Posted In: Business Transactions & Corporate Counseling

Business Blog: The Corporate Transparency Act and Reports of Beneficial Ownership Information

By Brendan J. Carney on June 8, 2023

Congress passed the Corporate Transparency Act (CTA) on January 1, 2021 with the intention of giving law enforcement another tool to combat money laundering, terrorist financing, tax fraud, and other illicit activity. On September 29, 2022 the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule implementing the CTA’s reporting provisions (Final Rule). The primary purpose of the Final Rule is to establish uniform requirements for certain business entities to report general information regarding the business, and most importantly, information about the persons who ultimately own or control the business, to FinCEN. The Final Rule will be effective starting January 1, 2024.

Reporting Companies and Exempt Entities

The CTA and the Final Rule defines a “Reporting Company” to include both domestic and foreign corporations, limited liability companies (LLCs), or other similar entities that are (1) created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe, or (2) formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or a similar office. Based on this definition, Reporting Companies will include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships. FinCEN estimates that there are approximately 30 million entities currently operating in the United States that will be subject to the reporting requirements, and more than three million new entities will be formed annually and subject to reporting requirements.

Notably, 23 types of entities are exempt from the definition of Reporting Company, with many of these exempt entities already being subject to extensive regulation and/or obligations to report their beneficial ownership information to a governmental authority. As an example, the Final Rule provides explicit exemptions for:

• “Large Operating Companies,” which are defined as entities that (1) employ more than 20 full time employees in the United States; (2) have an operating presence at a physical office in the United States; and (3) filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales.
• Entities subject to other regulatory reporting such as publicly traded companies, banks, insurance companies, tax-exempt entities, and public utilities.
• Subsidiaries of exempt entities are also exempt; however, to be exempt, subsidiaries must be controlled or wholly owned by the exempt parent entity.
• Inactive entities which (1) existed on or before January 1, 2020; (2) are no longer engaged in active business; (3) do not hold any assets; (4) are not owned by a foreign person; and (5) have not had a change in ownership, or transacted greater than $1,000, in the immediately preceding 12-month period. 

Reporting Information

Reporting Companies will be required to submit information to FinCEN through an online portal, the “Beneficial Ownership Secure System” (BOSS). Both the BOSS and the associated forms that will need to be filled out are currently being developed by FinCEN. Additionally, on December 16, 2022, FinCEN issued a new Notice of Proposed Rulemaking and is currently seeking comments on proposed regulations that will implement strict protocols on the security and confidentiality required to protect information reported to FinCEN. Specific to the information to be reported, the Final Rule requires the report to FinCEN to include information regarding the Reporting Company itself, information on the Beneficial Owners of the Reporting Company, and information concerning the Company Applicant. Each of these categories is discussed more fully below.

Reporting Company Information

The following information concerning the Reporting Company must be included in the initial report to FinCEN:

• The full name of the Reporting Company, including any trade name or “doing business as” name;
• The business street address, if the principal place of business is in the United States, and for all other cases the street address of the primary location in the United States where the Reporting Company conducts business;
• The State, Tribal, or foreign jurisdiction of formation; and
• A unique identifier associated with the Reporting Company, such as an IRS TIN or EIN.

Beneficial Owner Information

The Final Rule’s definition of “Beneficial Owner” may present the largest compliance challenge for Reporting Companies. A Beneficial Owner is any individual who (1) exercises substantial control, either directly or indirectly, over the Reporting Company or (2) owns or controls at least 25% of the Reporting Company’s ownership interests. The Reporting Company’s initial report must include the following information concerning all its Beneficial Owners:

• Full legal name and date of birth;
• Complete current address, which must be a residential address;
• The unique identifying number from an acceptable identification document such as a passport, driver’s license, or state ID; and
• An image of the document from which the unique identifying number was obtained.

In many cases, just identifying the Beneficial Owners of the Reporting Company will be the biggest hurdle. Determining who owns or controls at least 25% of the ownership interests seems straightforward; however, this calculation includes equity interests, capital or profits interests, convertible instruments, warrants, options, and any other agreement or relationship that can be used to establish ownership or control. As if that process won’t be difficult enough, the Reporting Company must also determine each individual who exercises substantial control. According to the Final Rule, individuals who exercise “substantial control” over a Reporting Company include those who:

• Serve as a “senior officer” of a Reporting Company, including a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of title, who performs a similar function;
• Have authority over the appointment and removal of any senior officer or a majority of the board of directors (or a similar body); or
• Directs, determines, or has substantial influence over “important decisions” made by the Reporting Company. The use of the catchall phrase, “important decisions” is a clear indicator that the substantial control factor is not limited to individuals holding formal positions at reporting companies, and includes decisions affecting:

                - Major expenditures, investments, financing and asset transfers, budget approval authority, and compensation and incentive programs for senior officers;
                - Reorganization, dissolution, or merger of the Reporting Company including amendments to any substantial governance documents of the Reporting Company, and any significant policies or procedures; and
                - Entry into, termination, fulfillment or non-fulfillment of significant contracts, selection or termination of business lines or ventures, or geographic focus of the Reporting Company.

