The Corporate Transparency Act (“CTA”) was enacted in 2021 to improve transparency in order to prevent bad actors from engaging in money laundering, tax fraud, and other illicit activities from exploiting US companies. Beginning January 1, 2024, the CTA requires “reporting companies” to report information about the individuals who own or control the company to the Financial Crimes Enforcement Network (“FinCEN”). Failure to comply with the CTA carries stiff penalties, and failure to timely submit a BOI report will result in fines accruing at $500 per day and up to $10,000. Willful noncompliance or fraudulent reporting to FinCEN may result in up to a two-year prison sentence.
What is a reporting company?

Both domestic and foreign entities must submit beneficial owner information (“BOI”) reports to FinCEN. Domestic “reporting companies” are limited liability companies, corporations, and any entity created through the filing of a document with the secretary of state or similar state office or Indian tribe. Foreign “reporting companies” are entities formed under the laws of a foreign country and registered to do business in the United States. BOI reporting regulations can be found at 31 CFR §1010.380(d)(1). Based on the sheer number of foreign and domestic entities covered by the CTA, over 30 million reporting companies will be required to submit BOI reports when the CTA goes into effect.

The deadlines to submit BOI reports differ based on the date a reporting company was formed. Those entities formed or registered before January 1, 2024 must submit the BOI report by January 1, 2025, while entities formed after January 1, 2024 must submit the report within 30 days of registering with the secretary of state or similar office. However, FinCEN has recently proposed to extend the initial filing deadline for beneficial ownership reports from 30 to 90 days for entities created or registered on or after January 1, 2024 in order to give reporting companies more time to understand the new obligations created by the CTA.

Not all companies fall under the umbrella of the CTA. Companies already subject to regulatory oversight are exempt from the CTA’s reporting requirements. The CTA identifies twenty-three entities that are exempt. This includes but is not limited to large operating companies (defined in 31 CFR §2020.380(c)(2)(ixx), but generally includes companies with over 20 employees and more than $5 million in gross receipts from US sources, banks, insurance companies, financial advisers, securities brokers, and pooled investment companies. A complete list of the exemptions can be found at 31 CFR §2020.380(c)(2).

Who is a beneficial owner under the CTA?

Under the CTA, a beneficial owner may or may not have actual ownership of the company. The CTA requires reporting companies to file BOI reports for all individuals who own or control at least 25% of the ownership interest in the reporting company or who exercise substantial control over the reporting company. The BOI report discloses an individual’s full name, date of birth, residential address, and an identifying number, such as a passport number or driver’s license number.

Ownership interests include both traditional equity interests and nontraditional interests that otherwise entitle someone to a company’s profits, such as a convertible security. The CTA considers the following to determine if an individual exercises substantial control:

• The individual serves as an important decision-maker;
• The individual is a senior officer of the company, such as a chief financial officer of chief technology officer;
• The individual holds authority to appoint or remove senior officers or important decision makers;
• The individual exercises control over major expenditures, reorganizations, or entry into and termination of major contracts; or
• The individual holds any other form of substantial control over the reporting company.

The “substantial control” provision may require a detailed analysis of all senior-level employees and governing documents to determine which individuals’ information must be reported under the CTA. Existing reporting companies with complex and sophisticated ownership and operating structures should update internal protocols to identify beneficial owners prior to the reporting deadline.

Not all beneficial owners must be included in the BOI report. The CTA includes five exemptions for individuals who would otherwise be considered a beneficial owner including: (i) minor children; (ii) an individual acting as an agent on behalf of another individual; (iii) an employee whose substantial control or economic benefit is derived solely from the employment status of the employee and is not a senior officer; (iv) an individual whose only interest is a future interest via some type of inheritance; and (v) creditors.

The CTA’s new reporting requirements will likely not present significant difficulties for reporting companies with easy access to an individual’s BOI and straightforward ownership and operating structures. However, reporting companies with complex corporate and organizational structures will likely require a detailed analysis of all relevant governing documents and senior officer job functions to file accurate and complete BOI reports.

Where do I submit a BOI report?

FinCEN has created the Beneficial Owner Secure System (“BOSS”) to facilitate filing and storage of BOI reports. The BOSS is expected to open on January 1, 2024. FinCEN identifier numbers will be available upon request by submitting the same information that must be reported in a BOI report. Reporting companies may then use an individual’s FinCEN identifier number in lieu of the information required in the BOI report. BOI reports submitted to the BOSS must be verified as true, correct, and complete.

BOI reports must be updated after a change in beneficial owners, i.e., new ownership or a new senior company officer. All reporting companies must update company and BOI within 30 calendar days of any BOI change and reports must be corrected within 30 calendar days of any knowledge or notice of any errors or inaccurate reporting information. In the event a reporting company inadvertently submits an incorrect initial BOI report, the CTA provides a safe harbor provision that allows corrected reports to be submitted within 90 days of the original submission.

What can reporting companies do to prepare for the CTA?

Looking forward, reporting companies must evaluate currently existing corporate compliance plans. While FinCEN will likely issue additional guidance and reporting procedures, companies should implement internal protocols to compile and update reporting information to ensure compliance with the CTA’s requirements. This includes identifying who is responsible for compiling beneficial owner information and submitting the report. Reporting companies should also create a system to track changes in senior-level positions or changes in ownership to ensure accurate BOI reports are timely submitted. FinCEN has published resources, including a frequently asked questions page, available via its website to help reporting companies understand the new obligations created by the CTA.

For more information or any questions, please contact Marc Pawlus at [email protected] or at (312) 648-2300.