As corporate counsel, we strive to keep our clients updated regarding their compliance obligations. While the Corporate Transparency Act (“CTA”) was enacted in 2021, it has become a compliance issue for business owners in 2024 as that is when the reporting requirements begin to take effect. The number one question we receive from clients is, “Can I get out of this through an exemption?” If the answer is no, their next question is, “How do I comply with the CTA?”

This blog will answer these and other questions about the CTA, including its goals, required reporting information, and the current federal lawsuit questioning its constitutionality.

What is the Corporate Transparency Act?

On January 1, 2021, Congress enacted the CTA as part of the National Defense Authorization Act on a bipartisan basis. The stated goal of the CTA is to combat illicit activity, including, but not limited to, tax fraud, money laundering, and financing for terrorism, by capturing ownership information on specific U.S. businesses that operate in or access the U.S. market. Ostensibly, the CTA’s reporting requirements will make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.

Companies falling within the reporting requirements of the CTA (“Reporting Companies”) are required to submit a Beneficial Ownership Information (“BOI”) Report (“BOIR”) to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Beneficial ownership information is defined as identifying information, e.g., Personally Identifiable Information (“PII”), about the individuals who directly or indirectly own or control a company.

I heard the CTA was struck down as unconstitutional. Do I still have to comply?

On March 1, 2024, a federal district court in Alabama ruled that the CTA is unconstitutional because it exceeds the legislative powers held by Congress under the Constitution. FinCEN has filed an appeal and issued a press release stating that it will continue to require compliance with the CTA by all reporting companies except the specific plaintiffs in the case. [1]  We are continuing to monitor these developments. However, in the meantime, all reporting companies must follow FinCEN’s directive to comply with the CTA.

What Businesses Are Considered Reporting Companies?

At its simplest, Reporting Companies include U.S. entities registered to do business through a U.S. State or Indian tribal jurisdiction. Corporations and limited liability companies are specifically referenced, but the CTA also encompasses “any other entities.” Thus, limited partnerships, limited liability partnerships, and trusts fall under that umbrella without a specific exemption.

Nuances abound, including companies and trusts that qualify for an exemption but own subsidiaries that do not. These issues are beyond the scope of this blog, but our team is happy to meet with you to determine your specific obligations. FinCEN also offers flow charts in its Small Entity Compliance Guide to help business owners work through these questions.

Which Companies Are Exempt?

The CTA exempts twenty-three (23) types of entities from BOI reporting requirements. These entities include publicly traded companies meeting specified requirements, many nonprofits, and certain large operating companies. The complete list follows:

Each exemption requires specific criteria to be met; for example, to qualify for the Large Operating Company exemption, number twenty-one (21), the company must have (1) more than twenty (20) full-time employees in the United States; (2a) more than five million dollars ($5,000,000) in gross receipts or sales listed (not including gross receipts or sales from outside the United States) on their IRS form 1120, 1065 or other applicable form; (2b) have filed a Federal income tax or information return in the United States in the previous year reflecting this amount; and (3) have an operating presence at a physical office in the United States. This means an entity created in 2024 or 2025 will likely be unable to be exempt as a Large Operating Company as it will not have the required tax filing.

Again, this blog is intended to provide a high-level overview of the CTA, and we thus can’t provide the specific criteria for each of the 23 exemptions. Please feel free to contact us for a more detailed analysis of any potential exemption. You may also want to review FinCEN’s Small Entity Compliance Guide for exemption checklists.

Who is Considered a Beneficial Owner of a Company?

Any individual who, directly or indirectly, (a) exercises substantial control over a Reporting Company or (b) owns or controls at least 25% of the ownership interests of a Reporting Company is a beneficial owner.

FinCEN lists four (4) ways an individual can exercise substantial control over a Reporting Company. If an individual falls into any of these categories, that individual is exercising substantial control.

