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The Corporate Transparency Act: Summary and Reporting Obligations

The Corporate Transparency Act ("CTA") takes effect January 1, 2024. The CTA creates reporting obligations with the Financial Crimes Enforcement Network ("FinCEN") for most business entities, like corporations, LLCs, and others. This includes business entities formed both before and after the CTA takes effect.


What is a Reporting Company?

A reporting company is any entity formed or registered to do business in the US by the filing of a document with a secretary of state. 

Exemptions:

However, there are exemptions for certain types of entities. 23 listed exemptions, to be specific, which include, among others:

  • "Large operating companies" which are entities that (a) have more than 20-full time US employees; (b) reported more than $5M of revenue from US sources for the previous year; and (c) have an operating presence at a physical location in the US.
  • Venture capital fund advisers.
  • Nonprofits, political organization, and certain tax-exempt trusts
  • Public companies, insurance companies, banks, SEC-registered investment companies and investment advisers, and certain other entities already subject to oversight.
  • Pooled investment vehicles operated or advised by the persons described above.
  • Subsidiaries that are wholly owned, directly or indirectly, by the foregoing exempt entities.

If an entity is exempt, then it does not have reporting requirements. If it does not fit one of the enumerated exemptions, then it must comply with reporting requirements.

Timing of Reporting for New Entities

Reporting companies formed on or after January 1, 2024 (but before January 1, 2025), must file a beneficial ownership ("BOI") report with FinCEN within 90 calendar days of formation. Reporting companies formed on or after January 1, 2025, must file a BOI report within 30 calendar days of formation.

Timing of Reporting for Existing Entities

Reporting companies formed before January 1, 2024, must file a BOI report by January 1, 2025.

What Information Needs to be Reported?

Each reporting company has to submit a BOI report. The report will include (1) company information, (2) beneficial owner information, and (3) if the company was created on or after January 1, 2024, company applicant information.

Company Information

Company information includes entity name, street address (not a PO box), jurisdiction of formation, and taxpayer ID number.

Beneficial Owner Information

For each individual who is a beneficial owner, their full legal name, date of birth, residential address and a unique ID number (e.g., US passport or driver’s license) and image of the corresponding ID document.

Company applicant information

Company applicant information is only for companies that were formed on or after January 1, 2024. The information to be submitted is the same as for beneficial owners.

Who are Beneficial Owners and What Information is Required?

Beneficial owners are individuals who, directly or indirectly, (a) own or control 25% or more or the ownership interests in a reporting company, or (b) exercise "substantial control" over a reporting company. 

The rules set out four categories for substantial control:

  1. The individual is a senior officer, e.g., CEO, president, CFO, general counsel, or other officer role with comparable duties.
  2. The individual has authority to unilaterally appoint or remove any such senior officer or a majority of the board of directors of the reporting company.
  3. The individual directs, determines or has substantial influence over important decisions made by the reporting company.
  4. The individual has any other form of substantial control over the reporting company.

The third and fourth categories will likely require analysis on a case-by-case basis, as they leave plenty of room for interpretation. For example, the fact that an individual is a board member of a reporting company should not, on its own, make that person a beneficial owner. But if that individual has been given substantial influence over important decisions, like a sale of the company, then the individual is likely considered a beneficial owner. 

For each beneficial owner and company applicant, each reporting company will need to provide the individual's (i) legal name, (ii) birth date, (iii) address), and (iv) ID number from an approved document, as well as an image of the document.

Who are "Company Applicants"?

As a reminder, only reporting companies formed on or after January 1, 2024 must identify company applicants.

For such reporting companies, they will need to identify at least one but no more than two company applicants. A company applicant is defined as (1) the individual who directly files the document that creates a domestic reporting company or first registers a non-US reporting company to do business in the US, and, if applicable, (2) the individual primarily responsible for directing or controlling the filing of the creation or registration document. 

Hence, the company applicants could include individuals like startup founders, attorneys, employees of online formation services companies, and others. 

What are "FinCEN Identifiers" and What is Their Function?

A FinCEN identifier is an ID number that FinCEN will issue to individuals upon their request. By obtaining a FinCEN identifier, an individual is effectively providing the information to FinCEN they would otherwise need to provide to a reporting company for that reporting company to meets its reporting obligations FinCEN. 

By having a FinCEN identifier, though, the individual can simply provide that identifier to the reporting company to report to FinCEN. This makes reporting easier for the reporting company as it has less work to do in gathering information. Having a FinCEN identifier will be especially useful for individuals who will be beneficial owners or company applicants for more than one company.

An individual with a FinCEN identifier is obligated to keep the information provided to FinCEN updated. 

What are the Ongoing Reporting Obligations?

It's important for reporting companies to keep information in the BOI report current through ongoing reporting. This includes things like a change in address, the addition of a trade name, and new beneficial owners. Changes to beneficial ownership information have to be reported within 30 days of the change becoming effective.

Note that reporting companies are not obligated to file BOI reports on an annual or other recurring basis--only if information in their latest BOI report changes.

Also, entities must file reports to note changes in their exemption status from being reporting companies. For example, any entity that originally qualified as being exempt as a reporting company that subsequently fails to meet the exemption criteria will need to file a BOI report (and subsequently comply with reporting company obligations). On the other hand, entities that begin as reporting companies but then qualify for an exemption must file an updated report noting such change. 

What are the Consequences for Reporting Violations?

The CTA provides for civil and criminal penalties (up to $10,000 and two years imprisonment) for willfully providing false information, failing to provide complete information, or failing to update information. In short, reporting companies should be diligent in filing reports when required to do so.

Impact on Startups and Investment Funds

The exemptions generally benefit well-established businesses. Most startups and small businesses will be deemed reporting companies and therefore subject to the disclosure requirements of the CTA.

For private investment funds, the CTA could remove anonymity for certain fund managers, family offices and investors who traditionally preferred for their investments to be kept private.

The CTA could also impact the desirability of organizing companies in certain states (e.g., Wyoming) because anonymity is weakened under the CTA, at least as it relates to disclosures to the federal government.

It should be noted, however, that reports filed with FinCEN will not be publicly accessible and not subject to requests under Freedom of Information Act (FOIA). However, federal, state and local agencies will have access to the information for purposes of tax administration and civil and criminal investigations and enforcement.

That said, it remains to be seen how the CTA would be applied, interpreted, enforced (and potentially challenged) to determine the ultimate impact on businesses. 

Takeaways

The CTA will apply to most SMBs in the US. It will impose reporting obligations both upon formation and on an ongoing basis as the businesses grow, change ownership, and grant significant voting rights. This is not a minor regulatory change. Rather, it is sure to impose significant compliance burdens on a wide swath of companies. Businesses should work closely with their legal team to understand and comply with their reporting obligations.

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