On January 1, 2024, the Corporate Transparency Act (the “CTA”), codified at 31 U.S.C. 5336[i] and the final rule (the “Final Rule”)[ii] promulgated thereunder, will become fully effective. Passed in 2021, the CTA creates a new beneficial ownership information reporting regime designed to make it more difficult for bad actors to hide behind, or benefit from, use of corporate entities where no disclosure of ownership is required. As further discussed in this article, entities that are subject to the CTA (“reporting companies”) will be required to furnish beneficial ownership information (“BOI”) about “beneficial owners” to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) and disclose information about the individuals who created the entity or registered it to do business in the United States (“company applicants”).
Reporting Companies and Exemptions
Unless an exemption applies, all corporations, limited liability companies and other organizations that are created by the filing of a document with a secretary of state or similar office, are considered “reporting companies” subject to the CTA. Foreign entities that have registered to do business in the United States will also be subject to the CTA.
The CTA includes 23 exemptions, most of which are available to larger entities and/or entities that are already subject to robust federal oversight. Notable exemptions from reporting under the CTA include:
- Operating companies that employ more than 20 full-time employees in the US, have more than $5,000,000 in gross receipts or sales in the US and have an operating presence at a physical office within the US.
- Highly regulated entities such as banks, credit unions, money services businesses, broker-dealers, entities registered under the Securities Exchange Act of 1934, as amended, investment companies and investment advisers, venture capital fund advisers, insurance companies, Commodity Exchange Act registered entities, and registered public accounting firms.
- Certain federal tax-exempt entities.
- Governmental units.
- Certain subsidiaries of entities that are exempt under the CTA.
The above is not an exhaustive list of available exemptions. We note that some exemptions, in particular the exemption for large operating companies, have very specific criteria. Companies that believe they may qualify for an exemption should consult with counsel.
Who Must Provide Information?
Under the CTA, information regarding the reporting company, its beneficial owners, and company applicants must be disclosed to FinCEN.
For purposes of the CTA, the term “beneficial owner” means an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity. The CTA and its accompanying regulations are designed to look through business entities, including layers of ownership, to identify the persons in ownership and control positions. Also, holders of convertible instruments than enable the holder to purchase beneficial ownership should be included.
Substantial Control Test
An individual exercises substantial control over a reporting company if the individual meets any of four general criteria: (1) the individual is a senior officer, such as a president, chief financial officer, or chief operating officer; (2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company; (3) the individual is an important decision-maker; or (4) the individual has any other form of substantial control over the reporting company. Please note, substantial control is construed very broadly under the CTA. For a more expanded discussion regarding the indicators of substantial control, please see FinCEN’s small entity compliance guide (the “Guide”) available at: https://www.fincen.gov/boi/small-entity-compliance-guide or consult counsel.
25% Ownership Test
Total ownership interests that an individual owns or controls, directly or indirectly, shall be calculated as a percentage of the total outstanding ownership interests of the reporting company. Any of the following may be an ownership interest: equity, stock, or voting rights; a capital or profit interest; instruments that are convertible, with or without consideration into equity, stock, or voting rights, or capital or profit interest; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership. An individual’s total ownership interests of a reporting company that they own or control, directly or indirectly, is to be calculated: as a percentage of the total outstanding ownership interests of the reporting company; including as of the date of the report, any of the individual’s options or similar interests which are to be treated as exercised.
Indirect ownership must be taken into account. Under the Final Rule, an individual may be a beneficial owner “through ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the reporting company.” As with the substantial control criteria, the ownership interest test is heavily fact and circumstance dependent. we suggest a conversation with counsel regarding the tests for direct and indirect ownership interests.
Entities formed on or after January 1, 2024 will have to provide information regarding a maximum of two (2) company applicants. The CTA defines company applicants to mean the person who directly files the formation/registration document of the reporting company and/or was primarily responsible for directing such filing. For example, if a law firm has been engaged to form an entity for a client, the attorney or paralegal involved in the drafting and filing of its organizational documents may be considered a “company applicant.” Entities formed prior to Jan. 1, 2024, will not need to disclose this information.
Reporting Companies under the CTA.
A reporting company under the CTA must include the following information about the company itself:
- Its full legal name.