1. The individual serves as a senior officer, e.g., the company’s president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function;
2. The individual has the authority to appoint or remove certain officers or a majority of directors (or similar body) of the Reporting Company;
3. The individual directs, determines, or has substantial influence over important decisions, including, but not limited to, a Reporting Company’s business, finances, and structure; or
4. Any other form of substantial control.

An ownership interest is an arrangement that establishes ownership rights in the Reporting Company. Examples of ownership interests include:

1. Equity, stock, or voting rights;
2. Capital or profits interest;
3. Convertible instruments (i.e., instruments that convert into equity, stock, voting rights, or profit interests);
4. Option or privilege (i.e., puts, calls, straddles, and other forms of buying or selling equity, stock voting rights, or profit interests); and
5. Any other instrument, contract, arrangement, understanding, relationship, or mechanism establishing ownership.

Certain individuals cannot be beneficial owners, including, but not limited to, minor children (however, the minor’s parent or guardian must report as a beneficial owner), future inheritors, and creditors.

What Information Must Be Provided?

The Reporting Company’s;

1. Full legal name;
2. Any trade names, “doing business as” (d/b/a), or “trading as” (t/a) names (even if these are not registered);
3. The current street address of its principal place of business if that address is in the United States, or, for reporting companies whose principal place of business is outside the United States, the current address from which the company conducts business in the United States; and
4. Its jurisdiction of formation or registration; and
5. Its Taxpayer Identification Number (or, if a foreign Reporting Company has yet to be issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of the jurisdiction).

Each beneficial owner’s:

1. Full legal name;
2. Date of Birth;
3. Current residential street address;
4. An identifying number from an acceptable identification document:

1. A non-expired U.S. driver’s license (including any driver’s license issued by a commonwealth, territory, or possession of the United States);
2. A non-expired identification document issued by a U.S. state or local government or Indian Tribe;
3. A non-expired passport issued by the U.S. government; or
4. A non-expired passport issued by a foreign government (only when an individual does not have one of the other three forms of identification listed above).

1. The Reporting Company will also have to report an image of the identification document used to obtain the identifying number in item 4.

If applicable[2], each company applicant’s:

1. Full legal name;
2. Date of Birth;
3. Current residential street address;

1. If the company applicant works in corporate formation—for example, as an attorney or corporate formation agent—then the Reporting Company must report the company applicant’s business address. Otherwise, the Reporting Company must report the company applicant’s residential address.

1. An identifying number from an acceptable identification document:

1. A non-expired U.S. driver’s license (including any driver’s license issued by a commonwealth, territory, or possession of the United States);
2. A non-expired identification document issued by a U.S. state or local government or Indian Tribe;
3. A non-expired passport issued by the U.S. government; or
4. A non-expired passport issued by a foreign government (only when an individual does not have one of the other three forms of identification listed above).

1. The Reporting Company will also have to report an image of the identification document used to obtain the identifying number in item 4.

How Do I Report?

All reporting is done through FinCEN’s BOI E-Filing website at https://boiefiling.fincen.gov. There is no filing fee, and all the required forms can be accessed by clicking the link above and selecting “File BOIR.”

When Do I Report?

Starting January 1, 2024, Reporting Companies have a limited time frame to file a BOIR to FINCEN. This time frame is determined by when the Reporting Company was established:

1. Companies established before January 1, 2024, have until January 1, 2025, to file.
2. Companies established between January 1, 2024, and January 1, 2025, have ninety (90) days from either (a) the actual notice of formation or (b) public announcement, whichever comes first to file.
3. Companies established on or after January 1, 2025, will have thirty (30) days to either (a) the actual notice of formation or (b) public announcement, whichever comes first to file.

The good news is that the CTA does not require annual reporting. A Reporting Company only needs to file an initial BOIR and, as applicable, updated or corrected BOIRs.

Do I Have to Report Updates and Changes?

