Background and Scope
The Corporate Transparency Act (“CTA” or the “Act”), enacted on January 1, 2021, and set to take effect on January 1, 2024, is federal legislation crafted to bolster law enforcement efforts against money laundering, tax fraud, terrorism financing, and other illicit activities carried out through anonymous shell companies in the U.S. The CTA aims to enhance financial transparency by requiring certain reporting companies to disclose personal information about their beneficial owners and applicants to the Financial Crimes Enforcement Network (“FinCEN”), a federal department dedicated to shielding the U.S. financial system against illicit activities.
The types of companies required to file these beneficial ownership reports will include most small corporations, LLCs, and limited partnerships – even those formed solely for tax or estate planning purposes. The beneficial ownership information of these reporting companies will be stored in a dedicated database within FinCEN, accessible only to law enforcement agencies and financial institutions for the purposes of detecting and preventing financial misconduct in the U.S.
Despite its broad scope, the CTA provides several exemptions. Notably, “large operating companies” with over 20 employees and gross receipts or sales exceeding $5 million, certain SEC-registered investment companies, and venture capital fund advisers are exempted from the CTA’s reporting requirements. Entities that are wholly owned and operated by another CTA-exempt entity and certain inactive entities may also be exempt from the reporting requirements.
Reporting Obligations Under The CTA
Beginning on January 1, 2024, newly formed entities and foreign entities registering to do business in the U.S. that do not meet an exemption under the CTA must file their first Beneficial Owners Information (“BOI”) report. For entities formed or registered on or after January 1, 2024, they are required to file their initial BOI report within 90 calendar days of formation or registration. However, it's important to note that entities formed or registered on or after January 1, 2025, will have a shorter timeframe, being required to file their initial BOI report within 30 calendar days of formation or registration. The formation date is defined as the date on which the Secretary of State first made actual or public notice that the company was formed. This date is typically stamped on the company's formation document, such as a Certificate of Formation or a Certificate of Incorporation. It can also be found online on the Secretary of State’s website.
Entities that were in existence or registered to do business in the U.S. prior to January 1, 2024, will have until January 1, 2025, to file their initial BOI report, unless an exemption is available. Additionally, any changes to the information provided in the initial BOI report must be reported to FinCEN within 30 calendar days of the change.
Companies that are exempt from the CTA are not required to take any action.
Noncompliance with the CTA, including mistakes, omissions, or late reporting, may result in civil fines of up to $500 per day for ongoing violations, in certain cases, including fines up to $10,000 and imprisonment for up to two years. Both the individuals submitting the information and senior officers at the time of the violation could be held responsible.
Determining An Entity's Reporting Status
1. Identify Entity Type:
Determining the applicability of the CTA begins by identifying the types of entities that are subject to the CTA’s reporting requirements – these include corporations, limited liability companies (LLCs), limited liability partnerships (LLPs), limited partnerships (LPs), business trusts, and other entities formed through a filing with a secretary of state or a similar office, as well as foreign entities registered to do business in the United States. Notably, sole proprietorships, some general partnerships, foreign entities not registered to do business in the U.S., unincorporated associations, and wealth planning trusts are excluded from the list of reporting companies.
2. Review Available Exemptions:
The next step in determining applicability of the CTA involves reviewing the list of exemptions to determine whether the entity is exempt from the reporting requirements. The list of exemptions include:
3. Identify Beneficial Owners and Applicants:
Entities that are not exempt from the CTA must then identify their beneficial owners and applicants. “Beneficial owners” are defined as individuals who either own or control at least 25% of the ownership interests of the entity or exercise substantial control over the entity. Substantial control is not explicitly defined in the CTA. Generally, it refers to senior officer positions, such as the CEO, CFO, general counsel, and other comparable roles. It also includes (i) individuals with the authority to appoint or remove key officers or a majority of the board; (ii) individuals with the capacity to influence key decisions; (iii) individuals who steer vital business, financial, or structural decisions; and (iv) any other significant form of substantial control, even in unique ways or flexible corporate structures not explicitly mentioned.
“Applicant” is defined under the CTA as an individual who either directly files the documents required to form or register the reporting company or who is principally responsible for directing or controlling such filings.
4. Information Required to Be Disclosed:
Ongoing Reporting and Compliance
The CTA not only mandates the initial reporting of beneficial ownership information but also imposes continuing obligations on reporting companies to maintain the accuracy of their submissions. Any changes to the reported details must be captured in an updated report filed within 30 calendar days of the change. It is important to note that modifications regarding company applicants are not subject to this update requirement.
Changes that trigger the need for an updated report could include, but are not limited to, alterations in company details such as a new DBA name, changes in beneficial ownership like a new CEO or shifts in ownership percentages, and updates to a beneficial owner’s personal information. In particular, if a beneficial owner receives a new identification document or if there are changes due to a beneficial owner's death, these must be reported accordingly with supporting documentation.
Furthermore, should any inaccuracies be identified in a previously filed BOI report, a corrected report must be filed no later than 30 calendar days after the discovery of such inaccuracies. This correction must address all information related to the company, its beneficial owners, and company applicants. Importantly, if the corrections are made voluntarily within 90 calendar days of the original report's deadline, the CTA provides a safe harbor from penalties for these corrections.
Reporting entities are required to file both updated and corrected reports through FinCEN’s secure electronic filing system. Special circumstances, such as a beneficial owner who was a minor reaching the age of majority, or a company becoming exempt from reporting requirements after having filed a report, must also be reflected in an updated report to accurately capture these new circumstances.
Navigating the BOI Reporting Process
Starting January 1, 2024, the FinCEN will open its portal for filing BOI reports, as required by the CTA. If your entity was formed or registered in the U.S. before this date, you need to file your initial BOI report by January 1, 2025. FinCEN has also released a Small Entity Compliance Guide to help businesses understand these new reporting rules, it can be found at: Small Entity Compliance Guide.
With the CTA's effective date fast approaching, businesses should prioritize understanding the scope of the CTA’s applicability and their potential reporting obligations, identifying their beneficial owners and applicants, compiling the information required to be disclosed in the BOI reports, and ensuring that processes are in place for timely BOI reporting and updates.
Our firm is tracking the latest developments related to the CTA, and we are available to assist businesses of all sizes in determining their reporting status and with their ongoing reporting obligations.
UPDATE (12/11/2024):
On December 3, 2024, a federal judge in the Eastern District of Texas granted a preliminary nation-wide injunction that enjoins enforcement of the CTA or the imposition of penalties for violations of the CTA pending final judgment in that lawsuit. The U.S. Department of Justice has appealed from this injunction. We expect that in connection with the appeal, a stay of the injunction will be sought. Once requested, the request for a stay should be decided quickly. In response to the injunction, FinCEN has released the following statement: “in light of the injunction, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.” This is a developing situation. We will provide further updates when more information becomes available.
If you have any questions, please contact:
Robel Tsegu
rtsegu@hallettperrin.com
214.922.4188
