Corporate Transparency Act: What You Need to Know

12.15.2023

Background

The Corporate Transparency Act (the CTA) is a new federal law that imposes significant reporting requirements on most U.S. companies, including corporations, LLCs and limited partnerships.  Hirschler has been closely monitoring the CTA, and considering how best to advise our clients with respect to its unprecedented reporting requirements.  While we anticipated receiving more clarity from the U.S. government on several CTA-related issues and its implementation, given the imminent effectiveness of the CTA, we are issuing this Alert to enable companies to begin preparations for this sweeping new information-gathering initiative.

This alert (1) provides a basic overview of the CTA and its implementing regulations as they exist today and (2) raises various issues, questions, and nuances regarding the real world application of the CTA in real estate, corporate, tax, private client, finance, and other transactional practices.

Overview of CTA

On January 1, 2024, the Corporate Transparency Act (CTA) will go into effect in the U.S., creating a new reporting system in which most small and privately held companies will now be required to report to the U.S. government information about the individuals who ultimately own and control those companies.  These reports – called “beneficial owner information” (BOI) reports – will need to be filed online with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), where they will be compiled into a new cloud-based database called the Beneficial Ownership Secured System (BOSS).  Congress passed the CTA in 2021 to combat the use of anonymous shell companies by bad actors for illegal activities such as money laundering, terrorist financing and other illicit activity.  However, the impact on small and privately held businesses will be wide-reaching, and it is anticipated that millions of domestic and foreign companies in the U.S. will need to comply with this new reporting requirement.

Who is required to file a Beneficial Owner Information (BOI) report?

Under the CTA, every “reporting company” must file a BOI report.   A “reporting company” includes any corporation, limited liability company (LLC) or other entity, such as a limited partnership (LP), created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.  The term also includes non-U.S. entities that are registered to do business in any state or tribal jurisdiction by the filing of a document with that jurisdiction.

Are there exemptions from reporting?

Yes, the CTA provides 23 exemptions from the definition of “reporting company”, but those generally will only apply to businesses which are already highly regulated, such as publicly traded companies, regulated insurance companies, registered investment companies, banks and tax-exempt entities.  There will also be an exemption for any “large operating company”, which is defined as an entity which (i) operates in a physical office in the United States, (ii) employs more than 20 employees on a full-time basis in the United States, and (iii) filed a federal income tax return for the previous year reflecting more than $5,000,000 in gross receipts or sales.   However, given the actual language used in the CTA regulations, there may be timing issues and other highly technical considerations which would cause a company not to qualify for one of these exemptions.  Careful review and application of the CTA regulations, in consultation with legal counsel, will need to be undertaken to ensure that an exemption applies.  Most small and privately held companies will likely be required to file a BOI report.

When does the initial BOI report need to be filed?

• Reporting companies that were created or registered before January 1, 2024 will have until January 1, 2025 to file their initial BOI report with FinCEN.
• New companies created or registered during calendar year 2024 will have 90 days from the date of formation or registration to file their BOI report with FinCEN.
• New companies created or registered on or after January 1, 2025 will have only 30 days from the date of formation or registration to file their BOI report with FinCEN.

What will need to be included in the BOI report?

• For the reporting company itself:
  • Full legal name of the company
  • Any trade name or “doing business as” (dba) name
  • Current street address of the principal place of business
  • Jurisdiction of formation
  • Employer Identification Number (EIN) of the reporting company

• For every “beneficial owner” of the reporting company:
  • Full legal name of the individual
  • Date of birth of the individual
  • Current residential address of the individual
  • A copy of a non-expired U.S. passport or driver’s license (or similar identification document) or non-U.S. passport if the individual does not have any of the foregoing

Who is considered a “beneficial owner” of a reporting company?

A “beneficial owner” is any individual who:

• Owns or controls at least 25% of the ownership interests in the company; or
• Directly or indirectly exercises “substantial control” over the company

The CTA defines these concepts extremely broadly.   For example, “ownership interests” includes equity, stock, voting rights, capital or profit interests, convertible instruments, options, and any other instrument, contract, or other mechanism used to establish ownership.  “Substantial control” is defined even more broadly, and includes: (1) all “senior officers” (e.g., President, CEO, CFO, COO, General Counsel); (2) all individuals with authority to appoint or remove such officers or a majority of the company’s board or similar governing body; (3) all individuals with “substantial influence” over important decisions made by the reporting company, including corporate transactions, major expenditures, equity issuances, executive compensation, or entry into or termination of material contracts; and (4) any other individual with “any other form of substantial control” over the company.

