Authored By: Kenneth F. Neuman and Nicholas Swider
The Corporate Transparency Act (“CTA”) is, for all intents and purposes, old news. The federal statute was enacted as part of the National Defense Authorization Act on January 1, 2021 with the goal of protecting U.S. economic prosperity combatting occurrences of money laundering, racketeering, terrorist financing, corruption, and other illicit financial activities through corporations, limited liability companies, and other business entities. However, three years later, the CTA’s effects are now being felt by business owners and shareholders across the country.
Beginning on January 1, 2024, business entities within the scope of the CTA are now required to disclose information regarding their beneficial owners to the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). The CTA defines a “beneficial owner” as “an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests.” “Substantial control” is further defined as an individual who is a senior officer, has authority to appoint or remove officers or directors, or who is an “important decision-maker” on behalf of the company.
The scope of the CTA is broad as reporting requirements apply to any domestic or foreign corporation, limited liability company, partnership, or other entity either formed in or registered to do business in any U.S. state or tribal jurisdiction. That scope, however, is limited by exemptions for 23 categories of entities which are not required to report under the CTA. Although exemptions apply for companies registered with the SEC, the widest exemption is the “subsidiary exemption” for companies whose ownership interests are controlled or entirely owned by one or more entities that qualify for an exemption themselves. (A more complete list of the 23 categories of exempt entities can be found at 31 CFR § 101.380.)
The reporting company will be required to file a beneficial ownership information report (“BOI” report) with FinCEN’s new Beneficial Ownership Secure System. In addition to basic information about the business entity itself (such as all “dba” names, address, jurisdiction of formation, and tax identification number), the BOI report is required to provide the following for each beneficial owner: full legal name, date of birth, residential address, and passport or driver’s license number together with a scanned copy of the passport or driver’s license.
Under the CTA, BOI reports must be filed annually, but the timeframe for filing a business’ initial BOI report varies depending upon when the business was, or is, formed. For existing businesses formed before January 1, 2024, the report must be filed no later than January 5, 2025. Newly formed entities, however, do not have nearly as much time. Businesses formed between January 1, 2024 and January 1, 2025 must file an initial BOI report within 90 days of registration effective date, and businesses formed on or after January 1, 2025 have only 30 days from the registration effective date to do so. Timely reporting is crucial as the CTA fixes civil penalties at $500 per day for each violation so long as the violation continues. Likewise, the CTA also has criminal repercussions for individuals who repeatedly fail to comply with reporting requirements or who “willfully” provide or attempt to provide false information to FinCEN.
Although the new required disclosures may appear to be somewhat intrusive, the CTA has implemented safeguards to safeguard FinCEN data. As such, the information provided in a BOI reports will only be shared with the following under very specific circumstances: federal national security and intelligent agencies; federal, state, and local law enforcement where a court has authorized the agency to obtain the information in connection with a criminal or civil investigation; federal regulatory agencies engaged in supervision of financial institutions; and the Treasury Department for tax administration purposes.
Those forming a new business entity should seek advice from counsel to ensure strict compliance with reporting and timing requirements of the CTA so as not to incur any potential sanction. The Altior Law team is always available to discuss your reporting obligations and best practices to not only ensure compliance with the CTA but also to clarify, streamline, and simplify all legal business processes.