By Bill Siegel and Casey Erick
Some of you may have heard about the bi-partisan passage of the Corporate Transparency Act (the “CTA”) which became law and went into effect on January 1, 2024.
“…a federal law that requires most small corporations, companies, and limited partnerships to register ‘beneficial ownership information’ (or “BOI”) reflecting the ownership and management structure of the entity…”
Billed as an effort to plug a hole in law enforcement’s ability to find information regarding small or “closely-held” businesses and enacted as a part of the Anti-Money Laundering Act of 2020, the CTA is a federal law that requires most small corporations, companies, and limited partnerships to register “beneficial ownership information” (or “BOI”) reflecting the ownership and management structure of the entity with the Financial Crimes Enforcement Network (or “FinCEN”).
Obligation to Report Under the Corporate Transparency Act
Here are answers to a few important questions concerning an entity’s obligation to report under the CTA.
Are You Exempt from BOI Reporting?
It is likely your entity is not exempt.
I. CTA Summary
The BOI reporting requirement applies to all domestic and foreign reporting companies. A domestic reporting company includes a corporation, limited liability company, limited partnership, or any other entity created by the filing of a document with a Secretary of State or similar office, including—in certain circumstances—limited liability partnerships and business trusts. A foreign reporting company includes similar entities formed under the law of a foreign country that is registered to do business in any jurisdiction within the United States. Unless an exemption applies, each reporting company must submit to FinCEN information regarding itself, each of its beneficial owners, and its company applicants.
II. Narrow Exemptions
Though the CTA contains 23 exemptions, they are narrowly tailored and must be claimed on an entity-by-entity basis.
At this time, we expect most newly-formed and existing entities operating in the United States will not be exempt, unless they are wholly owned or controlled subsidiaries of:
- a regulated entity subject to regular reporting with an agency of the US government (e.g., public companies, banks, broker-dealers, investment advisers, as enumerated in the CTA); or
- an entity able to rely on the “large operating company” exemption, which requires (a) 20 full-time employees in the United States; (b) filing a US federal income tax or information return in the United States demonstrating more than $5,000,000 in US gross receipts or sales for the prior fiscal year; and (c) an operating presence at a physical office in the United States.
Notably, FinCEN currently interprets the statutory text as requiring an entity to be owned entirely by one or more specified exempt entities in order to qualify for the exemption, which may preclude controlled entities from qualifying. Therefore, pending further guidance from FinCEN, even if an entity is a controlled subsidiary of a public company for certain purposes (e.g., accounting consolidation), it may not meet the definition of subsidiary for purposes of the CTA requirements unless it is, in fact, wholly owned.
A list of the exempt entities, along with answers to other frequently asked questions, can be found here: Beneficial Ownership Information Reporting | FinCEN.gov.
Most other entities are required to complete the BOI reporting.
When Must We Report?
- If your entity was formed prior to January 1, 2024 and is not exempt from doing so, it must register with FinCEN by January 1, 2025.
- If your entity was formed between January 1, 2024 and December 31, 2024 and is not exempt from reporting, it will have 90 days from the date of formation to register with FinCEN.
- Non-exempt entities formed on or after January 1, 2025 will be required to register with FinCEN within 30 days of formation.
- Whenever the BOI changes, that entity must notify FinCEN of the changes within 30 days of their occurrence.
The Beneficial Ownership Information Reporting | FinCEN.gov website provides access for reporting. You may either print the report to complete and submit it, or you may file online directly.
What Information Constitutes “BOI?”
For the reporting company, BOI includes (a) the legal name of the entity; (b) any assumed names; (c) the business address; (d) the jurisdiction of formation; and (e) the taxpayer ID number.
For each of the “beneficial owners” the information required includes either: (a) a government-issued FinCEN identifier (for those owners who have obtained such number); or (b) personal information, including (i) full legal name, (ii) date of birth,
(iii) residential address (or, for a company applicant, business address), and (iv) identifying number from an official driver’s license, state issued identification, or a passport (a copy of such item is required to be uploaded or attached with the report).
Who Must Provide “BOI” to FinCEN?
The CTA requires BOI from the following persons within each entity. (And, if these persons change (quit or are replaced, responsibilities change, sell their interest, etc.), an updated report to FinCEN is also required.)
- The “Company Applicant,” who is the individual who files the formation or registration papers for the entity AND any individual who controls such filing (for entities formed or registered after January 1, 2024);
- Anyone who owns at least 25% of the entity;
- Anyone who exercises “substantial control” over the entity (regardless of whether they are owners or the percentage amount of their ownership), such as a manager, officers, directors, or anyone with the authority to hire and fire senior management; and
- Potentially, depending on their role in the entity, anyone with a capital or profits interest, holders of convertible interests, and profits participants.
Notably, if the corporate structure of the entity changes, whether due to a merger or stock split, the involvement of new investors, or a change in the corporate management, these changes CAN require the entity to file an update with FinCEN, and that update must occur within 30 days of the change.
What Can Happen If I Choose Not to Report of if My Report is Inaccurate?
These reports are mandatory under federal law and are applicable to non-exempt entities in all 50 states and the territories, as well as foreign entities doing business anywhere within the United States.
The willful failure to report as required, including providing timely (i.e. within 30 days) updates for changes to an existing report, or the willful provision of false or fraudulent BOI, can result in: (a) civil penalties of up to $500 per day, per violation; and (b) criminal penalties including (i) imprisonment for up to 2 years, and (ii) a fine of up to $10,000.
Who Will Have Access?
Under FinCEN regulations, five types of institutional actors will have access to the BOSS (Beneficial Ownership Secure System) database:
- The U.S. Department of Treasury;
- Federal agencies (engaged in national security, intelligence, or law enforcement activities);
- State, local, and tribal enforcement agencies — with court authorization;
- Financial institutions and their federal and state regulators; and
- Foreign law enforcement agencies.
The BOSS database will contain: the reporting company information; and the personally identifiable information of the beneficial owners, officers, and control persons of every reporting company. (The number of entities that will have access to the BOSS database will be broad, thus privacy of ownership information (for reporting companies once the CTA is implemented) should not be assumed.
Compliance and Status
Compliance:
- The FinCEN Small Entity Compliance Guide outlines essential information regarding reporting and exemptions.
- In December 2023, FinCEN issued additional regulations regarding the BOSS database, access to it, and safeguards for use — noting that recipients must protect beneficial ownership information, including mandatory protocols for security and confidentiality.
Status/Monitoring:
- Some within government, and at least one lawsuit thus far, have pushed back against the CTA reporting requirements. See Nat’l. Small Bus. United vs. Yellen, No. 5:22-CV-01448 , 20245 U.S.Dist. LEXIS 36205, 2024 WL 899372 (N.D. Ala. Mar. 1. 2024).
- The Protect Small Businesses and Prevent Illicit Financial Activity Act (H.R. 5119) passed the U.S. House of Representatives. The bill revises the requirements for small U.S. businesses to report certain BOI: It extends the existing company reporting timeframe from one to two years, and extends the reporting timeframe for newly-formed companies from 30 days to 90 days. The bill was received in the U.S. Senate December 13, 2023 and was ultimately referred to the Committee on Banking, Housing, and Urban Affairs.
