As discussed in our prior alert, effective as of January 1, 2024, the Corporate Transparency Act and rules issued thereunder by the Financial Crimes Enforcement Network (“FinCEN”) (collectively, the “CTA”) require most U.S. entities and foreign entities registered to do business in the United States to file reports (“BOI reports”) with FinCEN disclosing information about the entity and its beneficial owners (“BOI”). This client alert provides an updated overview of the requirements of the CTA, current reporting deadlines and steps that companies should be taking now to ensure initial and ongoing compliance.

Expansive Scope/Limited Exemptions

Under the CTA, most entities formed or registered to do business in the United States will qualify as “reporting companies” and will be required to file BOI reports with FinCEN. Whether an entity is a reporting company or is exempt from reporting must be determined on an entity-by-entity basis. Although there are 23 categories of entities that are exempt from filing, these exemptions are generally limited to large companies, regulated entities and wholly owned subsidiaries of exempt entities and are comprised of the following:

• Governmental authorities
• Regulated entities:
  • U.S. public companies
  • Banks, credit unions, depository institution holding companies and money services businesses
  • Securities and Exchange Commission (“SEC”)-registered broker-dealers, SEC-registered securities exchanges and clearing agencies, and other entities registered under the Securities Exchange Act of 1934
  • SEC-registered investment companies and investment advisers and venture capital fund advisers that have filed Item 10, Schedule A and Schedule B of Part 1A of Form ADV with the SEC
  • Insurance companies and state-licensed insurance producers
  • Entities registered under the Commodity Exchange Act
  • PCAOB-registered accounting firms
  • Regulated public utilities and financial market utilities
  • Pooled investment vehicles (i.e., a company that (i) would be an investment company under the Investment Company Act of 1940 but for the exemptions provided in Section 3(c)(1) or Section 3(c)(7) thereunder and (ii) is identified by its legal name in the applicable investment adviser’s Form ADV (or will be so identified in the investment adviser’s next annual updating amendment)) operated or advised by a bank, credit union, broker-dealer, investment company, investment advisor or venture capital fund advisor (described in the foregoing)
• Tax-exempt entities that are Internal Revenue Code (“IRC”) Section 501(c) charities, IRC Section 527 political organizations, non-exempt charitable trusts under IRC Section 4947(a) and certain entities controlled by U.S. persons that operate exclusively to provide financial assistance to or hold governance rights over any of the foregoing
  • Note: An entity that has not yet obtained tax-exempt status may have a filing obligation even if it later obtains tax-exempt status (at which point it would be entitled to claim the exemption and stop reporting).
• Large operating companies
• Subsidiaries of any of the preceding exempt entities (other than subsidiaries of money services businesses, pooled investment vehicles or entities assisting tax-exempt entities)
• Inactive entities

Thus, unless an entity is regulated or tax-exempt, the exemptions that are most likely to be available (if at all) are those for large operating companies, subsidiaries of exempt entities, and inactive entities.

Large Operating Companies

To qualify as a “large operating company,” the entity must have (i) more than 20 employees, (ii) an operating presence at a physical office in the United States and (iii) filed federal income tax or information returns in the United States for the previous year demonstrating over $5 million in gross receipts or sales from sources in the United States. The requirement to have more than 20 employees is assessed on an entity-by-entity basis. If the entity is part of an affiliated group that files a consolidated U.S. federal income tax return, the gross receipts or sales requirement is based on the amount reported on the affiliated group’s consolidated tax return.

Subsidiaries of an Exempt Entity

A subsidiary is not required to file BOI reports if its ownership interests are wholly controlled or wholly owned, directly or indirectly, by one or more exempt entities (other than, as discussed above, money services businesses, pooled investment vehicles or entities assisting tax-exempt entities). FinCEN defines an ownership interest as generally meaning “an arrangement that establishes ownership rights in the [applicable entity]. Examples of ownership interests include shares of equity, stock, voting rights, or any other mechanism used to establish ownership.” The definition is broadly construed, including, among others, voting trust certificates, capital or profits interests, instruments that are convertible into equity, stock or voting rights or capital or profits interests, and puts, calls, straddles or other options or privileges with respect to the foregoing. Thus, when determining whether a subsidiary is exempt, it is important to first identify all of the ownership interests in the subsidiary and then confirm that they are either wholly owned or wholly controlled by an exempt entity. As noted by FinCEN, “If an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary does not qualify [as an exempt entity]. To qualify, a subsidiary’s ownership interests must be fully, 100 percent owned or controlled by an exempt entity.”

Inactive Entities

Inactive entities are narrowly defined as entities that (i) were in existence before January 1, 2020, (ii) are not engaged in any business activities, (iii) do not hold any assets, including ownership interests, in any other entities, (iv) are not owned by foreign persons, (v) have not had changes in ownership during the immediately preceding 12-month period and (vi) have not sent or received more than $1,000 in the immediately preceding 12-month period. Thus, an entity must be truly dormant to qualify as an inactive entity.

Broad Initial Reporting Obligations

Each reporting company must disclose its name, trade names/dbas, address, jurisdiction of formation or registration, and tax ID number, and each beneficial owner’s name, birthdate, residential address and acceptable identification document (e.g., passport or state-issued ID). As discussed in our prior client alert, beneficial owners include individuals who own or control 25% or more of the entity’s ownership interests (as defined above) or who exercise substantial control over the entity (e.g., senior officers (in most cases) directors and those who exercise direct or indirect substantial control over the entity (such as through the power to appoint its senior officers, a majority of the directors or to make important decisions for the entity)). Entities formed on or after January 1, 2024, also must disclose (but are not required to update) information regarding their company applicants (up to two individuals who are responsible for preparing and filing the entity’s organizational documents).

