.S. national security interests against money laundering, the financing of terrorism, and other illegal activities. Because “shell” companies are often used to facilitate illegal activities, the CTA requires non-exempt companies to disclose certain company information, including information about the company’s beneficial owners, to the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
On September 29, 2022, FinCEN released its final rule implementing the reporting requirements of the CTA, which will soon take effect.
As discussed below, the CTA applies to both existing companies and companies to be formed.
- Reporting companies that are created or registered to do business before January 1, 2024, will have until January 1, 2025 to file their beneficial ownership information reports (“BOI Reports”).
- Reporting companies created or registered on or after January 1, 2024 and before January 1, 2025, will have 90 days after the creation or registration of the company to file their initial BOI Reports.
- Reporting companies created or registered on or after January 1, 2025, will have 30 days after the creation or registration of the company to file their initial BOI Reports.
Who Is Required to File?
The CTA requires a “reporting company” to file BOI Reports with FinCEN, and disclose certain information about (i) the company itself; (ii) its beneficial owners; and (iii) the company applicant.
A “reporting company” is defined as a domestic or foreign corporation, limited liability company, or other similar entity that is created by filing a document with a Secretary of State or other similar office, or a foreign company that is registered to do business in any state that does not qualify under one of the exemptions enumerated in the CTA.
Reporting Company Exemptions
There are currently 23 exemptions listed in the CTA, as a result of which an entity will not be considered a “reporting company” and will not be required to file a BOI Report under the CTA. Many of these exempt entities are already required to disclose their company and beneficial ownership information to another government agency and are regulated by other federal and/or state government agencies. The exemptions include, but are not limited to, banks, credit unions, issuers of publicly registered securities, certain tax-exempt entities, large operating companies, and subsidiaries of certain exempt entities.
One common entity excluded from the reporting requirements of the CTA is “large operating companies.” A large operating company is defined as any entity that (i) employs more than 20 full-time employees in the U.S.; (ii) with gross receipts or sales of more than $5,000.000 from U.S. sources; and (iii) has an operating presence at a physical office within the U.S. It is important to note that if an exempt entity no longer qualifies for that exemption, they must timely begin to report as a reporting company. For example, if a large operating company falls below the threshold of maintaining 20 full-time employees, that company would then need to report to FinCEN under the CTA.
What Information Is a Reporting Company Required to Report?
If a company is deemed to be a reporting company it will be required to report to FinCEN information about (i) the company itself; (ii) its beneficial owners; and (iii) its company applicants (if created or registered on or after January 1, 2024). Except for reported information about the company applicant, the reported information must be timely updated whenever the required company information or beneficial owner information changes.
1. Required Company Information.
A reporting company must report the following information about itself:
- Full legal name, including any “doing business as” or trade names;
- U.S. street address of its principal place of business (or if a foreign reporting company, from the address in which the company conducts business in the U.S.);
- Jurisdiction of formation or registration; and
- Taxpayer Identification Number.
2. Beneficial Owners.
A reporting company must also provide the following information for each Beneficial Owner:
- Individual’s full name;
- Individual’s date of birth;
- Individual’s residential street address;
- Unique identifying number from an acceptable identification document (e.g. passport, driver’s license); and
- Image of the identifying document.
3. Company Applicants.
Additionally, for companies created or registered on or after January 1, 2024, a reporting company must also provide the following information for each Company Applicant:
- Individual’s full name;
- Individual’s date of birth;
- Business street address used by Company Applicant;
- Unique identifying number from an acceptable identification document (e.g. passport, driver’s license); and
- Image of the identifying document.
Who are Beneficial Owners?
A beneficial owner of a reporting company is any individual (i) who directly or indirectly exercises “substantial control” over the reporting company; or (ii) who directly or indirectly owns or controls at least 25 percent of the “ownership interests” of the reporting company.
However, a beneficial owner does not include: (i) a minor child; (ii) a person acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (iii) an employee of a reporting company, acting solely as an employee, whose substantial control over or economic benefits from the reporting company are derived solely from that person’s employment status, provided that such person is also not a senior officer; (iv) an individual whose only interest in the reporting company is a future interest through a right of inheritance; or (v) a creditor of a reporting company.
The definition of “substantial control” is quite broad and is enumerated in 31 CFR §1010.380(d)(1). Certain individuals who have been found to have “substantial control” over a reporting company include, but are not limited to: (i) senior officers; (ii) people with authority to appoint or remove any senior officer or a majority of the board of directors; (iii) people who can direct, determine, or have substantial influence over important decisions made by the company (e.g. sale, lease, mortgage, or pledge of a substantial asset, amending corporate governance documents); or (iv) people who have any other form of substantial control over the reporting company.
The term “ownership interest” is also broadly defined to include equity and stock, profit interests, convertible instruments, and other complex ownership arrangements as set forth in 31 CFR §1010.380(d)(2).
Who Are the Company Applicants?
A reporting company may have up to two individuals who qualify as the company applicant: (i) the person who creates, files, or registers the reporting company; and (ii) the person who is primarily responsible for directing or controlling the creation, filing, or registration of the reporting company. Note: Companies formed or registered before January 1, 2024, do not have to report their company applicants. Only reporting companies formed or registered on or after January 1, 2024, will have to report their company applicants to FinCEN.
Deadlines to File
For companies that were created or registered to do business before January 1, 2024, the deadline to file the initial BOI Report is January 1, 2025.
For domestic companies created on or after January 1, 2024 and before January 1, 2025, the deadline to file the initial BOI Report is 90 calendar days after formation.
For foreign companies registered in the U.S. on or after January 1, 2024 and before January 1, 2025, the deadline to file the initial BOI Report is 90 calendar days after registration.
For companies that were created or registered on or after January 1, 2025, the deadline to file the initial BOI Report is 30 calendar days after formation or registration.
Additionally, all reporting companies are required to file updated reports within 30 calendar days after a change in any previously reported information.
Penalties for Failure to Comply with CTA
Failure to comply with the CTA may result in severe civil and criminal penalties. The willful failure to file a complete initial or updated report with FinCEN is subject to a civil penalty fine of $500 per day, and criminal penalties, including imprisonment for up to two years (31 U.S.C. 5336).
Additionally, any individual who knowingly discloses beneficial owner information, without authorization, is subject to a fine of $500 per day, and up to five years imprisonment.
The contents of this article are for general information purposes only and should not be construed as legal advice. For more comprehensive information or tailored advice, please seek counsel from a qualified attorney. Additional resources, which have also been used as a reference for this article, include 31 CFR §1010.380 and the FAQ section of the FinCEN website.
