Y’ALL READY FOR THIS?
If you own or manage a small business, unless you have been living under a rock the past year or so, you have almost certainly heard about the Corporate Transparency Act (“CTA”) and the new requirements for “beneficial owner information” (“BOI”) reporting. First, I have included some TL; DR takeaways, and below that, more detailed discussion of the new law. Each takeaway is linked to the relevant discussion below. Be advised that this article is for general informational purposes and does not constitute, or provide suitable substitute for, legal advice. This is information is current as of January 1, 2024.
Click here for the most recent update as of February 7, 2024.
- DOES THIS APPLY TO MY COMPANY? Unless your company qualifies for one of the 23 specific exemptions, this new law is something you must contend with. Most businesses will be affected.
- WHAT DO I HAVE TO DO? You must file a report with FinCEN identifying information (name, date of birth, address, unique identification number, and copy of documentation of identification number) for your company’s “beneficial owners” (as defined by the law). You should be reviewing and implementing protocols to ensure the accuracy of identifying information provided to you for purposes of the CTA. These protocols should include measures to maintain the confidentiality of this information, just as owner information reported for tax and record-keeping purposes should remain private. See also the discussion below concerning the recently promulgated rules concerning access to information received and stored by FinCEN.1
- WHEN DO I HAVE TO DO IT? If your company was created before 1/1/2024, you have until January 1, 2025 to file your initial report. If your company was created on or after January 1, 2024, you have 90 days from the company’s creation to file the initial report, which must include the same information for the “company applicant(s)” (as defined by the law) as required for beneficial owners. Companies created after January 1, 2025 will have 30 days from the company’s creation to file the initial report.
- DO I HAVE TO DO THIS EVERY YEAR OR EVER AGAIN? Reporting is not an annual requirement; however, new reports must be filed within 30 days if there is a change in any information previously reported. Errors must be corrected within 90 days of the filing of the inaccurate information or, if later, 30 days after you become aware of the inaccuracy. See section (a)(3) of 31 CFR 1010.380.
- WHAT HAPPENS IF I DON’T FILE? The law provides for various penalties. Your company may be subject to penalties of $500 per day for failing to file the report. Individuals by be fined up to $10,000 or imprisoned for up to two years upon conviction for willfully failing to file or willfully filing inaccurate information. These penalties increase to up to $500,000 and ten years of imprisonment if noncompliance is part of additional illegal activity. See section (h)(3)(B)(ii)(II) of 31 U.S.C 5336.
The new law was enacted in 2021 and is the result of years of legislative efforts going back to 2008 to give law enforcement agencies (primarily) information to combat financial crimes. Accordingly, the new law is enforced by the Federal Financial Crimes Enforcement Network (“FinCEN”). The background of this new law is beyond the scope of this article; however, the American Bar Association has an excellent discussion of this at the link provided in the notes below.2
The CTA is enshrined into law in Section 5336 of Chapter 31 of the United States Code.3 The core of the law is this statement: “In accordance with regulations prescribed by the Secretary of the Treasury, each reporting company shall submit to FinCEN a report that contains the information described in paragraph (2) [of 31 U.S.C. 5336(b)]”. Paragraph (2) provides that this report will “identify each beneficial owner of the applicable reporting company and each applicant with respect to that reporting company by (i) full legal name; (ii) date of birth; (iii) current, as of the date on which the report is delivered, residential or business street address; and (iv)(I) unique identifying number from an acceptable identification document; or (II) FinCEN identifier in accordance with [certain] requirements….” (Emphasis added). The rules implementing the CTA further require that the report include an image of the document from which the unique identifying number is obtained, which must be a current U.S. passport, State or Indian tribe issued identification, State issued driver’s license, or current non-U.S. passport if the individual does not have any of the other listed documents.
As you can imagine, there is a lot to unpack in this deceptively short core provision of the law. There are numerous definitions, exceptions, and exemptions in the statute and in the accompanying rules/regulations. The rules and regulations are found in 31 CFR (Code of Federal Regulations) 1010.380.4 Thankfully, FinCEN has published helpful guidance in the form of the Small Entity Compliance Guide5 and has compiled a health list of frequently asked questions (and answers).6
The CTA defines “reporting company” as “a corporation, limited liability company, or other similar entity that is (i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.” This definition encompasses essentially every form of entity that can lawfully do business in the U.S., including but not limited to corporations, professional associations, limited liability companies, professional limited liability companies, limited partnerships, non-profit corporations, and business trusts.
There are 23 exemptions; however, these will not apply to many small businesses. Generally speaking, these exemptions include publicly traded companies, governmental bodies, banks, credit unions, brokerages, investment companies, insurance companies, public accounting firms, public utilities, tax exempt entities (not all non-profits-for example, most home owner associations will be subject to reporting requirements unless the law is changed7), inactive companies, and large operating companies. Generally speaking (again), a “large operating company” will employ more than 20 full-time employees (under applicable laws), will have an operating presence at a physical office within the United States, and will have reported more than $5,000,000 in gross receipts or sales (net of returns or allowances) on its prior year’s Federal income tax return.
As noted above, the CTA requires any reporting company to submit to FinCEN a report that identifies the reporting company’s beneficial owners and company applicant(s) by (i) full legal name; (ii) date of birth; (iii) current, as of the date on which the report is delivered, residential or business street address; and (iv)(I) unique identifying number from an acceptable identification document; or (II) FinCEN identifier in accordance with [certain] requirements….” The report must also include an image of the document from which the unique identifying number is obtained, which must be a current U.S. passport, State or Indian tribe issued identification, State issued driver’s license, or current non-U.S. passport if the individual does not have any of the other listed documents.