Fortunately, the Final Rule includes 5 exceptions to the definition of a Beneficial Owner, providing some clarity to an otherwise confusing definition:

• Minor children, provided that the parent or guardian’s information is reported;
• Individuals acting as a nominee, intermediary, custodian, or agent of another individual;
• Employees, provided that the individual is acting “solely as an employee” and deriving control and economic benefits solely from their employment status;
• Individuals who only have a future interest in the Reporting Company, such as through inheritance; and
• A creditor of a Reporting Company.

Company Applicant Information

A Reporting Company may also be required to report certain information about each of its Company Applicants. The Final Rule defines “Company Applicant” as an individual that either directs or controls the creation or registration of the Reporting Company. For practical purposes, the Company Applicant is the person who files the document to form the Reporting Company (or if a foreign entity, the person who registered the foreign company to do business in the United States), as well as the person who is primarily responsible for directing or controlling the filing, such as an attorney supervising the work of a paralegal.

The information to be reported to FinCEN regarding a Company Applicant is identical to the information that must be reported for a Beneficial Owner; provided however, that where a Company Applicant forms or registers entities in the course of their business, the report must provide the street address of the Company Applicant’s business. The most important distinction between Company Applicant and Beneficial Owner reporting is the fact that for Reporting Companies formed before January 1, 2024, there is no need to report the Company Applicant information, just that the Reporting Company was formed before the January 1, 2024 cutoff date.

FinCEN Identifiers

In an effort to increase the ease and efficiency of reporting for Reporting Companies, FinCEN has established a process whereby Reporting Companies, Beneficial Owners and Company Applicants can apply to FinCEN for a unique identifying number that can be used in reporting. The primary benefit of obtaining a FinCEN identifier will be with respect to Beneficial Owners and Company Applicants. Once an individual has obtained a FinCEN identifier, that unique number will replace reporting all Beneficial Owner or Company Applicant information that the Reporting Company would otherwise be required to collect and file with FinCEN. Creating an additional layer of security for the Reporting Company, once a FinCEN identifier has been obtained by a Beneficial Owner or Company Applicant, the obligation to keep submitted information up to date shifts from the Reporting Company to that specific Beneficial Owner or Company Applicant. Reporting Companies should carefully consider the benefits of ensuring that Beneficial Owner’s and Company Applicant’s all obtain a FinCEN identifier.

Timing and Penalties

Timing Requirements for Filings

Under the Final Rule, the time when a Reporting Company is required to file a report is dependent upon: (1) the date the Reporting Company was created or registered; and (2) whether the report is an initial report, an updated report providing new information, or a report correcting erroneous information from a previous report. The following timelines apply to Reporting Companies that are not otherwise exempted. 

• Any entity formed or registered prior to January 1, 2024, will have until January 1, 2025, to file their initial reports with FinCEN.
• Any entity formed or registered on and after January 1, 2024, will be required to file their initial reports with FinCEN within 30 calendar days of the date on which they are created or registered.

In addition to the initial filing requirements, the Final Rule also imposes subsequent filing requirements that obligate the Reporting Company to file an updated or corrected report. For any entity that needs to update the information filed with FinCEN, or that formerly met the criteria for an exemption but no longer qualifies for an exemption, a report shall be filed within 30 calendar days of discovery —the date the Reporting Company knew or should have known— that reported information was inaccurate, or within 30 days of the change that causes the entity to no longer meet the criteria for an exemption.

Penalties for Non-Compliance

Under the CTA, it is a federal crime for Reporting Companies to willfully file false reports, including any false or fraudulent identifying photograph or document, or to willfully fail to report complete or updated information to FinCEN. Additionally, any person that violates the Act shall be liable for a civil penalty of not more than $500 for each day that the violation continues or has not been remedied. Maximum penalties allow an individual to be fined no more than $10,000, imprisoned for no more than two years, or both. The Final Rule states that “each person filing such report or application shall certify that the report or application is true, correct, and complete.” Further, the Final Rule clarifies that liability may apply to any person who provides required information through another person—which impliedly includes Beneficial Owner information and related data required to be assembled and filed by a Reporting Company.

Conclusion

In preparation for the regulations taking effect, Reporting Companies, Beneficial Owners, Company Applicants and their counsel will want to take a variety of steps to ensure compliance. For Reporting Companies formed before January 1, 2024, taking the steps to gather information regarding the entity and Beneficial Owners will be necessary to ensure compliance with the January 1, 2025 deadline. For reporting companies formed after January 1, 2024, the Reporting Companies, Beneficial Owners and Company Applicants will want to ensure that a process is in place to gather the required information and ensure that all information concerning Beneficial Owners and Company Applicants will be complete and ready to submit to the FinCEN database.

Lastly, the Final Rule is one of three rulemakings planned to implement the CTA. FinCEN is currently and will continue to engage in additional rulemakings to (1) establish rules for who may access BOI, for what purposes, and what safeguards will be required to ensure that the information is secured and protected; and (2) revise FinCEN’s customer due diligence rule following the promulgation of the Final Rule. In addition to the formal rules in different stages of development, FinCEN plans to publish in the Federal Register, for public comment, the reporting forms persons will use to comply with their reporting obligations and is anticipating developing guidance to assist Reporting Companies in complying with the Final Rule, including a Small Entity Compliance Guide. As FinCEN continues to supplement both the laws and reference materials intended to implement the CTA, we will provide updates to this blog with additional information and guidance, as necessary.

This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2024 Brouse McDowell. All rights reserved.

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