If there is any change to the required information about (a) your company or (b) its beneficial owners in a BOIR that your company filed, your company must file an updated report no later than thirty (30) days after the date of that change. A Reporting Company is not required to file an updated report for changes to previously reported information about a company applicant.

Additionally, if a BOIR is inaccurate, your company must correct the report no later than thirty (30) days after the date your company (a) became aware of the inaccuracy or (b) had reason to know of it. This includes any inaccuracy in the required information provided about your company’s company applicants and your company and its beneficial owners.

What Are the Penalties for Failing to Report?

Under the CTA, if a person willfully violates the BOI reporting requirements, they may be subject to the following:

1. Civil penalties of up to five hundred dollars ($500.00) for each day of the violation;
2. Criminal penalties of up to two (2) years imprisonment and a fine of up to ten thousand dollars ($10,000.00).

Violations under the CTA include:

1. Willfully failing to file a beneficial ownership information report;
2. Willfully filing false beneficial ownership information; or
3. Willfully failing to correct or update previously reported beneficial ownership information.

Both individuals and corporations can be held liable for willful violations of the CTA and for failing to report complete or updated beneficial ownership information. Such individuals include, but are not limited to, individuals who attempt to or actually file false information with FinCEN; individuals who willfully provide the filer with false information; and individuals who cause a failure in reporting or are a senior office at the company at the time of the failure.

Further, an enforcement action can be brought against an individual who willfully causes a Reporting Company’s failure to submit complete or updated ownership information by willfully failing to provide the Reporting Company with the required information.

Who Can Access Beneficial Ownership Information?

FinCEN has said they will only permit Federal, State, local, and Tribal officials, as well as certain foreign officials who submit a request through a U.S. Federal government agency, to obtain beneficial ownership information for certain authorized activities relating to national security, intelligence, and law enforcement. Financial institutions allegedly will have access to beneficial ownership information in certain circumstances, but only with the consent of the reporting company. Those financial institutions’ regulators will also have access to beneficial ownership information.

FinCEN has stated that reported information will be stored in a secure, non-public database using rigorous security protocols. It will work closely with those authorized to access such information to ensure they understand and handle the information appropriately. Whether FinCEN will be able to deliver on these promises remains to be seen.

Where Can I Get More Information?

If you have more questions concerning the CTA or are looking for help filing or reviewing your BOIR, please contact Penwell Law at info@penwelllaw.com. Additional information and resources can be found on FinCEN’s BOI Homepage at https://www.fincen.gov/boi.

[1] National Small Business United et al. v. Yellen et al., No. 5:22-cv-01448, Dkt. 52 (N.D. Ala. 2024); https://fincen.gov/news/news-releases/updated-notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448

[2] Domestic companies and authorized foreign companies formed on or after January 1, 2024, have additional reporting requirements. Specifically, the person(s) who set up the company (“company applicants”) must be identified. A company applicant is (a) the person who directly files the document that creates or registers the Reporting Company, and (b) if more than one person is involved with the filing of the document, the person who is primarily responsible for directing or controlling the filing. This definition would include both the staff member who files the document and the attorney who is primarily responsible for directing or controlling that filing. Each Reporting Company can have no more than two (2) company applicants, so if more than two (2) individuals could be classified as a company applicant, careful thought will be required on which meet this definition.

Sources:

• Beneficial Ownership Information – Frequently Asked Questions. https://www.fincen.gov/boi-faqs
• What is the Corporate Transparency Act? CTA basics. https://www.wolterskluwer.com/en/expert-insights/what-is-the-corporate-transparency-act-cta-basics
• What every small business needs to know about the Corporate Transparency Act and Beneficial Ownership Information Reporting. https://www.wolterskluwer.com/en/expert-insights/small-businesses-and-the-corporate-transparency-act
• Who is a beneficial owner under the Corporate Transparency Act? https://www.wolterskluwer.com/en/expert-insights/who-is-a-beneficial-owner-under-the-corporate-transparency-act