1. What Is the Corporate Transparency Act and Why Was It Enacted?
Congress enacted the Corporate Transparency Act (CTA) on January 1, 2021, to address concerns that the inaccessibility of U.S. companies’ beneficial ownership information (BOI) allows bad actors to engage in money laundering, tax fraud, corruption, and other illicit activity. The CTA requires certain entities to disclose their BOI to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
2. Who Must File BOI Reports With FinCEN?
Entities the CTA defines as “reporting companies” must file reports to FinCEN. The two types of reporting companies include:
a. Domestic Reporting Companies—corporations, limited liability companies, or other entities created by filing a document with a secretary of state or similar office under state or tribal law.
b. Foreign Reporting Companies—corporations, limited liability companies, or other entities formed under a foreign country’s laws and registered to do business in a U.S. state or tribal jurisdiction by filing a document with a secretary of state or similar office under state or tribal law.
3. What Are the Exemptions to the Definition of a Reporting Company?
The CTA exempts 23 types of entities from the definition of a reporting company, thus exempting such entities from filing reports with FinCEN. Some of the most notable types of exempt entities are large operating companies, certain publicly traded companies, and other securities reporting issuers, insurance companies, tax exempt companies, regulated financial services companies, PCAOB registered accounting firms, and certain types of inactive entities in existence on or before January 1, 2020. Further, if an entity’s ownership interests are controlled or wholly owned, directly or indirectly, by an exempt entity, then such entity will also likely qualify for an exemption. Many exempt entities are regulated by the government and already disclose their BOI to a governmental authority. A full list of exempt entities can be found in the beneficial ownership information Reporting Regulations at 31 CFR § 1010.380(c)(2).
4. As Related to the Large Operating Company Exemption (Exemption No. 21), How Are the Employees and Gross Receipts Calculated Amongst Wholly Owned or Controlled Subsidiaries (or Group of Subsidiaries or Entities)?
Large operating companies are exempt if they have more than 20 full-time employees, more than $5 million in gross receipts or sales, and an operating presence at a physical office within the United States. Companies may not consolidate employees of wholly owned or controlled subsidiaries to meet the requirements of this exemption because employees are determined on an entity-by-entity basis. However, companies may consolidate gross receipts or sales earned by wholly owned or controlled subsidiaries to meet the $5-million threshold.
5. When Must Reports Be Made?
The reporting regime goes into effect on January 1, 2024. The initial report deadline depends on when the reporting company was created. Entities formed on or after January 1, 2024, must file their initial report within 30 days from the earlier of the date the company receives actual notice that its creation or registration is effective, or after the secretary of state or similar office first provides public notice of its creation or registration. However, FinCEN recently proposed extending this deadline to 90 days. Entities formed prior to January 1, 2024, have until January 1, 2025, to file their initial reports.
6. How Are BOI Reports Filed?
Reporting companies will report BOI electronically through FinCEN’s secure filing system. This system is not yet available, but will be made available on FinCEN’s website before reports are due. There will not be a fee for submitting beneficial ownership reports. Once available, information about the form will be posted at: https://www.fincen.gov/boi.
7. Can a Parent Company File a Single BOI Report on Behalf of Its Group of Companies?
No. Every entity that meets the definition of a reporting company and is not exempt must file its own report.
8. Who Can Access BOI Reports?
As currently proposed, Federal, State, local, and Tribal officials, as well as certain foreign officials who submit a request through a U.S. federal government agency, will be permitted to obtain BOI reports for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will also have access to beneficial ownership information in certain circumstances, with the consent of the reporting company. FinCEN is in the process of developing the rules that will govern access to and handling of BOI reports.
9. Who Is Considered a Beneficial Owner?
A beneficial owner is an individual who either (a) directly or indirectly exercises “substantial control” over a reporting company or (b) directly or indirectly owns or controls 25 percent or more of the ownership interests in a reporting company.
a. An individual can exercise “substantial control” over a reporting company if the individual:
b. serves as a senior officer of the company or performs a similar function;
c. has authority to appoint or remove officers or a majority of the board of directors (or similar body) of the company;
d. is an important decision-maker for the company; or
e. has any other form of substantial control over the company. Important decisions include decisions about a company’s structure, business, and finances.
An “ownership interest” is an arrangement establishing ownership rights in a company. Examples of ownership interests include voting rights, stock, and shares of equity. Individuals may exercise control over ownership interests directly or indirectly through means such as:
a. joint ownership;
b. other individuals acting as an agent, custodian or intermediary;
c. as trustee, grantor, settlor, or beneficiary of a trust; or
d. through ownership or control of intermediary entities that separately or collectively own or control ownership interests in a reporting company.
When analyzing ownership interests, ownership interests should be looked at on a fully diluted basis, assuming that any outstanding options are exercised.
Lawyers and accountants providing general arm’s-length services to a reporting company are generally not considered beneficial owners of the company. When these types of service providers act as an agent of a reporting company, they typically fall into the “nominee, intermediary, custodian, or agent” exemption for beneficial ownership described in Question 12, below. However, those serving as general counsel of a reporting company are senior officers and therefore beneficial owners of the reporting company.
10. Who Is Considered a Senior Officer for Purposes of the Substantial Control Prong?
According to FinCEN, a senior officer is considered any individual holding the position or exercising the authority of a:
a. President;
b. Chief financial officer (CFO);
c. Chief executive officer (CEO);
d. Chief operating officer (COO);
e. General counsel (GC); or
f. any other officer, regardless of official title, who performs a similar function as the foregoing officers.
