CSG Law Alert: The Corporate Transparency Act: How Will It Impact Your Business?
Starting next year, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) will now require a greater degree of information about the ownership of certain companies as a result of mandatory disclosure requirements of the Corporate Transparency Act (“CTA”) going into effect.
The CTA was enacted in January 2021 as part of the 2021 National Defense Authorization Act and is intended to regulate domestic and foreign entities for money laundering, tax evasion, financing terrorism and other illicit activities by placing disclosure requirements on certain entities.
Starting on January 1, 2024, the CTA will require certain companies to report to FinCEN certain information about the company and the individuals who directly or indirectly own or control the company (referred to as “Beneficial Ownership Information Reports” or “BOI Reports”). The CTA further authorizes FinCEN to disclose this information to certain U.S. and foreign government and law enforcement authorities, regulators and financial institutions for limited purposes.
We provide below a high-level overview of the CTA and the reporting requirements based on guidance that has been issued by FinCEN as of the date of this publication.
Is My Company Subject to the CTA?
All domestic corporations, limited liability companies, or similar entities created by the filing of a document with a secretary of state or similar office (including limited partnerships and certain trusts), and foreign entities registered to do business in the United States are subject to the CTA unless they are subject to an exemption (“Reporting Companies”).
Certain entities are exempt from the reporting requirements under the CTA primarily because the entities are already subject to financial regulations and reporting requirements. The exemption also applies to large companies that (1) employ more than 20 full-time employees in the United States, (2) filed a U.S. federal income tax return for the previous year that showed more than $5,000,000 in gross receipts or sales, and (3) have a physical presence in the United States (such as owned or leased office space that is not a personal residence and is not shared with anyone else). Additionally, certain inactive entities are exempt from the reporting requirements if they (1) were formed on or prior to January 1, 2020, (2) are inactive, (3) are not directly or indirectly owned by a foreign person, (4) have not experienced any ownership change in the prior twelve months, (5) have not sent or received more than $1,000 in the prior twelve months, and (6) do not hold any assets in the United States or abroad.
What Information Must My Company Report?
A Reporting Company must disclose certain basic formation information, including: (1) its full legal name, (2) any trade names or “doing business as” names, (3) its current street address of its principal place of business, (4) the jurisdiction of formation and any foreign registrations, and (5) its Taxpayer Identification Number (“TIN”) or other legal entity identifier if it does not have a TIN.
A Reporting Company must also disclose information with respect to each “beneficial owner,” and, if the company was created or registered on or after January 1, 2024, its “company applicant.” The information required to be disclosed for each beneficial owner and company applicant includes the following: the individual’s full legal name, date of birth, current residential street address (or business address in the case of a company applicant), a unique identifying number (such as a passport number, driver’s license or identification document issued by a governmental agency), the name of the state or jurisdiction that issued the identification document, and a picture of the identification document containing the unique identifying number.
Who is a “Beneficial Owner” and a “Company Applicant”?
A “beneficial owner” is a person who either (1) exercises “substantial control” over a Reporting Company, or (2) directly or indirectly owns or controls at least 25% of the “ownership interests” of the Reporting Company. Reporting Companies may have multiple beneficial owners.
A person is deemed to exercise “substantial control” over a Reporting Company if the individual serves as a senior officer, has authority to appoint or remove any senior officer or a majority of the board of directors, or directs, determines, or has substantial influence over important decisions made by the Reporting Company. A person’s “ownership interests” in a Reporting Company generally include, but are not limited to, shares of stock, membership interests, profit interests, convertible debt, options, and certain other forms of entity ownership instruments. Given that the definition of a “beneficial owner” is subjective, a Reporting Company will have to conduct an analysis to determine who meets the criteria of a “beneficial owner.”
A Reporting Company may have one or two “company applicants.” A “company applicant” is the individual who directly files the document that creates or initially registers the Reporting Company and the individual who is primarily responsible for directing or controlling the filing of the relevant document. Information regarding a Reporting Company’s “company applicant” is only required to be disclosed for Reporting Companies that are created or registered after January 1, 2024.
When Must a Reporting Company File a BOI Report?
Reporting Companies in existence prior to January 1, 2024 must file an initial BOI Report on or before January 1, 2025. Reporting Companies formed on or after January 1, 2024 must file an initial BOI Report within 30 days from the date the formation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier. All Reporting Companies will have an ongoing obligation to update their BOI Reports any time there is a change in previously reported information or if a Reporting Company discovers an inaccuracy in a previously filed BOI Report.
What are the Penalties for Non-Compliance?
Individuals face civil penalties of $500 per day (up to a total of $10,000), and criminal penalties of up to two years in prison for willful violations of the CTA.
How Do I File My Company’s BOI Report?
A Reporting Company must submit its BOI Report electronically through a secure filing system to be provided on FinCEN’s website. The system is currently unavailable as FinCEN continues to develop the system in accordance with the CTA’s comprehensive security and confidentiality requirements.
Next Steps
We strongly encourage businesses to start evaluating how the CTA and its reporting requirements will apply to the company and review the company’s records, policies and procedures to ensure that it has the necessary information to complete its BOI Report at the appropriate time. In some instances, Reporting Companies may need to implement and/or revise reasonable technical, administrative and physical security measures to ensure the Reporting Company is properly maintaining sensitive information, and obtain consent from its “beneficial owners” and “company applicants” to disclose the necessary data in its BOI Report. Should you have any questions about the CTA and its applicability, please contact the Corporate and Securities Group at CSG Law.
FinCEN continues to issue guidance regarding the reporting requirements under the CTA. We will continue to provide updated information as it becomes available. For more information on the CTA, please visit the FinCEN website at https://www.fincen.gov/boi-faqs.