Executive Summary:

Business owners must report ‘beneficial owner’ details to the Financial Crimes Enforcement Network (FinCEN). A ‘beneficial owner’ is someone with significant control or owns at least 25% of the company. New companies, starting in 2024, must report within 90 days of formation. Existing companies have until January 1, 2025. Not complying can lead to daily fines, criminal fines up to $10,000, and possibly two years in prison. It’s crucial to assess your company’s status and prepare accordingly. For more details, check FinCEN’s FAQs.

Link to the BOI E-Filing System

The Corporate Transparency Act (“CTA”) was enacted January 1, 2021, as part of the National Defense Authorization Act, representing the most significant reformation of the Bank Secrecy Act and related anti–money laundering rules since the U.S. Patriot Act. The CTA is intended to address and guard against money laundering, terrorism financing, and other forms of illegal financing by mandating certain entities (primarily small and medium size businesses) to report “beneficial owner” information to the Financial Crimes Enforcement Network (“FinCEN”).

The CTA authorizes FinCEN, a bureau of the U.S. Treasury Department, to collect, protect, and disclose this information to authorized governmental authorities and to financial institutions in certain circumstances.

Our firm is sending you this communication to provide you with some general information regarding the new reporting rules as well as initial steps you should take to address the implications of the CTA to your organization.

What entities are subject to the new CTA reporting requirements?

Entities required to comply with the CTA (“Reporting Companies”) include corporations, limited liability companies (LLCs), and other types of companies that are created by a filing with a Secretary of State (“SOS”) or equivalent official. The CTA also applies to non-U.S. companies that register to do business in the U.S. through a filing with a SOS or equivalent official. Since the definition of a domestic entity under the CTA is extremely broad, additional entity types could be subject to CTA reporting requirements based on individual state law formation practices.

There are several exceptions to who is required to file under the CTA. Many exceptions are entities already regulated by federal or state governments and, as such, already disclose their beneficial ownership information to governmental authorities.

Another notable exception is for “large operating companies,” defined as companies that meet all of the following requirements:

• Employ at least 20 full-time employees in the U.S.
• Gross revenue (or sales) over $5 million on the prior year’s tax return
• An operating presence at a physical office in the U.S.

Who is considered a “beneficial owner” of a Reporting Company?

A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” or owns or controls at least 25% of the company’s ownership interests.

An individual exercises “substantial control” if the individual (i) serves as a senior officer of the company; (ii) has authority over the appointment or removal of any senior officer or a majority of the board; or (iii) directs, determines, or has substantial influence over important decisions made by the Reporting Company. Thus, senior officers and other individuals with control over the company are beneficial owners under the CTA, even if they have no equity interest in the company.

In addition, individuals may exercise control directly or indirectly through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control.

CTA regulations provide a much more expansive definition of “substantial control” than in the traditional tax sense, so many companies may need to seek legal guidance to determine who are deemed beneficial owners within their organization ultimately.

Phase-in of reporting requirements

As currently promulgated, the CTA’s reporting requirements will be phased-in in two stages:

• All new Reporting Companies — those formed (or, in the case of non-U.S. companies, registered) on or after January 1, 2024 — must report required information within 90 1 days after their formation or registration.
• All existing Reporting Companies — those formed or registered before January 1, 2024 must report required information no later than January 1, 2025.

How to prepare for the CTA

With the CTA introducing a new and expansive reporting regime, now is the time to assess the new rules’ implications on your organization. Some questions and comments for your company to consider now, although not meant to be all-inclusive, include:

• Is your company subject to the CTA or do you qualify for any of the exemptions?
• If your company is not exempt, how should you calculate percentages of “ownership interests” to determine whether any owners meet the 25%-ownership threshold? In many companies with simple capital structures, the answer will be obvious. It may be much less obvious, however, for companies with complicated capital structures (given the expansive definition of “ownership interest”), or companies in which some ownership interests are held indirectly for example, through upper-tier investment entities, holding companies, or trusts.
• How do you assess and determine each person who exercises “substantial control” over the company? There may well be multiple people who qualify, given the expansiveness (and vagueness) of the “substantial control” definition.
• What new processes and procedures should the company put in place to monitor future changes in its beneficial owners and reportable changes on existing beneficial owners that will require timely updated reports to FinCEN? Note that the types of information that must be provided to FinCEN (and kept current) for these beneficial owners include the owner’s legal name, residential address, date of birth, and unique identifier number from a non-expired passport, driver’s license, or state identification card (including an image of the uniqueidentifier documentation). A word of caution, this is going to be a trap for Reporting Companies, as you will need to rely on beneficial owners to timely update you on reportable changes to their information (e.g., ownership changes, moves, marriages, divorces, etc.). As a result, a company’s operative documents may need to be revised to include provisions related to the CTA such as representations, covenants, indemnifications, and consent clauses. For example, the operating agreement may require:
  • A representation by each shareholder, member or partner, as applicable, that it will be in compliance with or exempt from the CTA;
  • A covenant by each shareholder, member or partner, as applicable, requiring continued compliance with and disclosure under the CTA or to provide evidence of exemption from its requirements;
  • An indemnification by each shareholder, member or partner, as applicable, to the company and its other shareholders, members or partners, as applicable, for its failure to comply with the CTA or for providing false information; and
  • A consent by each disclosing party for the company to disclose identifying information to FinCEN, to the extent required by law.

Take immediate action now!

As the CTA is not a part of the tax code, the assessment and application of many of the requirements outlined in the regulations, including but not limited to determining beneficial ownership interest, may necessitate legal guidance and direction. As such, since we are not attorneys, our firm cannot provide you with any legal determination as to whether an exemption applies to the nature of your entity or whether legal relationships constitute beneficial ownership.

If you have any questions regarding your organization’s compliance with the CTA, please contact us as soon as possible, and we can help you evaluate your specific situation and assess what, if any, CTA-related services we may be able to provide.

We are currently monitoring potential delays in implementing this new regulation and determining if we can assist you with these filings.  The filing system is expected to open on January 1, 2024 and we will update details here once more information is available.

Note that penalties for willfully violating the CTA’s reporting requirements include (1) civil penalties of up to $500 per day that a violation is not remedied, (2) a criminal fine of up to $10,000, and/or (3) imprisonment of up to two years.

For additional information regarding the beneficial ownership reporting requirements under the CTA, refer to FinCEN’s Frequently Asked Questions document at https://www.fincen.gov/boi-faqs.

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