The Corporate Transparency Act: What It Means for Your Business

The Corporate Transparency Act (“CTA”) became law effective January 1, 2021 when Congress overrode President Trump’s veto. The purpose of the CTA is to eliminate money laundering and other illegal criminal and terrorist activities that are often conducted through anonymous shell companies. Under the CTA, business entities will be required to report certain information to the Financial Crimes Enforcement Network (“FinCEN”) of the Department of Treasury. Said information will not be publicly available but may be distributed in a limited number of instances.

Who is subject to the CTA and who is exempt?

FinCEN has adopted the Beneficial Ownership Information Reporting Rule (the “Reporting Rule”) by virtue of the authority granted to it under the CTA. According to the Reporting Rule, a “reporting company” is subject to the requirement of the CTA. Generally, a reporting company falls into two categories:

1. A domestic reporting company – an entity such as a corporation, limited liability company, partnership, or other such entity that is created by filing a formation document with a state’s Secretary of State or equivalent agency; or
2. A foreign reporting company – an entity such as a corporation, limited liability company, partnership, or other such entity that is created by filing a formation document in a foreign country but which is qualified or registered to do business in a state by filing appropriate paperwork with a state’s Secretary of State or equivalent agency.

While a company may be considered a domestic reporting company or foreign reporting company at first glance, a company may be exempted from the CTA’s requirements if the company falls under any of the twenty-three (23) exemptions set forth in the Reporting Rule. Example of exemptions include, but are not limited to, certain tax-exempt entities, inactive entities, certain large operating companies, insurance companies, banks, and credit unions.

In almost all cases, a for-profit entity, such as a medical practice or a practice providing other professionally licensed services, will be considered a reporting company that is subject to the CTA reporting requirements. Not-for-profit entities will be considered exempt from the CTA reporting requirements if they meet any of the following requirements:

1. The entity is an organization that is described in Section 501(c) of the Internal Revenue Code of 1986 (the “Code”), determined without regard to Section 508(a) of the Code, and exempt from tax under Section 501(a) of the Code;
2. The entity is an organization that is described in Section 501(c) of the Code, and was exempt from tax under Section 501(a) of the Code, but lost its tax-exempt status less than 180 days ago;
3. The entity is a political organization, as defined in Section 527(e)(1) of the Code, that is exempt from tax under section 527(a) of the Code; or
4. The entity is a trust described in paragraph (1) or (2) of Section 4947(a) of the Code.

What is required under the CTA?

Reporting companies are required to file beneficial ownership information (“BOI”) reports with FinCEN. These BOI reports shall include the following:

1. Information about the reporting company itself;
2. Beneficial owner information; and
3. Company applicant information.

What are beneficial owners and company applicants?

A beneficial owner is any individual that:

1. Owns or controls at least twenty-five percent (25%) of the ownership interests of a reporting company, whether directly or indirectly; or
2. Exercises substantial control over a reporting company.

Even if an individual meets the above requirements, there are five (5) exemptions including, but not limited to, if the individual is a minor or an agent acting on behalf of a beneficial owner. A reporting company will have at least one (1) beneficial owner, may have multiple beneficial owners and every beneficial owner must be included in the BOI report.

A company applicant must be included in the BOI reports filed by domestic and foreign reporting companies that are created on or after January 1, 2024. Company applicants fall into two categories:

1. Direct filers – the individual who physically or electronically filed a reporting company’s formation or registration document with the Secretary of State or similar office; and
2. An individual who directs or controls the filing action – the individual who was primarily responsible for directing or controlling the filing of the reporting company’s formation or registration document with the Secretary of State or similar office.

What specific information is required for the filing?

For the reporting company itself,

1. The full legal name;
2. All trade names or assumed (DBA) names;
3. The current principal place of business address in the United States, or if the principal place of business address is not in the United States, the primary location in the United States where the company conducts its business;
4. State, tribal, or foreign jurisdiction of formation;
5. For a foreign reporting company, the state or tribal jurisdiction of first registration; and
6. the Employer Identification Number (EIN) or Taxpayer Identification Number (TIN) issued by the
7. IRS and, if a foreign reporting company does not have a TIN, then a tax identification number issue by a foreign jurisdiction and the name of the foreign jurisdiction.

For each beneficial owner or company applicant,

1. The beneficial owner or company applicant’s full legal name;
2. The beneficial owner or company applicant’s date of birth;
3. The beneficial owner or company applicant’s current residential address; provided, however, that if the company applicant forms or registers a reporting company in the course of their business, then the company applicant’s business address;
4. Unique identifying number from an acceptable non-expired document such as:
   • A U.S. passport
   • A State issued driver’s license
   • An identification document issued by a state, local government or tribe
   • If a beneficial owner has none of the above, a foreign passport; and
5. An image of the document from which the unique identifying number came from.

Notwithstanding the above, a beneficial owner or company applicant may provide their respective information directly to FinCEN and obtain a “FinCEN Identifier,” which will be a unique identify number. Reporting companies can these use these FinCEN Identifiers in lieu of providing the above-required information for beneficial owners and company applicants. This is beneficial for a few reasons: (1) filing BOI reports will be faster and more streamlined; (2) it is easier for beneficial owners and company applicants of multiple reporting companies; and (3) it prevents reporting companies access to a company applicant’s personal information.

When must BOI reports be filed?

Domestic and foreign reporting companies created before January 1, 2024 must file a BOI report by January 1, 2025.

Domestic and foreign reporting companies created on or after January 1, 2024 must file a BOI report within thirty (30) days of receiving actual or public notice that the creation or registration of the reporting company is effective.

Penalties for not filing

The willful failure to file a BOI report or to report false, fraudulent or incomplete beneficial ownership information may result in criminal and civil penalties such as:

• Up to $500 for each day violation continues;
• Imprisonment for up to two (2) years; and
• A fine of up to $10,000

If a reporting company discovers that it reported inaccurate or incomplete information, there is a ninety (90) day safe harbor from the date of the original deadline to provide corrected information.

Conclusion

This is a broad overview of the CTA and Reporting Rule requirements. More detailed descriptions, exemptions, and requirements are set forth in the CTA and the Reporting Rule.

For further information contact us.