Is Your Business Ready for the Corporate Transparency Act?

Beginning January 1, 2024, the Corporate Transparency Act (CTA) will take effect and impose an obligation on many U.S. entities (and foreign entities doing business in the United States), unless exempted, to report to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Treasury Department, information of their beneficial owners, and for entities formed on or after January 1, 2024, information of “company applicants” who create or register them (collectively, the “BOI Reporting Rule”). This reported information will be maintained in a non-public government database.

The CTA is an anti-money laundering law that is intended to combat lack of transparency that may facilitate money laundering, fraud, corruption, tax evasion, organized crime, and other illicit activities. Penalties for noncompliant entities, and their owners and officers, include civil fines, criminal penalties, and even imprisonment.

Furthermore, certain states have begun to propose laws that in certain ways mirror the CTA provisions in order to create state-level databases of beneficial ownership information for entities.

With the federal beneficial ownership reporting regime expected to take effect on January 1, 2024, we describe below the CTA requirements and provide some suggested action items. More detailed information can be found in FinCEN’s Small Entity Compliance Guide, and in the Frequently Asked Questions section of the FinCEN website.

Affected Entities 

Both U.S. and non-U.S. entities are subject to the BOI Reporting Rule. A “reporting company”—an entity that must comply with the BOI Reporting Rule—means any of the following:

Domestic Reporting Companies

• A corporation
• A limited liability company
• Any other entity created by the filing of a document with a secretary of state or any similar office under the law of a U.S. state or American Indian tribe

Foreign Reporting Companies

• A corporation, limited liability company, or other entity formed under the laws of a foreign (non-U.S.) country and registered to do business in any U.S. state or American Indian tribe jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a U.S. state or American Indian tribe

Exempted Entities

If your entity is a reporting company, you must comply with the BOI Reporting Rule unless the entity qualifies as one of the 23 types of entities that are currently exempt from the BOI Reporting Rule. Some of the more wide-ranging exemptions are as follows:

Broad-Based Exemptions

• Issuers of public securities registered under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)
• Issuers of securities that are required to file supplementary and periodic information under the Exchange Act
• Banks and credit unions
• Insurance companies
• Tax-exempt entities (including Section 501(c)(3) companies)
• Broker-dealers and others registered under the Exchange Act
• Commodity pool operators, commodity trading advisors, and other entities registered under the Commodity Exchange Act
• U.S. government and public utilities entities

Large Operating Companies

A “large operating company” is exempt from the reporting requirements if it:

1. employs more than 20 full-time employees in the United States;
2. has an operating presence at a physical office within the United States; and
3. filed a federal income tax return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales (net of returns and allowances), excluding gross receipts or sales from outside the United States.

Note that a newly formed entity that has not yet filed a U.S. tax return (requirement 3 above) is not exempted from the disclosure requirements under the BOI Reporting Rule even if it meets the employment and physical presence requirements (1 and 2 above). Similarly, note that the tax return must show $5 million derived from only U.S.-sourced receipts or sales (requirement 3 above).

Subsidiaries of Exempt Entities

With certain exceptions (such as money services businesses and pooled investment vehicles), if a parent entity that owns or controls another entity is exempt from the disclosure requirements of the BOI Reporting Rule, the subsidiary entity similarly does not have to report the information required under the BOI Reporting Rule.

Investment Advisors and Pooled Investment Vehicles

• SEC-registered investment advisors
• Venture capital fund advisors
• Pooled investment vehicles

Information to Be Filed

• “Reporting company” information
• Beneficial ownership information (BOI) and
• For only those reporting companies created or registered on or after January 1, 2024, “company applicant” information

Reporting Company Information

Each reporting company must provide its full legal name (and any trade or dba names), address, jurisdiction of creation/registration, taxpayer identification number, and certain information regarding all of its beneficial owners.

BOI

• A beneficial owner is any individual who directly or indirectly exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. The disclosed information must include each beneficial owner’s:

  • full legal name;
  • date of birth;
  • complete current residential street address; and
  • unique identifying number, issuing jurisdiction, and image of a non-expired U.S. passport, state driver’s license, foreign passport, or other identification document issued by a state or local government or an American Indian tribe that identifies the individual.

Company Applicants

• Reporting companies created on or after January 1, 2024 must also provide certain information regarding the “company applicant”—the person who physically or electronically filed the document that first created or registered the reporting company with the secretary of state or similar office (“Company Applicant”).
• Each reporting company may have no more than two Company Applicants. The person who directly files the document that creates the reporting company (or, in the case of a foreign reporting company, first registers the foreign reporting company) is considered the Company Applicant. If more than one individual is involved in filing the document, the person primarily responsible for directing or controlling the filing must also be reported as a Company Applicant.

Timing of Reporting

Initial Reporting Due Date

Continuous Reporting Requirements

After a reporting company’s initial filing, any previously reported updates or revisions to the BOI must also be filed with FinCEN by the reporting company within 30 calendar days from the date that the change occurs. This due date also applies to previously exempt entities that are no longer exempt. Failure to meet the reporting requirements can result in civil or criminal penalties.

Additionally, if a reporting company or individual obtains a FinCEN identifier number, that reporting company or individual is then required to keep current their information provided to FinCEN. 

Determining Who Is a “Beneficial Owner”

The CTA defines a “beneficial owner” to include any individual who, directly or indirectly, either exercises “substantial control” over a reporting company or owns or controls at least 25% of its ownership interests.

FinCEN expects a reporting company to identify at least one beneficial owner. But, unlike for a Company Applicant, there are no limits on how many beneficial owners may be reported.

Substantial Control

An individual is deemed to exercise “substantial control” over a reporting company under the BOI Reporting Rule if the individual

• serves as a senior officer of a reporting company (which includes the president, CFO, COO, general counsel, or any other officer, regardless of title, who performs a similar function);
• has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);
• directs, determines, or has substantial influence over important decisions made by a reporting company; or
• has any other form of substantial control over the reporting company.

Means of Control

An individual may directly or indirectly exercise “substantial control” over a reporting company through the following:

• Board representation
• Ownership or control of a majority of the voting power or voting rights of the reporting company
• Rights associated with any financing arrangement or interest in the reporting company
• Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company
• Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees
• Any other contract, arrangement, understanding, relationship, or otherwise

Next Steps

• If you anticipate creating a new entity in the near future, consider creating the entity on or before Friday, December 29, 2023.
• Consider amending your entity’s governing documents to require beneficial owners to have an ongoing obligation to provide timely and accurate personally identifiable information to permit a reporting company to meet its BOI Reporting Rule obligations.
• Consider establishing a policy and protocol for handling all personally identifiable information that may be sent to FinCEN.
• Consider establishing a process for tracking any changes in the beneficial ownership information and reporting those changes in a timely manner to FinCEN.

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As always, we and our colleagues are available at any time to discuss the implementation of the CTA, its application to your business, and other matters.