Background and Summary
A new federal law, the Corporate Transparency Act (CTA), went into effect on January 1, 2024. The CTA requires that most entities file Beneficial Ownership Information Reports (BOI Reports) with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury. BOI Reports provide identifying information about the entity and its beneficial owners (either through direct/indirect 25% ownership, or persons with “substantial control” such as senior officers). The CTA is intended to aid the U.S. government in preventing money laundering, fraud, and other illicit activities conducted through previously anonymous entities. Reported information is intended for government and law enforcement use and should not be publicly available. Entities formed prior to January 1, 2024, have until December 31, 2024, to file their initial BOI Report. Entities formed in 2024 will have 90 days from formation to file their initial BOI Report.
McAfee & Taft has established a CTA Working Group to monitor developments and provide support on CTA matters, so please don’t hesitate to contact us with any questions or assistance you may need in complying with this new federal law.
Why the CTA was enacted
The CTA was enacted to combat the use of legal entities for illicit activities, including money laundering. While reasonable people may disagree about its effectiveness for that purpose, the CTA does bring the United States more in line with international standards on reporting beneficial ownership information. In fact, in many countries, this information must be reported before an entity can even be formed. However, recognizing the sensitive nature of the information required, the CTA is limited to governmental use and is not available to the public.
Who must report
The CTA requires reports from any corporation, LLC, or other similar entity formed by filing of a document with a secretary of state (or similar state or tribal office). The CTA also requires reports from any entity formed under the law of a foreign country and registered to do business in the United States via a filing with a secretary of state (or similar state or tribal office). Collectively, such an entity is referred to herein as a Reporting Company.
To avoid duplicative work for entities that already have significant governmental reporting obligations, the CTA exempts 23 different categories of entities (each, an Exempt Entity). This list is detailed in full at the end of this article, but the major categories and a brief description of the Exempt Entities are as follows:
- Large Operating Companies – any entity that: (a) has an operating presence at a physical location in the U.S.; (b) employs more than 20 full-time employees; and (c) has filed a federal tax return for the previous year showing more than $5,000,000 of gross receipts
- Subsidiaries of certain exempt entities – any entity owned solely by one or more exempt entities (other than pooled investment vehicles, money services business, an entity assisting a tax-exempt entity and inactive entities)
- Inactive entities – any entity that: (a) was in existence prior to January 1, 2020, (b) is not engaged in an active business, (c) is not owned by a foreign person (directly or indirectly, in whole or in part), (d) has had no changes in ownership during prior 12 months, (e) has not sent or received funds greater than $1,000 in the prior 12 months, and (f) does not hold any assets in the U.S. or otherwise, including any ownership interests in other entities
- Entities already registered with the SEC/FinCEN – (a) registered securities issuers; (b) brokers or dealers in securities; (c) securities exchanges or clearing companies; (d) money services businesses; (e) other Exchange Act registered entities; (f) investment companies or investment advisers; (g) venture capital fund advisers; (h) Commodity Exchange Act registered entities
- Other highly regulated businesses – (a) banks; (b) credit unions; (c) depository institution holding companies; (d) insurance companies; (e) state-licensed insurance producers; (f) accounting firms; (g) public utilities; (h) pooled investment vehicles; (i) financial market utilities
- Governmental and non-profit entities – (a) governmental authorities and political subdivisions; (b) tax-exempt entities; (c) entities assisting a tax-exempt entity
What information to report
A Reporting Company must report certain information with regard to itself and its Beneficial Owners and Company Applicants.
Who is a beneficial owner? A Beneficial Owner is any individual who, directly or indirectly, either (i) exercises substantial control over a Reporting Company or (ii) owns or controls at least 25% of the ownership interests of the Reporting Company.
Substantial control includes: (1) service as a senior officer; (2) authority over the appointment/removal of a senior officer or a majority (or dominant minority) of the board of directors (or similar body); (3) direction, determination, decision of, or substantial influence over important matters affecting the Reporting Company; and (4) any other form of substantial control over the Reporting Company. Depending on the complexity of the entity’s control structure, this could be a fact-intensive analysis.
Ownership interest includes: (1) any equity interest, regardless of certification, transferability, voting rights, or classification as stock or anything similar; (2) any capital or profits interest in a LLC or partnership (including both limited and general partnership interests); (3) any proprietorship interest; (4) any instrument convertible into any of the above, or a future or right to purchase any of the above; and (5) any put, call, straddle or other option/privilege of buying or selling any of the above. An individual can directly or indirectly own or control such interests in a variety of ways, including: (1) joint ownership with one or more others; (2) through control of such interest owned by another; (3) as a trustee of a trust owning such interest (with power to dispose of such interest); (4) as a beneficiary of a trust owning such interest (if either the sole permissible recipient of income/principal from the trust or able to demand distribution of all/substantially all of the trust assets); (5) as a grantor of a trust owning such interest (if able to revoke the trust or otherwise withdraw the assets of the trust); (6) through ownership or control of one or more intermediary entities; and (7) through any other contract, arrangement, understanding, or relationship.
