The Corporate Transparency Act: Is It Too Late to Call Your Congressman?
In January 2021, Congress passed the Corporate Transparency Act (the “CTA”) in hopes of identifying more shell companies used in money laundering and other illegal activities. Congress charged the Financial Crimes Enforcement Network (“FinCEN”) with administering and enforcing the CTA. In September 2022, FinCEN issued its final regulations for the CTA which will take effect on January 1, 2024.
The CTA will impact you if you own or operate a limited liability company, limited partnership, corporation, or any other entity that is formed by the filing of a document with a secretary of state, in which case you will (with limited exceptions) need to comply with the CTA’s reporting requirements.
The remainder of this article provides additional details regarding the applicability of the CTA, but, if you read no further, just be aware that (absent delay by FinCEN or an act of Congress), the CTA reporting requirements go into effect January 1, 2024, and that entity owners and operators need to prepare to comply with the CTA regulations.
Does the CTA apply to your entity?
As mentioned above, the CTA applies to limited liability companies, limited partnerships, corporations, and any other entities that are formed by the filing of a document with a secretary of state. An entity that is required to report under the CTA is called a “Reporting Company”.
There are limited exemptions to the CTA’s filing requirements, including for SEC reporting companies, regulated financial services companies, insurance companies, non-profits, and certain inactive entities. There is also an exemption for certain large operating companies. In order to qualify for the large operating company exemption, a company must meet all three of the following requirements:
(1) have a physical office location in the United States;
(2) have at least 5 million dollars in gross receipts or sales; and
(3) have at least 20 full-time employees.
If an entity does not qualify for one of the CTA exemptions, it will have to report. It does not matter if the entity is not an actual operating business (holding company, family limited partnership, etc.).
The CTA regulations apply to both existing entities and entities that will be formed in the future.
The result is that the owners and operators of most entities will have to comply with the CTA’s reporting requirements for EACH Reporting Company they own or operate.
What information must you report?
A Reporting Company is required to file a beneficial ownership information report (a “BOI Report”) with FinCEN that includes the legal name, address, state of formation, and EIN of the Reporting Company.
The BOI Report will also list ALL of the “Beneficial Owners” of the Reporting Company and their individual information (including their address, date of birth, and SSN). A Beneficial Owner is any individual that (a) exercises “substantial control” over the Reporting Company or (b) owns or controls more than 25% of the ownership interests in the Reporting Company. Who exactly is considered a Beneficial Owner will depend on the facts and circumstances of the Reporting Company. The following individuals are just a few examples of potential Beneficial Owners:
senior officers of the Reporting Company, such as a president, CEO, CFO, or general counsel;
an individual who has the authority to appoint or remove any senior officer or a majority of a board of directors of a Reporting Company;
an individual who directs, determines, or has substantial influence over important decisions; and
an individual that has any other substantial control of the Reporting Company, either directly or indirectly.
A Reporting Company will also have to disclose who its “Company Applicant” is and their individual information. The Company Applicant is the individual that filed the certificate of formation or articles of organization with a secretary of state. This may often be a paralegal, attorney, or an accountant.
In addition to filing an initial BOI Report with FinCEN, a Reporting Company will also have to file updates to report any changes in the Beneficial Owners of the Reporting Company no later than 30 days after such change occurred.
What are the filing deadlines and fees?
A Reporting Company formed prior to January 1, 2024, must file its initial BOI Report by January 1, 2025.
·A Reporting Company formed on or after January 1, 2024, must file its initial BOI Report within thirty (30) days of the date of formation.
There could be fines or other civil or criminal penalties for failing to file a BOI Report for a Reporting Company, or for willfully filing false information.
The BOI Report does not have to be refiled or updated annually, but a Reporting Company must make timely updates regarding any changes in the Beneficial Owners of the Reporting Company or face a fine or other civil or criminal penalties.
FinCEN anticipates there will be a fee of approximately $85.00 to file an initial BOI Report.
How will you file your BOI Reports?
FinCEN is still developing the BOI Report forms and filing guidance.
FinCEN is developing a secure online interface and database where BOI Reports will be filed, stored, and updated. That system is still under development.
We anticipate that attorneys, accountants, or other service providers will start developing and implementing CTA compliance processes.
As always, beware of any solicitations offering CTA compliance services. Given the sensitive nature of the information required by the BOI Reports, be careful with who you provide information to.
Absent a change of heart by Congress, CTA reporting is coming. Now is the time to start developing a compliance strategy. If you have questions about the CTA or want to discuss how to prepare to comply with the CTA, please let us know.
