- Beginning on January 1, 2024, many entities will be required to:
- Report certain beneficial ownership information (“BOI”) to the U.S. Department of Financial Crimes Enforcement Network (“FinCEN”);
- Report certain information about the business entity itself;
- Disclose who created the entity or registered it to do business in the U.S.; and
- Report any change to previously reported information.
- For entities existing prior to January 1, 2024, the due date for filing a BOI with FinCEN is January 1, 2025. This 2025 filing deadline will affect an estimated 32.6 million business entities.
- All businesses should determine their reporting responsibilities, because failure to report required information can result in severe civil and criminal penalties, including fines up to $10,000 and two years imprisonment.
- Continuing to monitor your business and update its ownership will be increasingly important as reporting changes is now required.
The Corporate Transparency Act (the “CTA”) was enacted into law in 2021 as a part of the National Defense Authorization Act for Fiscal Year 2021.1 Beginning January 1, 2024, the CTA will require certain business entities to: (1) report certain BOI to FinCEN; (2) disclose information about who created the entity or registered it to do business in the U.S.; (3) report certain information about itself; and (4) report any change to previously reported information within the specified time period.
The CTA is intended to assist law enforcement in combating money laundering, tax fraud, financing of terrorism, and other illicit activity through anonymous shell and front companies. FinCEN estimates that around 32.6 million business will be required to report in the first year, with 5 million more businesses reporting each year in Years 2-10.2 Given the breadth of this new requirement, all companies should determine whether and what information must be reported to FinCEN. This E-Brief discusses the basics of the CTA, outlining the major areas all companies should consider before January 1, 2024.
Who Must Report?
Under the CTA, all “Reporting Companies” must file a BOI report with FinCEN. The CTA broadly defines Reporting Company to include both domestic and foreign companies.
- Domestic companies include all corporations, limited liability companies and other similar entities which are created by the filing of a document with a secretary of state or similar office.
- Foreign companies include all corporations, limited liability companies, and other similar entities which are formed under the law of a foreign country and register to do business in the U.S. by the filing of a document with a secretary of state or similar office.
This sweeping definition encompasses most companies that enjoy limited liability. However, FinCEN makes clear in its final rule that state corporate formation laws and practices ultimately dictate whether a company is a Reporting Company.3
What Companies are Exempt from Reporting?
The CTA exempts from the definition of Reporting Company 23 specific types of entities. Generally speaking, these exempt entities are already subject to significant state and/or federal regulation. The list below includes some of the exempt entities, each of which have their own definitions and specific requirements:
- Large operating companies (must meet certain size and location requirements, such as over 20 full time employees and more than $5 million in gross U.S. receipts).
- Public companies.
- Inactive entities.
- Banks and other financial institutions.
- Brokers or dealers registered under the Exchange Act.
- Tax-exempt entities and certain entities that assets tax-exempt entities.
- Domestic government authorities.
- Certain insurance companies.
- Certain pooled investment vehicles.
- Certain public accounting firms.
- Certain wholly owned subsidiaries of certain exempt entities.
Per the final rule, these exemptions are intended to be interpreted narrowly to prevent their use by entities that otherwise fail to disclose their BOI to the federal government.4
Who Must Be Identified?
The CTA requires Reporting Companies to identify both Beneficial Owners and Company Applicants.
Beneficial Owners are defined as an 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.
An individual exercises substantial control if they do any of the following:
- Serve as a senior officer of the Reporting Company.
- Have authority over the appointment or removal of any senior officer or a majority of the board.
- Direct, determine, or have substantial influence over important decisions made by the Reporting Company.
- Have any other form of substantial control over the Reporting Company.
Additionally, there are five categories of individuals who are excluded from the definition of Beneficial Owner, including (1) minors, (2) nominees, intermediaries, custodians, and agents, (3) certain employees who are not senior officers, (4) heirs, and (5) certain creditors.
Company Applicants are defined as those individuals who either:
- Directly file 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.
Importantly, Company Applicant information is required only for those entities created or becoming a foreign Reporting Company on or after January 1, 2024. For those companies in existence before then, only information related to the Beneficial Owners is required.What Information Must Be Reported?
Beneficial Owners and Company Applicants must report the following information:
- Full legal name.
- Date of birth.
- Complete current address.
- A unique identifying number from one of the following nonexpired documents:
- U.S. passport;
- State, local government, or Indian tribal ID document issued for the purpose of identifying the individual;
- State-issued driver’s license; or
- If none of the above, a passport issued by a foreign government.
- An image of the document from which the unique identifying number is issued.
The Reporting Company must report the following information:
- The full legal name of the reporting company.
- Any trade names, d/b/as, or trading as names through which it conducts business.
- A complete current address consisting of:
- If its principal place of business is in the U.S. – the current street address of its principal place of business; or
- All other cases – the current street address of the primary location in the U.S. where the Reporting Company conducts business.
- For domestic Reporting Companies - its state, tribal, or foreign jurisdiction of formation.
- For foreign Reporting Companies – the state or tribal jurisdiction where it first registered in the U.S.
- Its IRS taxpayer identification number, including an employer identification number.
When Must Reports Be Filed?
The deadline for when reports must be filed depends on when the Reporting Company was formed.
- For a Reporting Company formed before January 1, 2024: initial report is due no later than January 1, 2025. Given the uncertainty surrounding the practical implementation of the CTA, it probably does not currently make sense to register prior to the fall of 2024.
- For a Reporting Company formed on or after January 1, 2024, and before January 1, 2025: initial report is due within 90 calendar days of its creation or registration.
- For a Reporting Company formed on or after January 1, 2025: initial report is due within 30 calendar days of its creation or registration.
When Must Reports Be Updated or Corrected?
If any of the information contained in the report must be updated or corrected, the Reporting Company must file an updated or corrected report within 30 calendar days after the day such change occurs.
What Are The Penalties For Violation?
Penalties for violation of the CTA’s requirements can result in severe penalties. For instance, certain reporting violations such as willful reporting of false information or willful failure to submit a report may result in fines of up to $500 per day the violation continues or has not been remedied. Such fines can reach up to $10,000 in total and result in up to two years of imprisonment.
The CTA is wide-reaching and all companies, regardless of size or industry, should determine their reporting requirements. Some companies will fit squarely under the definition of a Reporting Company or one of the exemptions. Other companies, depending on their organizational matrix, may require the collection of a substantial amount of information about their owners or additional research into the applicability of certain exemptions.
Currently, FinCEN is developing an infrastructure to administer the CTA’s reporting requirements in accordance with the CTA’s security and confidentiality requirements. In addition, FinCEN is producing forms that Reporting Company’s will use to comply with their BOI reporting obligations. To review the guidance and information already released by FinCEN, please click here.
This E-Brief has outlined the major areas of consideration but is not meant to provide comprehensive guidance on the CTA.
Please contact any of the attorneys in the Business Services practice group at Woods Aitken if you have any questions or would like assistance determining your company’s reporting obligations.
An overview of Woods Aitken’s transactional and corporate services can be found here. We encourage you to subscribe to our E-Briefs for the latest news, tips, and updates, including an update on the outcome of FinCEN’s notice of proposed rulemaking regarding filing deadlines.
1 See generally 31 U.S.C. §5336; 31 C.F.R. §1010.380.
2 Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59,498 (Sept. 30, 2022) (to be codified at 31 C.F.R. §1010.380).
3Id. at 59539
4Id. at 59540