11. What If a Trust Is an Owner of the Company?
For trusts, the following individuals are beneficial owners:
a. any trustee or other individual with authority to dispose of trust assets;
b. any beneficiary who either
i. is the sole permissible recipient of trust income and principal, or
ii. has the right to demand a distribution or withdrawal of substantially all of the trust assets; and
c. any grantor or settlor who has the right to revoke the trust or otherwise withdraw trust assets. A trust may have more than one beneficial owner.
12. What Are the Exemptions to the Definition of Beneficial Ownership?
The CTA exempts four types of people from the definition of a beneficial owner, thus exempting reporting companies from including these individuals in their reports with FinCEN. These exempt individuals are as follows:
a. minor children; provided, however, that the reporting company must provide information on the child’s parent or legal guardian;
b. individuals acting as a nominee, custodian, or agent on behalf of another individual who is a beneficial owner;
c. employees acting solely as an employee and whose control over the entity is derived solely from their employee status, provided that the employee is not a senior officer; and
d. creditors of reporting companies.
13. Who Is Considered a Company Applicant?
Reporting companies created or registered on or after January 1, 2024, must include information about their “company applicant(s)” on reports to FinCEN. Reporting companies can have up to two individuals qualify as company applicants. A company applicant is the individual who directly files the document that creates a reporting company. If more than one individual is involved in filing the document, the company applicant is also the individual primarily responsible for directing or controlling the filing. Third parties such as attorneys, paralegals, or accountants may be company applicants if they file on behalf of clients or oversee the filing process.
For example, if a law firm prepares the organizational documents, the two company applicants would be (1) the person actually filing the documents (presumably CT or CSC, etc.), and (2) the attorney who oversees the preparation and filing. Only where the organizer creates and files the documents without using a law firm would the organizer be considered the company applicant.
14. What Must Reports Include?
The information a reporting company must include in its reports depends on when the entity was created or registered. Reporting companies created or registered on or after January 1, 2024, must report information about themselves, their beneficial owners, and their company applicants. Reporting companies created or registered before January 1, 2024, must report about themselves and their beneficial owners but do not need to report on their company applicants.
A reporting company must report the following information about itself:
a. legal name;
b. any trade, “doing business as” or “trading as” names;
c. current address of its principal place of business if such address is in the United States, or current address from which the company conducts business in the United States if its principal place of business is outside the United States;
d. jurisdiction of formation or registration; and
e. Taxpayer Identification Number.
A reporting company must report the following information about each beneficial owner:
a. name;
b. date of birth;
c. residential address;
d. unique identifying number from one of the acceptable identification documents described for beneficial owners above;
i. non-expired driver's license issued by a U.S. state;
ii. non-expired identification document issued by a U.S. state, local government, or tribe issued for the purpose of identifying the individual;
iii. non-expired passport issued by the U.S. government; and
iv. if the individual does not have any of the forms of identification described in (i) – (iii) above, the non-expired passport issued by a foreign government;
f. state or jurisdiction that issued the identification document;
g. image of the identification document.
A reporting company created or registered after January 1, 2024, must report the following information about each company applicant:
a. name;
b. date of birth;
c. residential address or, if the individual engages in the business of corporate formation (e.g., as an attorney or corporate formation agent), the company applicant’s business address;
d. unique identifying number from one of the acceptable identification documents described for beneficial owners above;
e. state or jurisdiction that issued the identification document; and
f. image of the identification document.
15. What Is a FinCEN Identifier?
Individuals and entities may apply for and obtain a FinCEN identifier to make the reporting process more efficient. A FinCEN identifier is an identification number issued by FinCEN that reporting companies may include in their reports in place of the information required for an individual. Individuals must provide their name, date of birth, address, and identification to apply. Reporting companies may request a FinCEN identifier by checking a box when submitting their reports.
16. Are Updates Required Once an Initial Report Is Filed?
If a reporting company experiences any change with respect to information previously reported to FinCEN, the reporting company must file an updated report within 30 calendar days after the date of the change. Examples of changes that would require an updated report include any change to the information reported about the reporting company or beneficial owners, a change in beneficial owners, transfers of ownership interests due to an owner’s death or a minor child reaching the age of majority, a reporting company becoming exempt from reporting requirements, or changes to a previously submitted identifying document.
Note that a reporting company does not need to file an updated report for any changes to the previously reported information about a company applicant. If a reporting company files a report but then becomes exempt from the reporting requirements, the company must file an updated report indicating its newly exempt status.
A reporting company must also update its report if it becomes aware of any mistakes or omissions in its previously filed report. A corrected report must be filed within 30 calendar days after the date the reporting company becomes aware or has reason to know of the mistake or omission. As long as the reporting company corrects the mistake or omission within 90 days of the deadline for the initial report, it will not be penalized by FinCEN.
17. Are There Penalties for Not Filing?
Reporting companies must make sure they meet all beneficial ownership filing obligations because failure to comply with the CTA can result in civil penalties up to $500 for each day a violation persists. Failing to comply or willfully providing false information may result in criminal penalties – including a fine up to $10,000 or two years’ imprisonment.
18. How Long Does FinCEN Retain the Beneficial Owner Information?
FinCEN is required to maintain the information until five years after the reporting company terminates or is otherwise dissolved.
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