Beginning January 1, 2024, the Corporate Transparency Act (CTA) will require that certain companies that are not otherwise regulated by the government, called “Reporting Companies,” file Beneficial Ownership Information (BOI) reports with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). These reports will provide information on the “Beneficial Owners” of Reporting Companies.

The purpose of the CTA is to assist FinCEN and other federal and state law enforcement agencies to identify and combat against persons who use anonymity and/or shell companies to conduct illicit activities such as money laundering, financing terror, tax fraud, counterfeiting, and securities and financial fraud. With this new legislation going into effect, it is critical for legal entities and their owners to understand the basic tenants of the CTA and the penalties that can be imposed for failure to comply in a timely manner.

What is a Reporting Company?
A Reporting Company is a company that is created or registered to do business in the United States by filing with a Secretary of State or its equivalent and does not otherwise fall within any of the 23 listed exemptions.

The exemptions generally include companies that are already registered and regulated by the government such as publicly traded companies, companies registered with the SEC, 501(c) tax-exempt entities, banks, and money lending companies. Other exemptions include:

• Large operating entities: a company that has at least 20 full time employees, federal income tax filing showing at least $5 million in gross receipts, and an operating presence in the United States;
• An inactive entity: a company that existed before January 1, 2020, is not engaged in active business, is not owned by a foreign person, has not experienced a change in ownership in the preceding 12 months, has not sent or received funds greater than $1,000 in the preceding 12 months, and does not hold any assets; and
• Subsidiaries of certain exempt entities: subsidiaries that are wholly controlled or owned by entities that are exempt from reporting are also exempt from reporting.

Who Qualifies as a Beneficial Owner?
A Beneficial Owner is any 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 at least 25 percent of the ownership interests of the Reporting Company.

Substantial control includes anyone that serves as a senior officer (i.e. CEO, CFO, COO, or General Counsel); has authority over the appointment and removal of any senior officer or a majority of the board; has substantial influence over important decisions; or has any other form of substantial control over the Reporting Company. Substantial control can be direct or indirect and exists even where several persons are collectively needed to exercise the control.

Ownership interest is broadly defined to encompass any kind of contract, arrangement, understanding, or other relationship that conveys ownership interests. An individual may have indirect ownership via a trust or where such person has ownership or control in intermediary entities that separately or collectively own or control at least 25 percent of the ownership interests in the Reporting Company. Options, warrants, and similar interests are treated as though exercised and included in such person’s aggregate ownership interest in a Reporting Company.

There are a few exceptions to the meaning of Beneficial Owner:

• Minors are never considered to be Beneficial Owners, however their parent/guardian must file a BOI report in place of the minor.
• Individuals acting as nominees, intermediaries, custodians, agents, or solely as employees (and who are not otherwise a senior officer) are not Beneficial Owners.
• Individuals whose only interest in the Reporting Company is a future interest through a right of inheritance or as a creditor are exempt from the definition of Beneficial Owner.

What Information Needs to be Included in a BOI Report?
The BOI report includes the following information if the Beneficial Owner is an individual:

• Name, birthdate, current residential street address, and a unique identifying number from an acceptable form of a government issued ID (like a passport), as well as an image of that document.

The BOI report includes the following information if the Beneficial Owner is an entity:

• Name, address of its principal place of business, and taxpayer identification number.

For persons that are Beneficial Owners of multiple entities, there is an alternative to having to provide beneficial ownership information on every BOI report it files. A Beneficial Owner can obtain a FinCEN Identifier, which is a unique number given to any applicant who provides its beneficial ownership information to FinCEN. This FinCEN Identifier, instead of the actual beneficial ownership information, can then be used on each BOI report that the Beneficial Owner is required to file.

Filing Deadlines and Consequences of Not Filing
BOI reports must be filed in a timely manner. This means:

• All companies formed before January 1, 2024 will have until January 1, 2025 to file their initial BOI report;
• Companies formed after January 1, 2024, but before January 1, 2025, will have 90 days from date of formation to file their initial BOI report; and
• Companies formed after January 1, 2025, will have 30 days from date of formation to file their initial BOI report.

Incorrect BOI reports must be updated or corrected within 30 days of the Reporting Company becoming aware of an inaccurate BOI report. This includes an obligation to update a BOI report should any beneficial ownership information change.

The penalty for noncompliance are civil fines of not more than $500.00 a day up to $10,000.00 and/or imprisonment for not more than 2 years.

Conclusion
It is not too early to start thinking about CTA compliance. Ulmer’s business attorneys are available to provide guidance as to whether you are a Reporting Company or a Beneficial Owner of a Reporting Company and to provide assistance with filing BOI reports. Please reach out to our attorneys if you have any questions.