Starting in 2024, the Corporate Transparency Act (CTA) will require many privately-owned companies to disclose to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) certain basic information about their Beneficial Owners, or Beneficial Ownership Information (BOI). The CTA establishes uniform reporting requirements designed to improve transparency for national agencies who are working to prevent and detect money laundering and terrorist financing.
Importantly, the CTA requires small private companies to file a form for regulatory compliance rather than large companies, for which the majority of regulatory compliance is applicable. In this case, money laundering and terrorist financing activities more often target small businesses. To ensure plenty of time to develop processes for compliance and avoidance of potential civil and criminal penalties for failure to comply, small private companies impacted by these new regulations should begin preparing now.
Who are the “Reporting Companies” that are required to file a report to comply with the CTA?
Reporting Companies Definition
Under the new Corporate Transparency Act, Reporting Companies are corporations, limited liability companies (LLCs), and similar entities that are formed under:
– U.S. law by the filing of a document with a Secretary of State (SoS) or equivalent official, or
– the law of a foreign country but registered to do business in the U.S. via the filing of a document with a SoS.
Exemptions
Large operating companies are exempt from this compliance requirement. They are defined as any company meeting all of these requirements:
– Employs more than 20 full-time employees in the U.S.,
– Operates a physical office in the U.S., and
– Filed a U.S. federal income tax return in the prior year with more than $5 million in gross receipts or sales from U.S. sources.
Other categories of exempt companies include publicly-traded companies, many companies in highly regulated industries (e.g., financial institutions, investment companies), nonprofit organizations, and certain inactive entities formed prior to 2020.
How is Beneficial Ownership defined, and for which individuals are reporting companies required to provide BOI?
Beneficial Ownership includes:
– major owners, defined as any individual owning 25% or more of the reporting company’s ownership interests. Ownership interests are applied broadly and include–but are not limited to–equity (e.g., stock, capital interests, etc.), instruments convertible into equity, and rights to sell or purchase equity (e.g., options).
– controlling persons, who exercise “substantial control” directly or indirectly over the reporting company through various activities, regardless of any ownership interests. Any one of the following criteria meet the threshold of substantial control: serving as a senior officer (e.g., C-level executive, general counsel, etc.), exercising authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body), or directing, determining, or wielding substantial influence over important decisions.
In addition to providing BOI for Beneficial Owners, new Reporting Companies will be required to also provide BOI for all Company Applicants, defined as individuals filing – or primarily responsible for filing – the SOS document.
What is included in the BOI that must be reported for each Beneficial Owner under the Corporate Transparency Act?
Reporting Companies must provide the following details, collectively the BOI, for each Beneficial Owner:
– full legal name,
– date of birth,
– complete and current residential address,
– unique identifying number and the issuing jurisdiction from an acceptable identification document (e.g., passport, driver’s license) and
– an image of the document from which the unique identifier was obtained.
Who will have access to the BOI provided to comply with the CTA’s requirements?
FinCEN will maintain all BOI securely in a restricted-access database and subject to safeguards and controls. Database access will be available only to authorized government personnel for specific purposes related to combating money laundering and terrorist financing. It will not be made available to the general public or disclosed in response to Freedom of Information Act requests.
Access the Small Entity Compliance Guide published by the U.S. Department of the Treasury’s Financial Crimes Network (FinCEN).
What is the deadline for compliance with the Corporate Transparency Act?
Reporting requirements are being phased-in, with the Reporting Company’s compliance deadline dependent on whether it was formed prior to January 1, 2024.
| 2024 INITIAL REPORT FILING | |
| Existing Reporting Companies created or registered before January 1, 2024 | Have until January 1, 2025 – one full year – to file their initial reports to comply. |
| Newly-Formed Reporting Companies created or registered after January 1, 2024 | Have 30 calendar days to file their initial reports to comply. |
| 2025 AND BEYOND REPORT FILING | |
| All Reporting Companies | Required to provide any changes in previously reported information–new or changing Beneficial Owners and updated BOI–within 30 calendar days, regardless of when the Reporting Company received notification. |
Penalties
Willful violation of the Corporate Transparency Act’s reporting requirements can result in:
– a $500 daily civil penalty until violation is remedied,
– up to a $10,000 criminal fine, and/or
– up to two years of imprisonment.
FinCEN’s Next Steps
FinCEN is currently developing the regulatory framework for CTA implementation and has proposed a rule regarding access to the Beneficial Ownership Secure System (BOSS) database. The agency also published in the Federal Register for public comment the BOI reporting forms required for compliance. Finally, FinCen has communicated it will post detailed FAQs and anticipates developing a Small Entity Compliance Guide.
Architecting Your Next Steps for Reporting Companies
January 1, 2024 and January 1, 2025 certainly seem as though they are in the quite distant future, and for some Reporting Companies, particularly those with sole ownership or simple capital structures, compliance will likely be fairly straightforward. However, for Reporting Companies with complex capital structures or vague methods of determining substantial control, it may require several months to develop the processes and procedures necessary to make those determinations, as well as maintain up-to-date BOI for all Beneficial Owners. As you begin to consider some of the potential challenges ahead, we’ve listed several questions to help you begin the evaluation and implementation process required for your specific company.
– What formulas should I utilize to determine Beneficial Owners as defined by the 25% ownership threshold, taking into account any indirect ownership interests? And how should the company define its parameters – within the confines of compliance with the CTA’s guidance – for “substantial control” over the company?
– Should any legal agreements be created or updated based on these decisions?
– Who will prepare the report, and who is primarily responsible for filing it?
– Is your company a newly-formed Reporting Company, requiring the providing of BOI for these Company Applicants?
– How will the company monitor any changes to BOI across all Beneficial Owners to ensure updates are reported to FinCEN within 30 calendar days?
– Will the same individual be responsible for submitting any BOI updates within the required timeframe?
– Are there contracts (e.g., partnership agreements, employment agreements) or documents (e.g., an employee handbook) that should be updated with a requirement that Beneficial Owners notify the Company Applicant of any and all reportable BOI changed within the 30 day requirement (or less)?
– If you are planning or considering a potential future business sale, how will you ensure that updating the BOI for the company is included in the regulatory compliance information provided to the new owners?
Let’s Build Your Compliance with the Corporate Transparency Act Requirements
Whether these requirements feel a bit overwhelming and you’d like to discuss strategy, or time constraints simply require third-party assistance to meet the compliance deadline, our MSN Attorneys are here to provide assistance. Let’s meet and talk through your compliance program.