On January 21, 2021, the Corporate Transparency Act (CTA) was enacted into federal law in the United States. The CTA directs the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury and the US financial intelligence unit, to establish a national registry of beneficial ownership information (BOI) for the beneficial owners of most entities created or registered to do business in the United States (Reporting Companies). The CTA is primarily an anti-money laundering law to fight against bad actors that seek to use anonymous shell companies to facilitate money laundering, financing of terrorism, tax fraud, and other illegal acts.
On September 30, 2022, FinCEN published a final rule that implements the CTA’s BOI reporting requirements (Final Rule). The Final Rule requires Reporting Companies to disclose certain personal information of each “beneficial owner” and “company applicant” to FinCEN. The effective date of the Final Rule is January 1, 2024.
WHAT’S A REPORTING COMPANY?
Reporting Companies are bifurcated between domestic Reporting Companies and foreign Reporting Companies.
A domestic Reporting Company is any entity that is (1) a corporation, (2) a limited liability company (LLC), or(3) created by the filing of a document with a secretary of state of any similar office under the law of a state or American Indian tribe.
A foreign Reporting Company is any entity that is (1) a corporation, LLC, or other entity, (2) formed under the law of a foreign country, and (3) registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a state or American Indian tribe.
Who Must Report
Beginning on January 1, 2024, domestic and foreign reporting companies must file reports with FinCEN that provide information about the reporting company, beneficial owners, and company applicants, if applicable. The name of the CTA, “Corporate Transparency Act” is a misnomer; it applies to all “reporting companies.”
Not all companies are required to report BOI to FinCEN under the Final Rulemaking. Companies are required to report only if they meet the Final Rulemaking’s definition of a “reporting company” and do not qualify for an exemption.
The first step is to determine whether the company is a “reporting company,” and then whether the reporting company is exempt from the reporting requirements.
WHAT TO DO NOW: To prepare for the CTA, companies should review their existing and expected business structure in consultation with a professional business consultant and determine whether the CTA applies. To begin, look at the entity type and determine whether the business is either: (a) created by the filing of a document with the Secretary of State or similar office under the law of a state or Indian tribe; or (b) formed under the law of a foreign country AND registered to do business in any state or tribal jurisdiction, by the filing of a document with a Secretary of State or similar office under the laws of a state or Indian tribe. If neither of those situations applies, the business does not have to comply with the CTA. If one of those situations does apply, then check to see if one of the 23 statutory exemptions applies. If none of the exemptions applies, and the CTA does, companies in consultation with their lawyers should consider what process to use to gather the required information, how it will be reported to FinCEN in a timely manner, and how to monitor that information in the future. As an existing business, the reporting company will have until January to file . FinCEN is not accepting reports until January 1, 2024.
However, if the entity is formed in 2024, the company will have 90 days to file (with the filing deadline reduced to 30 days for entities formed after December 31, 2024). Thus, if a company plans to form an entity in 2024, it might consider forming the entity in 2023. There is no fee for reporting to FinCEN. Businesses should consult with a business consultant of their choosing with regard to whether the CTA will apply.
WHOSE INFORMATION MUST BE REPORTED?
Reporting Companies must disclose certain personal information of each “beneficial owner” and “company applicant” to FinCEN.
A “beneficial owner” is any individual who exercises “substantial control” over the Reporting Company or who owns or controls a 25% “ownership interest” in the Reporting Company. Both terms are further defined in the Final Rule.
A “company applicant” is any individual who directly files the document that creates the domestic Reporting Company or registers the foreign Reporting Company, and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.
WHAT INFORMATION IS REPORTED?
Reporting Company Information: Required disclosures include: (1) legal name, (2) trade name, (3) business address, (4) jurisdiction information, and (5) US Internal Revenue Service taxpayer identification number.
Beneficial Owners and Company Applicant Information: Required disclosures include: (1) legal name, (2) date of birth, (3) current address, and (4) an identification document with a unique identifying number (e.g., passport).
Fee: There will be no fee for submitting the report to FinCEN.
Third-Party Service Providers: Reporting companies may use third-party service providers to submit beneficial ownership information reports, and those providers will have the ability to submit the reports via FinCEN’s E-Filing system and/or an Application Programming Interface (API) assist reporting company.
Penalties for Reporting Violations
For reporting violations, the CTA authorizes a civil penalty of up to $500 for each day that the violation continues or has not been remedied and criminal penalties, including a fine of up to $10,000 and/or imprisonment (not more than two years). Section 1.3 of Guide states that senior officers of an entity that fails to file a required BOI report may be held accountable for that failure. It is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent reports or willfully fail to report complete or updated information.
NEW STATE LAWS COMING SOON IN NEW YORK & CALIFORNIA
Similar to the CTA, certain states have begun to pass or propose statutes that in certain ways mirror the federal provisions in order to create state-level databases of BOI. For example, the New York state legislature recently passed the LLC Transparency Act, which is awaiting Governor Kathy Hochul’s signature. Under the New York LLC Transparency Act, both current and newly established LLC’s will be required to disclose BOI information of its owners with the Department of State. However, unlike the CTA, which limits public access to the BOI information stored in its database, the New York bill will make the information largely available to the general public.
California has followed suit and proposed its own version of the CTA particularly aimed at corporations not formed in California or LLCs registered to do business in California to report BOI information with the secretary of state. The proposed bill would require these companies to disclose BOI information to do business in California or risk being guilty of a misdemeanor for noncompliance.
