Corporate Transparency Act – Substantial New Reporting Requirements Ahead for Many Business Entities

Beginning in 2024, many entities will face new beneficial owner reporting requirements as a result of the Corporate Transparency Act (“CTA”).  The CTA can apply to both existing entities and newly formed entities.  As a result, it is important for existing privately held entities to prepare for compliance with these new requirements.

In 2020, Congress passed the Anti-Money Laundering Act of 2020, which included the CTA, with the aim of combatting money laundering, tax fraud and other corrupt activities by using corporate structures to hide the perpetrators’ identities.  The U.S. Department of Treasury’s Federal Crimes Enforcement Network (“FINCEN”) issued final rules in September 2022 regarding the beneficial ownership information reporting requirements (“BOI”).

Reporting Companies 

The BOI requirements apply to “reporting companies” (both domestic and foreign) unless an exemption otherwise applies.   A domestic reporting company is a corporation, limited liability company, or any other entity created by filing a document with the secretary of state (or similar office) under law of state or of an Indian tribe.  A foreign reporting company is a corporation, limited liability company or other entity formed under the laws of a foreign country and that is registered to do business by filing a document with a secretary of state (or similar office) or an Indian tribe.  Consequently, entities that are generally not formed by public filings, such as general partnerships, sole proprietorships, and trusts, should be excluded from the BOI requirements.  

Exemptions

The final rules identify twenty-three (23) types of entities that are exempted from the definition of a reporting company.  Generally speaking, many of these entities are already heavily regulated so presumably additional reporting requirements are not necessary. These exempt entities include, but are not limited to, the following:

1. SEC reporting issuers;
2. Tax-exempt entities;
3. Banks;
4. Credit Unions;
5. Broker-Dealers;
6. Insurance companies;
7. Accounting firms; and
8. Public utilities

Additionally, “large operating companies” are exempted from the BOI requirements.  This exemption will be very important for many entities.  

Large Operating Companies

The requirements to be considered a large operating company are as follows:

1. Employs more than 20 full-time employees in the U.S.;
2. Operates at a physical presence in the U.S.; and
3. For the previous year filed a U.S. tax return showing more than $5 million in gross receipts, excluding income from sources outside the U.S.

For purposes of the physical presence test, the entity must regularly conduct business at a physical location in U.S. that it owns or leases and that is distinct from any other unaffiliated entity.  As a result, sharing space with other unaffiliated entities will not satisfy the exemption.

Initial Reporting Deadlines

For domestic reporting companies created on or after January 1, 2024, the BOI report must be filed within thirty (30) days after formation. For foreign reporting companies that newly qualify on or after January 1, 2024, the BOI report must be filed within thirty (30) days after it becomes a foreign reporting company.

For domestic reporting companies in existence prior to January 1, 2024, the BOI report must be filed by January 1, 2025. For foreign reporting companies that were reporting companies prior to January 1, 2024, the BOI report must be filed by January 1, 2025.

Required information

Reporting companies are required to directly file BOI reports with FinCEN reporting basic information about itself, its beneficial owners, and company applicants.

The following information must be provided for a reporting company:

1. Complete legal name and any d/b/a name;

2. Current street address for principal place of business if in U.S. or the primary place of business in the U.S. if principal place of business is outside the country;
3. Jurisdiction of formation- either state, tribal or foreign, and jurisdiction of first registration for foreign entity; and
4. Taxpayer Identification Number

The following information must be provided for each beneficial owner of the reporting company and the company applicant:

1. Legal name;
2. Date of birth;
3. Current address;
4. A unique identifying number from one of the following documents: (i) a passport; (ii) identification issued to the individual by a State, local government or an Indian tribe; (iii) a driver’s license; or (iv) a foreign passport if individual doesn’t possess (i) through (iii); and
5. Image of document in #4 above 

Company Applicant

The company applicant is the person that files the document creating or registering the reporting company, or the individual primarily responsible for directing the filing or registration of such document.

Beneficial Owner

A beneficial owner is someone that, “directly or indirectly, either (i) exercises substantial control over a reporting company or (ii) owns or controls at least twenty-five percent (25%) of the ownership interests in the reporting company.” Each beneficial owner must be identified, meaning a reporting company may have more than one beneficial owner.  

Substantial control is determined based on facts and circumstances. Examples in the final rules include the following:

1. Serving as a senior officer of the reporting company;
2. Having authority over the appointment or removal of a senior officer or majority of the board of directors;
3. Having substantial influence over important matters of the reporting company (examples include amending governance documents, selecting or terminating business lines or ventures; or dissolving or merging the reporting company); or
4. Having any other form of substantial control over the reporting company.

Reporting companies and their counsel will need to examine governing documents and business organization in general to determine the identity of any beneficial owners.  The fourth example of “substantial control” is clearly designed to capture controlling activities that are not within the literal language of the other three examples.  Additionally, since beneficial ownership may be indirect, reporting companies will have to analyze business entities that own interests in the reporting company.

Updated Information

Reporting companies are required to update previously filed information within thirty (30) days after a change occurs, including a change in identity of a beneficial owner or a change in particular requested information about a beneficial owner.  Reporting companies are not required to file updated reports about changes in information of the company applicant.

Conclusion

Entities should begin determining if they will be required to register as a reporting company and comply with the BOI requirements.  If the answer is yes, these entities should begin assembling the information and documents necessary to file by December 31, 2024.  For entities that are owned by other entities, the determination of the identity of the beneficial owners could require an analysis of the governing documents of multiple entities.  For entities formed in 2024, it is important that the information required to be registered must be considered as a necessary part of forming an entity.