On January 1, 2024, the Corporate Transparency Act (the “CTA”) took effect and now requires many business entities to comply with new federal reporting requirements. The purpose of this article is to explain what these new requirements entail and how businesses can comply.

What is the CTA and How Will it Impact Companies?

The CTA (which is a bit of a misnomer, since it applies to more than just corporations) was passed into law as part of the National Defense Authorization Act in 2021. The purpose of the CTA is to create more transparency in business entity ownership in order to prevent illegal business activities such as money laundering, terrorist financing, corruption, and tax fraud. To meet that end, the CTA generally requires domestic and foreign business entities to file Beneficial Ownership Information reports (“BOI Reports”) with the U.S. Department of Treasury Financial Crimes Enforcement Network (“FinCEN”).

These BOI Reports will include certain identifying information about (1) the Reporting Company, (2) its “Beneficial Owners,” and, if the Reporting Company was formed after January 1, 2024, (3) Company Applicants. The timeframe for filing a business entity’s initial BOI Report will depend on when the entity was formed, specifically:

• Entities formed before January 1, 2024 have 1 year (until January 1, 2025) to file their initial BOI Reports.
• Entities formed on or after January 1, 2024, but before January 1, 2025, have 90 days after formation to file their initial BOI Reports.
• Entitles formed after January 1, 2025, have 30 days after formation to file their initial BOI Reports.

What do Terms Like “Reporting Company,” “Beneficial Owner,” and “Company Applicant” Mean?

Important terms used in the CTA, and definitions entities will need to understand, are:

• A “Reporting Company” is any domestic or foreign entity that is formed by filing with a government agency. For domestic entities, this would include entities such as corporations, LLCs, LLPs, and any other entity that is formed by filing with a federal or state office. For foreign entities, the term includes any entity that was formed under the law of a foreign country, then registered to conduct business in the US via a filing with a secretary of state.

It is important to emphasize that entities such as sole proprietorships and general partnerships are not considered a Reporting Company because these entities can exist without filing with the secretary of state. Further, the CTA lists 23 exemptions, most of which apply to companies already subject to some form of governmental oversight or reporting. Other exemptions exist for tax-exempt entities, large operating companies, subsidiaries of certain exempt companies, and inactive entities.  

• A “Beneficial Owner” is someone who either exercises “substantial control” over the Reporting Company or owns or controls at least 25% of the Reporting Company’s ownership or economic interests. The term “substantial control” includes senior officers, anyone with the ability to appoint or remove senior officers, and important decision makers. The term is extremely broad and is meant to encourage disclosure in the instance of doubt. There are exemptions for minor children, nominees, intermediaries, custodians, agents, employees, inheritors, and creditors who would meet this definition solely through rights or interests obtained as collateral security for the payment of debts, etc. 
  • A Trust can be considered an “Beneficial Owner” if the Trust exercises “substantial control” or owns or controls at least 25% of the Reporting Company’s ownership or economic interests. If a Trust is considered a “Beneficial Owner” of a Reporting Company, then the following people may have to report on behalf of the Trust (more than one can apply):
    • Trustee and any other individual who has the authority to dispose of trust assets or control the shares held by the Trust.
    • Beneficiary who is the sole permissible recipient of trust income and principal or who has the right to withdraw substantially all of the trust assets.
    • Settlor who has the right to revoke the trust or withdraw the assets of the trust.

• A “Company Applicant” is the person who filed the formation documents for the Reporting Company and was primarily responsible for directing or controlling the filing of those documents. At a minimum, a Reporting Company will have one Company Applicant, but FinCEN allows for a maximum of two Company Applicants if one person filed the documents at the direction of another. It is important to note, a Company Applicant’s information only needs to be disclosed if the entity was formed on or after January 1, 2024.

What Information Needs to be Reported?