The term “beneficial owner” of an entity 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 percent of the ownership interests of the entity; and does not include (i) a minor child, as defined in the State in which the entity is formed, if the information of the parent or guardian of the minor child is reported in accordance with this section; (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (iii) an individual acting solely as an employee of a corporation, limited liability company, or other similar entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person; (iv) an individual whose only interest in a corporation, limited liability company, or other similar entity is through a right of inheritance; or (v) a creditor of a corporation, limited liability company, or other similar entity [unless the creditor is also a beneficial owner of the company through an ownership interest that is separate from its interest as a creditor].” (Emphasis added).
“Substantial Control” is not defined in the statute. FinCEN provided in its Final Rule on beneficial ownership reporting that an individual exercises “substantial control” over a reporting company if the individual (1) serves as a senior officer of the reporting company, (2) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body), (3) directs, determines, or has substantial influence over important decisions made by the reporting company, or (4) has “any other form of substantial control over the reporting company.”
It may not always be clear who does and does not have “substantial control.” Also, for many companies, calculating 25% ownership may be a simple matter. This can be more difficult, however, for a corporation with outstanding options, or for an LLC with an operating agreement that calls for a distribution waterfall. Other scenarios in which it may be difficult to determine whether a person or entity must be included in the report include reporting companies involving trusts, convertible debt, directors that are not also owners, and other arrangements where substantial control may exist purely by contract, among others, as evidenced by the lengthy FinCEN FAQ page mentioned above and linked in the notes below.
The final rule allows an individual (beneficial owner or the applicant(s)) to provide a FinCEN identifier in lieu of the other personally identifying information required.
“FinCEN identifier” means the unique identifying number assigned by FinCEN to an individual or reporting company under the CTA. An individual must apply to FinCEN for this identifier and in doing so, must provide the same information that it would otherwise provide to the reporting company. If an individual has concerns about providing this information to the reporting company, then such individual can provide the FinCEN identifier instead. This does not, however, allow a beneficial owner to withhold information that a reporting company may need for other purposes, such as for banking purposes, or preparation of tax returns. Information reported to FinCEN will not be public, and will be available to Federal, State, local, or Tribal law agencies in accordance with rules promulgated by FinCEN. The final rule was promulgated December 22, 20238.
“Company applicant” means the individual who directly files the document that creates the reporting company or first registers a foreign reporting company AND the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.
Filing the Report
FinCEN is responsible for providing the format and platform for filing the report, which must be done electronically. In the final rules and regulations, FinCEN has provided that the initial report of a reporting company shall include (and presumably subsequent reports will have the same requirements) the reporting company’s full legal name; any trade name or “doing business as” name; a complete current address consisting of the street address of the principal place of business or the primary location in the United States where a foreign reporting company conducts business in the United States; the State, Tribal, or foreign jurisdiction of formation of the reporting company and, for a foreign reporting company, the State or Tribal jurisdiction in the U.S. where such company first registers; and the Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company, or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction. The link to the FinCEN page where the report can be initiated is provided in the notes below.9
Reporting companies in existence prior to the effective date of FinCEN’s implementing regulations have one year (until January 1, 2025) to file their first beneficial ownership report, which, notably, does not have to include information for the company applicant if that person is not also a beneficial owner. Reporting companies formed on or after January 1, 2024 (or registered to do business in the U.S. on or after that date) must provide the required report for each beneficial owner, and for the company applicant. For 2024, these reports must be filed within 90 calendar days after the reporting company is created or registered to do business in the U.S. Reporting companies formed or registered on or after January 1, 2025, under the current rules, must file the report within 30 calendar days after the reporting company is created or registered to do business in the U.S.
Updates to information reported must be filed within 30 calendar days of any change. It is worth noting here that if a reporting company files a report and subsequently meets the criteria for one of the exemptions, the reporting company will be required to file an updated report. Conversely, if an exempt company that has never filed a report no longer meets the criteria for any of the exemptions, the reporting company must file its initial report within 30 calendar days thereafter. Other update triggers include interests passing through inheritance, and a minor child reaching the age of majority if prior reporting included the information of a parent or guardian in lieu of the minor child’s information.
In addition, corrections to inaccuracies must be reported before the later of 90 calendar days of the date the inaccurate report was filed, or 30 calendar days after the date on which the reporting company becomes aware of or has reason to know of the inaccuracy.
Penalties for Non-Compliance
There are multiple penalties for non-compliance with the CTA, and they are significant. The reporting company will be subject to a fine of $500 per day for failing to file a BOI report. Individuals may also be fined up to $10,000 or imprisoned for up to 2 years upon conviction for willfully failing to file or willfully filing inaccurate information. When a failure to file is combined with other illegal activity, or is “part of a pattern of any illegal activity involving more than $100,000 in a 12-month period,” criminal penalties can be increased up to $500,000 and imprisonment for up to 10 years.
Reporting companies will need to devote the necessary resources, attention, and senior personnel to ensure timely and accurate reporting to FinCEN, similar to but perhaps more stringent than requirements surrounding tax reporting. Competent legal advice will be critical, especially in the early stages of the implementation of this new law. I expect the upcoming year to be eventful as small businesses work to understand and comply with the CTA, and as questions inevitably and continually arise. Hopefully, FinCEN will continue to put out guidance as the practical implications bear out. You can sign up to receive FinCEN updates here. Stay tuned…
- Introductory video (0:55) https://www.youtube.com/watch?v=nx48tPUbRK0
- Informational video (4:27) https://www.youtube.com/watch?v=qQ5ABgZ6Xn4
1. See note 8 and related discussion.
4. See: https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-
p76995; and https://www.federalregister.gov/documents/2023/11/30/2023-26399/beneficial-ownership-