Exceptions to Beneficial Owner treatment include: (1) a minor child if the Reporting Company reports the information of the minor’s parent or guardian; (2) an individual acting purely as an agent for another individual, but only if the principal’s information is reported; (3) an employee of a Reporting Company (other than a senior officer) whose control over the Reporting Company is derived solely from the individual’s employment status; (4) an individual whose only interest in a Reporting Company is a future interest through an inheritance right; and (5) a creditor of a Reporting Company if the creditor’s only interest is for the payment of a predetermined sum (but the exception doesn’t apply if the creditor has a capital interest or debt convertible into a capital interest).
Who is a Company Applicant? For a domestic Reporting Company, a Company Applicant is any individual who files the document that creates the Reporting Company. For a foreign Reporting Company, a Company Applicant is any individual who files the document that first registers the foreign Reporting Company. In either case, this includes any individual who directs or controls the filing of such document by another person (i.e., the attorney who directs a paralegal or secretary to file). Reporting Companies in existence prior to January 1, 2024 are not required to include any information for a Company Applicant. Further, Reporting Companies are not required to update new information about the Company Applicant(s) after the initial filing, but would be required to correct any inaccurate information included in such initial filing.
Information Required. A Reporting Company must include the following information in the BOI Report with respect to itself: (1) the entity’s full name; (2) any trade name or DBA; (3) the business street address; (4) the state or tribal jurisdiction of formation (or registration for a foreign Reporting Company); and (5) the EIN. If the entity doesn’t have an EIN, it can report either its Dun & Bradstreet Universal Numbering System (DUNS) Number or its Legal Entity Identifier.
For every individual who is a Beneficial Owner or a Company Applicant with respect to a Reporting Company, the Reporting Company must include either such individual’s FinCEN Identifier (see below) or the following information in the BOI Report: (1) the individual’s full legal name; (2) the individual’s date of birth; (3) the complete current address (generally the residential address used for tax residency purposes, but could be a business address if a Company Applicant filed the relevant documents in the course of his/her business); (4) a unique identifying number from a non-expired government ID (U.S. passport, state/tribal ID card, state driver’s license, or foreign passport); and (5) an image of the document from (4), including both the ID number and a photograph.
If an Exempt Entity is a Beneficial Owner, the Reporting Company should report only the Exempt Entity’s name instead of the other information. If a minor child is a Beneficial Owner, the Reporting Company can report the required information with respect to a parent or legal guardian of the minor (noting such reporting).
FinCEN Identifier. The CTA provides individuals and Reporting Companies the ability to obtain a FinCEN identifier (a unique ID number) by providing FinCEN the respective information required for an individual or a Reporting Company. Thereafter, the holder of a FinCEN identifier can use such number in lieu of the otherwise required information. This may be beneficial if individuals do not want to provide identifying information to a Reporting Company. A holder of a FinCEN identifier must update their reported information to FinCEN as otherwise required in the CTA and regulatory guidance.
When to report
A Reporting Company created before January 1, 2024, will have until December 31, 2024, to file its initial BOI Report. Reporting Companies formed during 2024 will have 90 days from the date of formation to file the initial BOI Report. Reporting Companies formed after 2024 must submit the BOI Report within 30 calendar days of the date of formation. An entity that no longer meets the Exempt Entity criteria must submit a BOI Report within 30 calendar days of the date it no longer meets such criteria.
A Reporting Company must file an updated BOI Report if any of the information it reports to FinCEN changes. Such updated reports must be submitted within 30 calendar days of when such information changes. A Reporting Company must file a corrected BOI Report within 30 calendar days of when the Reporting Company becomes aware or has reason to know that any required information in a prior BOI Report was inaccurate when filed and remains inaccurate.
Failures to report
Violations of the CTA reporting requirements include: (1) willfully providing false or fraudulent information to FinCEN as required; or (2) willfully failing to report complete or updated information to FinCEN as required. A person can provide or attempt to provide information to FinCEN either directly or indirectly (by providing such information to another person for purposes of a required CTA report). Further, a person fails to report complete or updated information to FinCEN if such person controls another person with respect to a failure to report, or is in substantial control of a Reporting Company when it fails to report complete or updated information. Accordingly, more than one person could be liable for a failure to report.
The CTA provides for (1) daily penalties of up to $500 for each day a violation continues and has not been remedied, and (2) a fine of up to $10,000 and prison time of up to 2 years, or both. A person may avoid such penalties if they correct the inaccurate or incomplete BOI Report within 90 days of the original filing. The exception does not apply if the person intends to evade the reporting requirements and has actual knowledge that any information contained in the initial BOI REPORT is inaccurate.