A Reporting Company’s BOI Report must include all of the following information, regardless of when the entity was formed, unless the Beneficial Owner has a FinCEN identifier (discussed below):

1. The Reporting Company’s full legal name;
2. Any d/b/a names used by the Reporting Company;
3. Complete current street address of the principal place of business (this cannot be a P.O. Box);
4. Jurisdiction of formation;
5. The Reporting Company’s EIN/TIN;
6. The following personal information for each Beneficial Owner;
   1. Full legal name;
   2. Date of birth;
   3. Residential street address;
   4. A unique identifying number and issuing jurisdiction from a passport, driver’s license, etc.; and
   5. A copy of that unique ID.

If the Reporting Company is formed on or after January 1, 2024, it must also report the following information for its Company Applicant(s) unless the Company Applicant has a FinCEN identifier:

1. Each Company’s Applicant’s TIN
2. The full legal name of each Company Applicant;
3. The date of birth of each Company Applicant;
4. The residential or business street addresses of each Company Applicant;
5. A unique identifying number and issuing jurisdiction from a passport, driver’s license, etc. for each Company Applicant;
6. A copy of that unique ID from each Company Applicant.

What is a FinCEN Identifier?

If a Beneficial Owner or Company Applicant anticipates forming more than one entity, or does not wish to provide their personal information directly to the Reporting Company, they may apply electronically for a FinCEN Identifier. The application requires the submission of the same personal information listed above, and the individual will immediately receive a unique FinCEN identifier after submission. The Beneficial Owner or Company Applicant can then provide their FinCEN Identifier to the Reporting Company in lieu of their personal information. A Reporting Company can also obtain a FinCEN identifier by checking a box on the reporting form when it submits the BOI Report. This would be helpful if the Reporting Company must file updated or corrected reports in the future. Individuals and Reporting Companies must be sure to keep their information current if any changes arise.

What Happens After the BOI Report is Filed?

It is very important for Reporting Companies to understand that once the BOI Report is submitted, they have an ongoing duty to ensure that the required information about the Reporting Company and its Beneficial Owners is accurate. If a Beneficial Owner has obtained a FinCEN identifier, it is the duty of the individual to keep their information up to date.

If there is any change to the reported information, an updated BOI Report must be submitted to FinCEN within 30 days after the relevant change occurred. If the Reporting Company or a Beneficial Owner discovers an inaccuracy in the BOI Report or information provided for a FinCEN identifier, such inaccuracies must be corrected within 30 days of the discovery of such inaccuracy. There will be no penalties associated with the filing of an inaccurate report so long as it is corrected within 90 days of filing. Failure to make updates or corrections within such timeframe can result in civil penalties of up to $500 for each day the violation continues, or criminal penalties including up to two years of imprisonment and fines of up to $10,000 for the parties involved.

Where Can I Find More Information?

If you would like more detailed information on the CTA, please refer to the following helpful resources:

• FinCEN’s Beneficial Ownership Information page
• FinCEN’s CTA Small Business Compliance Guide
• FinCEN’s Frequently Asked Questions page

This will undoubtedly create significant workloads and time pressures for some companies, so it is important to start thinking about how your company will comply with these reporting obligations. The following three-step approach may be helpful for business entities as they begin this process:

1. Determine if the CTA applies to your entity. Your attorney is a helpful resource in this process, as many of the exemptions involve multiple criteria.
2. If you determine that your business entity is covered by the CTA, and is required to submit a BOI Report, communicate with the Reporting Company’s Beneficial Owners and Company Applicants so that they know that they will be required to provide their personal information, either to the Reporting Company for the BOI Report, or directly by obtaining a FinCEN identifier.
3. After you have alerted relevant parties, make a decision as to how the Reporting Company will file the BOI Report. If you are comfortable maintaining personal information and navigating the complex filing process, you can always file the BOI Report on behalf of the Reporting Company yourself. However, there are many companies offering CTA filing services for flat fees; if you are unsure of where to start, your attorney can make recommendations based on their experiences.

If you have any questions about the CTA and its application to your business, please reach out to Sarah K. Brown

Article written collaboratively by Sarah K. Brown & Andrew J. Hogan