Any Change Requires an Updated Report

Any change regarding the information originally reported to FinCEN must be reported to FinCEN by filing an updated BOI report, including, for example, registering a new dba, appointing a new CEO and reporting any change to information previously reported by a beneficial owner (e.g., name, address or unique identifying number). In addition, if a beneficial owner obtains a new driver’s license or other identifying document that includes the changed name, address or identifying number, the reporting company must also file an image of the new identifying document.

Short Filing Deadlines

The deadlines for filing initial reports with FinCEN depend on when the reporting company was created or registered:

In addition, the following deadlines apply with respect to changes in reporting company status and beneficial ownership or identification of errors in previously submitted BOI reports:

Given the short filing deadlines, the extensive disclosure obligations and the requirement to report changes in BOI following the initial BOI report, advance planning is critical. In particular, companies that may not have communicated with their beneficial owners recently may want to reach out to them well in advance of the filing deadlines to obtain the necessary filing information and an ongoing agreement to report changes in such information.

BOI Reports Are Not Public

The information contained in BOI reports may only be disclosed to certain authorized BOI recipients, which are limited to the following and which are subject to security and confidentiality requirements:

• Federal agencies engaged in national security, intelligence or law enforcement activity
• State, local and tribal law enforcement agencies that have received court authorization
• Foreign law enforcement agencies, judges, prosecutors and other authorities that meet specific criteria
• Financial institutions with customer due diligence requirements and regulators supervising them with respect to such compliance
• U.S. Department of the Treasury officers and employees

For additional information regarding authorized BOI recipients and the requirements applicable to their use of BOI, see FinCEN’s final rule and related fact sheet issued on December 21, 2023.

FinCEN Identifiers May Simplify Reporting Obligations

A FinCEN identifier (“FinCEN ID”) is a unique identifying number that FinCEN will issue to an individual or reporting company upon request. FinCEN IDs are not required, but they can simplify the reporting process for reporting companies. In particular:

• Company applicants: The reporting company can report the FinCEN ID of its company applicants in lieu of the company applicant’s personal information. With respect to vendors that make corporate filings on behalf of companies, we understand that they will generally provide the reporting company a FinCEN ID for the applicable company applicant at the time of the filing.
• Individual beneficial owners: A reporting company may report the FinCEN ID for an individual in lieu of providing the individual’s personal information.
• FinCEN IDs for entities: As described in the November 8, 2023 rule issued by FinCEN relating to the use of FinCEN IDs for entities, a reporting company may report another entity’s FinCEN ID and its full legal name in lieu of information about its beneficial owners if each of the following conditions are met:
  • The other entity has obtained a FinCEN ID and has provided it to the reporting company
  • The beneficial owners of the reporting company hold their interests in the reporting company through ownership interests in the other entity
  • The beneficial owners of the reporting company and the other entity are exactly the same

While FinCEN IDs may significantly simplify the reporting process, they also impose an obligation on individuals obtaining the FinCEN IDs to keep them updated. FinCEN is currently considering whether and how it may allow individual FinCEN ID holders to deactivate their FinCEN IDs so that they do not need to continue to update the underlying personal information. Until FinCEN acts, however, a FinCEN ID holder’s obligation to update his, her or its FinCEN ID will continue indefinitely.

Action Is Required Now

Given the CTA’s expansive scope, each company should take immediate steps to determine whether it is required to file and, if so, the steps necessary to do so accurately and timely. In particular:

• Entity-by-entity analysis: As discussed above, each entity in a corporate structure must be analyzed individually to determine whether it is a reporting company or is exempt from reporting. Subsidiaries are only exempt if their ownership interests are wholly owned or wholly controlled by an exempt entity. Inactive entities must meet each prong of the test.
• Determine beneficial ownership: Assess beneficial ownership for each reporting company at the reporting company level and up the chain of ownership and control to identify each individual who, directly or indirectly, (i) exercises substantial control over the entity or (ii) owns or controls 25% or more of the ownership interests in the entity. Special rules apply for calculating 25% or more beneficial owners depending on the type of entity involved.
• FinCEN IDs: Determine whether the reporting company will obtain a FinCEN ID or request (or require) its beneficial owners and company applicants to obtain FinCEN IDs.
• Filing options: Although reporting companies may make their BOI reports directly with FinCEN, we expect that many companies (especially those with multiple beneficial owners) will use a third-party filing tool or advisor to handle these reports. Filing directly with FinCEN will generally result in updates being more difficult to make and will not provide an integrated filing approach across more complicated corporate and portfolio company structures. We would be glad to discuss potential options with you.
• Provide correct information to reporting companies: Companies who are themselves beneficial owners of reporting companies (including companies who have the right to appoint board members to the reporting companies) should be prepared to provide complete and accurate information regarding their beneficial owners to the reporting companies so that the reporting companies can accurately complete their filings. Failure to timely provide such information may subject the beneficial owners of reporting companies to civil and criminal liability.
• Establish compliance policies and procedures: Companies should establish policies and procedures to ensure that initial filings and amendments are made accurately and timely. These policies and procedures should address requiring beneficial owners to provide BOI and updates to their BOI (including through agreements with officers, directors and equity holders), how the reporting company intends to use FinCEN IDs, what filing solutions the reporting company will use, and the applicable internal and external personnel and advisors responsible for operationalizing and executing the reporting company’s compliance program.

This client alert is based on the CTA (including rules) and FinCEN guidance in effect as of the date hereof, and we plan to provide periodic updates as FinCEN provides additional information and market practice regarding CTA filings and requirements become more settled.

The CTA will fundamentally change the disclosure and compliance requirements for millions of entities in the United States.