- Any trade name or “doing business as” name used by the reporting company.
- The complete current address of the reporting company’s principal place of business. For a foreign reporting company, this will be the primary business location in the United States. The reported address cannot be a post office box or address of a corporate formation agent.
- Its jurisdiction of formation. A foreign reporting company must also disclose the State or tribal jurisdiction where it first registered in the US.
- An Internal Revenue Service Taxpayer Identification Number, such as an EIN.
Beneficial Owners and Company Applicants
Comparable information must be provided regarding individual beneficial owners and company applicants of a reporting company, including their:
- Full legal name.
- Date of birth.
- Current address. Note- the residential address of beneficial owners must be reported. For company applicants who form or register a company in their course of business (such as attorneys or paralegals) their business address must be disclosed.
- A unique identifying number from an acceptable identification document, as well as a copy of such identification document. Acceptable identification documents include a non-expired US passport or State issued photo identification. Non-US persons may submit a copy of their foreign passport.
Access to Reported Information
FinCEN will store information disclosed to it pursuant to the CTA in a secure non-public database called the Beneficial Ownership Secure System (“BOSS”). Access to BOSS will be limited to:
- United States federal agencies engaged in national security, intelligence, or law enforcement activities, for use in furtherance of those activities;
- State, local, or tribal law enforcement agencies, provided that a court of competent jurisdiction has authorized such agency to seek the information as part of a criminal or civil investigation.
- A federal agency on behalf of non-US law enforcement or a foreign prosecutor or judge.
- A financial institution subject to customer due diligence requirements, with the consent of the reporting company, to facilitate the financial institution’s compliance with customer due diligence requirements under applicable law.
- Federal and state regulators assessing financial institutions for compliance with legally required customer due diligence obligations.
As noted above, the reporting requirements of the CTA will go into effect on January 1, 2025. Entities in existence on December 31, 2023, will be required file an initial report no later than January 1, 2025. New entities formed (or if a foreign entity, registered) on or after January 1, 2024, must file their initial BOI report within 30 days after their formation or registration. On September 28, 2023, FinCEN proposed extending this deadline to 90 days for entities formed in calendar year 2024. As of the date of this article, this proposed rule has yet to be adopted. Entities created or registered on or after January 1, 2025, will have 30 days to file their BOI reports with FinCEN.
Updating or Correcting Reports
If there is a change in information regarding either a reporting company or its beneficial owners, its CTA report must be updated within thirty (30) days of such change. This obligation is ongoing; there is no annual filing requirement, and a reporting company must keep information about itself and its beneficial owners current. Note-reporting companies do not need to update information regarding company applicants. The following is an illustrative list of events that would trigger an updated report:
- The reporting company registers a new d/b/a.
- There is a change of beneficial owners of the reporting company, for example if a new CEO is hired, or an equity issuance that causes a shareholder to exceed the 25% ownership threshold.
- The reporting company becomes exempt (for example, following an IPO that results in the reporting company becoming a reporting issuer under the Securities Exchange Act of 1934).
- Changes to previously disclosed personal information regarding existing beneficial owners, such as a change in address or name.
Further, if a company previously qualified for an exemption but no longer qualifies, it is required to file a BOI report within 30 calendar days of the date on which it ceased to be exempt.
If a reporting company identifies an inaccuracy in a previously filed report, it must be corrected no later than thirty (30) days after the date the reporting company became aware of the inaccuracy or had reason to know of it.
Beginning on January 1, 2024, individuals and entities will be able to apply electronically for a unique “FinCEN identifier.” Reporting companies will be able disclose FinCEN identifiers of its beneficial owners in lieu of furnishing the information described above.
FinCEN Identifiers for Individuals
In order to obtain a FinCEN identifier, an individual will need to provide FinCEN directly with the same information it would provide to a reporting company (i.e., name, date of birth, residence and passport/State issued ID information). FinCEN will automatically assign the individual an identifier.
While obtaining a FinCEN identifier is voluntary, FinCEN has publicly stated that it believes that most individuals will prefer using this more streamlined identifier process. For example, company applicants are generally responsible for registering multiple entities, and may not have an ongoing relationship with the companies they form. Use of a FinCEN identifier will likely be less of an administrative burden on the company applicant. It is important to note, however, that once a FinCEN identifier has been obtained by an individual, the duty to update or correct information shifts to the individual.
