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Corporate Transparency Act
The Corporate Transparency Act (CTA) was created under the Anti-Money Laundering Act of 2020 and goes into effect on January 1, 2024. The CTA seeks to prevent individuals from using anonymous shell companies to engage in illegal financial activities, such as money laundering and terrorism. It requires privately held corporations, partnerships, limited liabilities companies, and other entities registered with a Secretary of State (or similar agency), to file a Beneficial Ownership Information Report (BOIR). (For simplicity, this article will refer to all entities required to report as a Reporting Company.)
The BOIR filings will create a database of every Reporting Company operating in the United States. That database will include information about each Company and, importantly, information about parties with interests in those Reporting Companies, including their owners and officers. In some cases, this will include trustees and trust beneficiaries whose trusts own interests in a Reporting Company.
Which Companies Are Exempt From Filing a BOIR?
Several types of entities are exempt from filing a BOIR, but many of these exemptions are due to already existing filing requirements. For example, banks, public accounting firms, and tax-exempt entities are exempt from this requirement.
Additionally, there is a “Large Operating Company” exemption for companies that (i) have over 20 full-time employees, (ii) exceed $5,000,000 in gross receipts, and (iii) operate within the United States.
What Must Be Reported About a Reporting Company in the BOIR?
In the BOIR, the Reporting Company must provide its full legal name, trade name, business address, state or jurisdiction of formation, and taxpayer identification number.
The Reporting Company must also identify its “Beneficial Owners.” If the Company is formed after January 1, 2024, “company applicants” (individuals who file the documents that create the Reporting Company) must also be identified in the BOIR.
Who Is a Beneficial Owner?
Under the CTA, a “Beneficial Owner” is an individual who exercises “substantial control” over the Reporting Company (such as an officer or manager) or someone who owns or controls at least 25% of its ownership interests.
The language used to describe “substantial control” under the CTA is very broad. A party with “substantial control” includes, but is not limited to, the following: (i) senior officers of the Reporting Companies, (ii) parties with the ability to remove and replace officers or board members, (iii) parties who can direct or determine major business activities; and (iv) anyone having ‘any other form of substantial control over the reporting company.’
Does the CTA Apply to Trusts and Trust Beneficiaries?
If a trust is a Beneficial Owner of a Reporting Company, then the trust’s interest will need to be reported under the CTA. For example, if a trust owns a 25% interest in a Reporting Company, the trustee of the
trust is considered a Beneficial Owner of the Reporting Company.
Additionally, depending on the circumstances, some trust beneficiaries will be considered Beneficial Owners depending on the terms of the trust. For example, a trust beneficiary who receives all trust income or who has the authority to withdraw income and principal is deemed to have ownership or control, triggering the reporting requirement. Additionally, a grantor of a trust who retains the ability to revoke the trust is also deemed to have ownership or control, triggering the reporting requirement.
What Must Be Reported About the Beneficiary Owners?
For each Beneficiary Owner, the BOIR must provide their (1) full legal name, (2) date of birth, (3) current address, and (4) a clear copy of the individual’s photo identification with identification number.
Suppose an individual is a Beneficial Owner of multiple Reporting Companies. In that case, they can submit the required information to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and receive a unique FinCEN identifier. In lieu of providing the personal financial information of the Beneficial Owner, the Reporting Company can provide the FinCEN identifier in its BOIR.
Who Has Access to the Filed Information?
The BOIR reports and information collected by FinCEN will be available to state and federal law enforcement agencies (such as the FBI and U.S. Department of the Treasury), national security agencies, and intelligence agencies.
What is the Filing Procedure, and When Is the Filing Deadline?
Guidance from FinCEN has not been issued yet, but it is expected to be issued by January 1, 2024. It is expected that Reporting Companies will file their BOIRs electronically through the FinCEN website. At this time, existing Reporting Companies have until January 1, 2025, to file their initial reports, while Reporting Companies created after January 1, 2024, will have 30 calendar days following formation to file their BOIR.
Importantly, anytime there is a change in the Beneficial Ownership interests of a Reporting Company, that information must be updated with FinCEN within 30 days. For example, suppose a party acquires an interest in an LLC, bringing their interest to over 25% of that Reporting Entity. In that case, an updated BOIR must be filed within 30 days of that transaction. Additionally, if an exempt company becomes nonexempt, that Company will have 30 days to file its BOIR.
What Are the Penalties for Failing to Comply with the CTA?
Under the CTA, it is unlawful to fail to file complete or updated beneficial ownership information. Depending on the circumstances, failure to comply with the CTA could result in civil penalties of up to $500 per day, an additional fine of $10,000, and possible imprisonment for up to two years.
What Should Small Business Owners and Trustees Be Doing to Prepare for the CTA?
It is prudent for small business owners and trustees of trusts who own interests in Reporting Companies to begin working with their legal counsel and accountants to determine their reporting requirements and gather the necessary information.
It is also advisable for Reporting Companies and their owners to implement procedures to properly track the information needed for the BOIR. Moreover, Reporting Companies should consider updating their operating agreements and shareholder agreements to set forth reporting requirements that will ensure compliance with the CTA going forward.
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