Reporting methods
FinCEN has created an online portal called the Beneficial Ownership Secure System (“BOSS”) to collect and store CTA reports. A Reporting Company can either: (i) complete the BOI Report online through BOSS; or (ii) download an interactive PDF copy of the BOI Report to complete and upload to BOSS later.
Next steps
All legal entities formed or registered in the United States need to evaluate the following:
(i) Is the entity exempt from CTA reporting obligations?
(ii) If the entity is not exempt and has to file a BOI Report:
a. Who are its Beneficial Owners through substantial control?
b. Who are its Beneficial Owners through 25% ownership?
c. If the entity was created on or after January 1, 2024, who is its Company Applicant(s)?
As noted above, Reporting Companies have duties to update their information as it changes, so make sure to keep in contact as people and situations change in the future.
CTA Exempt Entities
- Large Operating Companies – requirements set forth above
- Subsidiaries of certain exempt entities – requirements set forth above
- Inactive entities – requirements noted above
- Entities already registered with the SEC/FinCEN –
- Securities reporting issuers – any securities issuers required (i) to register with the Securities and Exchange Commission (“SEC”) pursuant to Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”) or (ii) to file supplementary and periodic information pursuant to Section 15 of the Exchange Act
- Brokers or dealers in securities – any broker or dealer, as defined in Section 3 of the Exchange Act, that is required to register pursuant to Section 15 of the Exchange Act
- Securities exchanges or clearing companies – any exchange or clearing agency, as defined in Section 3 of the Exchange Act, that is required to register pursuant to Sections 6 or 17A of the Exchange Act
- Other Exchange Act registered entities – any other entity registered with the SEC pursuant to the Exchange Act
- Money services businesses – any money transmitting business registered with FinCEN pursuant to 31 U.S.C. 5330 and any money services business registered with FinCEN pursuant to 31 C.F.R. 1022.380
- Investment companies or investment advisers – any entity that is an investment company as defined in Section 3 of the Investment Company Act of 1940 or an investment adviser as defined in Section 202 of the Investment Advisers Act of 1940, and that is registered with the SEC pursuant to such laws
- Venture capital fund advisers – any investment adviser, as described in Section 203(l) of the Investment Advisers Act of 1940, who has filed Item 10, Schedule A and Schedule B of Part 1A of Form ADV (or any successor thereto) with the SEC
- Commodity Exchange Act registered entities – any entity that is a registered entity as defined in Section 1a of the Commodity Exchange Act (“Commodity Act”), or is one of the following: (i) a futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor, each as defined in Section 1a of the Commodity Act; (ii) a retail foreign exchange dealer as described in Section 2(c)(2)(B) of the Commodity Act; or (iii) is registered with the Commodity Futures Trading Commission pursuant to the Commodity Act
- Other highly-regulated businesses –
- Banks – any bank, as defined in Section 3 of the Federal Deposit Insurance Act, Section 2(a) of the Investment Company Act of 1940, or Section 202(a) of the Investment Advisers Act of 1940
- Credit unions – any federal or state credit union, as defined in Section 101 of the Federal Credit Union Act
- Depository institution holding companies – any bank holding company as defined in Section 2 of the Bank Holding Company Act of 1956 or any savings and loan holding company as defined in Section 10(a) of the Home Owners’ Loan Act
- Insurance companies – any insurance company, as defined in Section 2 of the Investment Company Act of 1940
- State-licensed insurance producers – any entity that: (i) is an insurance producer that is authorized by a State; (ii) is subject to supervision by the insurance commissioner (or similar office) of such State; and (iii) has an operating presence at a physical location in the U.S.
- Accounting firms – any public accounting firm registered pursuant to Section 102 of the Sarbanes-Oxley Act of 2002
- Public utilities – any entity that is a regulated public utility, as defined in 26 U.S.C. 7701(a)(3)(A), that provides telecommunications, electrical power, natural gas, or water and sewer services within the U.S.
- Pooled investment vehicles – any pooled investment vehicle that is owned or advised by a bank, credit union, broker or dealer in securities, investment company or investment adviser, or a venture capital fund adviser (all as defined in the CTA)
- Financial market utilities – any financial market utility designed by the Financial Stability Oversight Council pursuant to Section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010
- Governmental and tax-exempt entities –
- Governmental authorities and political subdivisions – any entity that: (i) is established under the laws of the U.S., a state, or a tribal entity; and (ii) exercises governmental authority on behalf of such jurisdiction
- Tax-exempt entities – any entity that qualifies as tax-exempt pursuant to Internal Revenue Code 501(c), 527(a), or 4947(a)(1, 2)
- Entities assisting a tax-exempt entity – any entity that: (i) operates exclusively to provide financial assistance to, or exercise governance rights over, a tax-exempt entity as described above; (ii) is a U.S. entity; (iii) is owned or controlled exclusively by one or more U.S. citizens or permanent residents; and (iv) derives at least a majority of its funding from one or more U.S. citizens or permanent residents