As a result, a reporting company may have multiple “beneficial owners”, beyond just the actual equity owners of the company.  Careful review of the facts and circumstances applicable to each reporting company will be necessary to identify each beneficial owner of the company whose information (i.e., name, DOB, address, photo ID, etc.) will need to be included in the company’s BOI report.

Does information about who created the company get reported?

Yes, but only for new companies created or registered on or after January 1, 2024.  For those companies, the BOI report will also need to include the same information that is provided for beneficial owners of the reporting company (i.e., name, DOB, address, photo ID, etc.) for up to no more than two “company applicants”.  A “company applicant” is: (1) the individual who directly files the document that creates or registers the company (e.g., a paralegal at a law firm or an office manager of a business that directly forms an entity); and (2) if one or more persons are involved in the filing, the individual who is primarily responsible for directing or controlling the filing.   For example, if on or after January 1, 2024 a paralegal at a law firm forms a reporting company by filing the formation documents at the request of an attorney, both the paralegal and the attorney will be “company applicants” for the reporting company, and their information will need to be included in the company’s BOI report.

Do changes to BOI report information need to be reported?

Yes. Any change in the information provided in a BOI report, including any change with respect to who is a beneficial owner or the BOI information reported for any particular beneficial owner, must be reported within 30 days.  For example, if a new individual acquires an ownership interest which makes that person a beneficial owner, or if an existing beneficial owner changes his or her residential address, or even obtains a driver’s license or passport with a new identifying number, the reporting company must update its BOI report with FinCEN within 30 days of such change.   One exception, however, is that no updates are required with respect to information related to any company applicant.

Privacy, Security, and Authorized Access to Reported Information

FinCEN will 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 BOI reports for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will also have access to BOI reports in certain circumstances, with the consent of the reporting company. Those financial institutions’ regulators will also have access to BOI reports when they supervise the financial institutions.

Are there penalties for non-compliance with the CTA?

The willful failure to file a complete or updated BOI report with FinCEN, or the willful provision of or attempt to provide false or fraudulent information in a BOI report, may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, up to $10,000, or criminal penalties including imprisonment for up to two years.  Senior officers of a reporting company that fails to file a required BOI report may be held personally accountable for that failure. However, the CTA provides a “safe harbor” from penalties if a person has reason to believe that a BOI report filed with FinCEN contains inaccurate information and voluntarily submits a report correcting the information within 90 days of the deadline for the original BOI report.

How does a reporting company file a BOI report?

Beginning January 1, 2024, reporting companies will be able to file BOI reports by logging on to FinCEN’s website (https://www.fincen.gov/boi) and following the instructions that FinCEN will provide. However, FinCEN will not begin accepting BOI reports until January 1, 2024.  As of the date of this writing there are no currently available links to FinCEN’s portal (the so-called “BOSS” system), and it is therefore not entirely clear what the BOI reporting system will look like in practice.  Various third party corporation service companies have also indicated that they will be offering fee-based filing services to assist reporting companies in filing BOI reports.  Please note that FinCEN has been notified of recent fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the CTA.  This fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code.  Only the official BOSS reporting portal or a verified third party service provider should be used for submitting a BOI report.

What steps can a company take now to prepare for CTA compliance?

Although BOI reports will not be accepted by FinCEN prior to January 1, 2024, and although existing companies will have until January 1, 2025 to submit an initial BOI report, all companies should begin taking steps to determine whether they constitute a “reporting company” under the CTA or whether they may qualify for one of the exemptions.  If a company is not exempt, the company should also begin identifying those individuals who will be the “beneficial owners” of the company, whose personal information (i.e., name, DOB, address, photo ID) will need to be provided in the company’s BOI report.

Are there additional information resources available?

To assist companies in understanding the CTA and its requirements, FinCEN has released a “Small Entity Compliance Guide”, available here:

https://www.fincen.gov/boi/small-entity-compliance-guide.

FinCEN has also published a list of FAQs, available here:

https://www.fincen.gov/boi-faqs

Next Steps and How Can Hirschler help?

In preparation for the effectiveness of the CTA, companies should start now to (i) familiarize themselves with the applicability and requirements of the CTA and (ii) assess and establish internal protocols for determining the identity of beneficial owners and for regularly collecting and updating the required reporting information.

While the CTA regulations are highly detailed and complex in certain areas, they also lack specificity and clarity in many areas.  Accordingly, we strongly recommend that companies seek guidance from an attorney that is well-versed in the CTA and its regulations for thorough analysis and direction on CTA reporting obligations.  

Hirschler attorneys are available to help with the above. If you have any questions regarding your company’s reporting obligations under the CTA, please contact your Hirschler attorney for guidance and support.