If you own or plan to form an LLC, corporation, or similar business entity, you should be aware of the Corporate Transparency Act and its reporting requirements to avoid significant penalties.

What is the Corporate Transparency Act? 

The Corporate Transparency Act (CTA)[1], effective Jan. 1, 2024, was enacted to combat money laundering, tax evasion and the financing of terrorism in the United States. The CTA requires that certain entities must disclose to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, Beneficial Ownership Information (BOI) and other related data about individual owners and those who control the entity (Beneficial Owners) and (Company Applicants) applying to form an entity.

Who does the CTA affect?  

The CTA impacts any entity that meets the definition of a “Reporting Company.” Companies that must report are corporations, LLCs and other entities created by filings with a Secretary of State or similar office. Trusts are not included in the definition of a Reporting Company but can trigger CTA reporting requirements if a trust owns a Reporting Company.  

Who is Exempt from the CTA’s reporting requirements? 

The CTA provides a non-exhaustive list of entities that are exempt from the definition of a Reporting Company, including, among others:

• Regulated businesses, such as banks, bank holding companies, SEC registered entities and insurance companies;
• Exempt charitable organizations, including Private Foundations (note, however, that newly created charitable organizations may need to report until granted exempt status);
• Large U.S. operating companies with more than twenty (20) employees and total sales exceeding $5 million;
• Certain entities with no active trade or business; and
• Subsidiaries of some, but not all exempt entities.

Companies that do not fit the definition of a Reporting Company or that fall under any of twenty-three (23) exemptions are not subject to the CTA’s reporting requirements. 

Who are an entity’s Beneficial Owners?

The CTA requires Reporting Companies to report BOI, information about the entity and the entity’s Beneficial Owners, to FinCEN.

A Beneficial Owner is any individual who (1) directly or indirectly exercises substantial control over a Reporting Company or (2) owns or controls at least 25 percent of the ownership interests of a Reporting Company.

An individual is considered to exercise substantial control over a Reporting Company if the individual:

• Serves as a senior officer of the Reporting Company, such as President, CEO, CFO, or General Counsel;
• Has authority over the appointment or removal of any senior officer or a majority of the board of directors or managers of the Reporting Company; or
• Directs, determines or has substantial influence over important decisions of the Reporting Company.

If a trust owns a reporting company, the CTA also generally treats the following individuals, among others, as Beneficial Owners who must report:

• Trustees;
• A trust beneficiary who is the sole permissible recipient of income and principal;
• A trust beneficiary who can demand distribution of or withdraw substantially all of the trust assets, and
• A trust grantor or settlor who has the right to revoke the trust or withdraw all of its assets.

How Does the Reporting Company File BOI with FinCEN?

Reporting Companies must file BOI to FinCEN electronically through a secure filing system available on FinCEN’s website: https://www.fincen.gov/boi.

What Information Must be Disclosed?

The Reporting Company must identify itself by reporting its:

• Full legal name;
• Any trade name or doing business name;
• Current address of its principal place of business (if in the United States), or current address from which the company conducts business in the United States (if principal place of business is outside the United States);
• Jurisdiction of formation or registration; and
• IRS taxpayer identification number or tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.

Information about a Beneficial Owner (and Company Applicants for companies created after Jan. 1, 2024) that must be reported includes:  

• Name;
• Birthdate;
• Residential Address;
• A unique identifying number and issuing jurisdiction from an acceptable identification document (passport, state identification document or driver’s license) and an image of the document.

Company Applicants are defined to include one or two individuals who file the document that creates the entity, register the entity to do business in the U.S., or are responsible for directing or controlling the filing of the relevant document.

When is BOI information due to Fincen?

• Reporting Companies created before Jan. 1, 2024 must file a report by the end of 2024.
• Reporting Companies created in 2024 must file a report within ninety (90) days of creation.
• Reporting Companies created after 2024 must file a report within thirty (30) days of creation.
• Reporting Companies must report inaccuracies or changes in information previously reported within thirty (30) days of when the change occurred or when the company became aware or had reason to know of the inaccuracy.

What penalties may be imposed under the CTA?

Failure to file a timely required report with FinCEN will result in civil and criminal penalties (fines of $500 per day that the report is outstanding, up to $10,000) and up to two years imprisonment. Any person who willfully provides false ownership information is subject to similar penalties.

Penalties will also be imposed on anyone who makes an unauthorized disclosure of information about Applicants or Beneficial Owners.  

Key Takeaways:

• Any entity that meets the definition of a Reporting Company and is not exempt is impacted.

• Critical determinations include whether an entity is a Reporting Company and who its Beneficial Owners are.
• A Reporting Company must report all BOI to FinCEN, which can be done electronically through a secure filing system available on FinCEN’s website.
• Filing deadlines depend on whether a Reporting Company was created before or after Jan. 1, 2024.
• Penalties will be imposed for failure to file a timely report or filing false or unauthorized information.

*The author thanks summer law clerk Madeline Humphrey for her assistance in drafting this client alert.

[1] It should be noted that on March 1, 2024, a U.S. District Court declared the CTA to be unconstitutional, but halted enforcement of the CTA only as to the Plaintiffs. National Small Business Association, et al. v. Yellen, No. 5:22-cv-01448 at 3 (N.D. Ala.). Those required to report under the CTA are therefore advised to do so to avoid the penalties outlined in this alert.