FinCEN Identifiers for Entities
A reporting company may obtain a FinCEN identifier when it files a report under the CTA. In certain circumstances, where a separate entity is considered the beneficial owner of a reporting company, that reporting company can elect to use the FinCEN identifier of its beneficial owner in lieu of BOI. In order to do so, the following conditions must be met: (i) the other entity must have received an FinCEN identifier and reported it to the reporting company; (ii) the beneficial ownership of the other company must arise through an ownership interest, and not substantial control; and (iii) the beneficial owners of the other entity and of the reporting company must be the same individuals.
Reporting companies may find it useful to rely on entity FinCEN identifiers where there is common ownership across a group of affiliates. It is important to note that if at any time the reportable beneficial owners cease to be identical, the reporting company will be obligated to file an updated report, and can no longer rely on the entity FinCEN identifier.
The willful failure to report complete or updated BOI, or the willful provision of or attempt to provide false or fraudulent BOI may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.
Safe Harbor for Reporting Violations
Although updated information is required to be filed within thirty (30) days following the triggering event, the CTA provides a safe harbor. No penalties will be imposed upon a person who has reason to believe that any report submitted contains inaccurate information and voluntarily and promptly submits a report containing corrected information no later than 90 days after the date on which the person submitted the inaccurate report.
Unauthorized Disclosure or Use Violations
Any person who unlawfully discloses BOI reported to FinCEN in an unauthorized manner is subject to: (a) civil penalties of up to $500 per day for each day a violation continues and is not remedied; and (b) either (i) a fine of not more than $250,000, imprisonment for not more than 5 years, or both or (ii) while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, a fine of not more than $500,000, imprisonment for not more than 10 years, or both.
We note that the CTA is administered by a law enforcement agency of the Federal government. The CTA is unlike the state regulations that companies are used to managing. As of the date of this article, there is no history of how this law will be enforced or under what circumstances the more serious criminal sanctions may be imposed.
How to Report
Reports will be filed electronically using a secure e-filing system. FinCEN has stated that third-party service providers will be able to submit BOI reports on behalf of reporting companies, either through the e-filing system or through an API. As of the date of this article, this filing system is still under development and FinCEN has not provided any technical specifications. FinCEN has stated that the filing system will not be available until January 1, 2024.
We represent many Canadian companies that have subsidiaries doing business in the United States. The reporting requirements for foreign entities that may be subject to the CTA will be the subject of an upcoming article.
This article is a general description of the requirements of the CTA. It should not be considered legal advice. In many cases, compliance with the CTA will be routine and easily accomplished. However, we foresee a number of scenarios where businesses will have questions. Whether you contact us or another law firm, we recommend consulting with counsel.
[i] The full text of the CTA is available at https://www.fincen.gov/sites/default/files/shared/Corporate_Transparency_Act.pdf
[ii] The full text of the Final Rule is available at https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements#p-124
Update 11/2023: FinCEN Extends Deadline for Companies Created or Registered in 2024 to File Beneficial Ownership Information Reports
The Financial Crimes Enforcement Network (FinCEN) is extending the deadline for certain reporting companies to file their initial beneficial ownership information (BOI) reports. Specifically, reporting companies created or registered in 2024 will have 90 calendar days from the date of receiving actual or public notice of their creation or registration becoming effective to file their initial reports.
This extension will give reporting companies created or registered in 2024 more time to become familiar with FinCEN’s guidance and educational materials located at https://www.fincen.gov/boi, and to resolve questions that may arise in the process of completing their initial BOI reports.
Reporting companies created or registered before January 1, 2024, have until January 1, 2025, to file their initial BOI reports with FinCEN, while reporting companies created or registered on or after January 1, 2025, will have 30 calendar days to file their initial BOI reports after receiving actual or public notice of their creation or registration becoming effective.
FinCEN will not accept BOI reports from reporting companies until January 1, 2024 — no reports should be submitted to FinCEN before that date.
FinCEN’s BOI Webpage: https://www.fincen.