Reporting company reports must include information such as legal names and trade names or DBAs, addresses, the jurisdiction of formation or registration, and taxpayer identification numbers (TINs).  Beneficial owner and company applicant reports are provided at the individual level and must include legal name, birthdate, address (in most cases, a residential street address), an identifying number from a driver’s license or passport (or other approved document), and an image of that approved document.  In most instances, the information must be updated any time reported information is changed.  This process can be somewhat simplified by applying for a FinCEN identifier, which requires submitting the reportable information directly to FinCEN.

Violations of the reporting obligations can be met with civil penalties of not more than $500 per day and a fine of not more than $10,000 and prison sentences of up to two years, or both. The statute and regulations do, however, limit violations to willful conduct.

The Act impacts corporations, limited liability companies, and other similar entities created in or registered to do business in the United States.  The Act may impact the following businesses and industries in particular:  Agriculture, Real Estate, Construction, Estate Planning, Private Held Businesses and Enterprises, Developers, Franchises, International, Corporate, Intellectual Property, Mergers and Acquisitions, Wealth Planning, Entertainment, Tribal Entities, and Alaska Native Corporations.

WHAT TO DO NOW – To prepare for the CTA, companies, in consultation with their lawyers, should review their existing and expected business structure and determine whether the Act applies.  To begin, look at the entity type and determine if the business is either: (a) created by the filing of a document with the Secretary of State or similar office under the law of a state or Indian tribe; or (b) formed under the law of a foreign country AND registered to do business in any state or tribal jurisdiction, by the filing of a document with a Secretary of State or similar office under the laws of a state or Indian tribe.  If neither of those situations apply, the business does not need to comply with the CTA.  If one of those situations applies, then check to see if one of the 23 statutory exemptions applies.  If none of the exemptions apply, and the Act does apply, companies in consultation with their lawyers should consider what process to use to gather the required information, how it will be reported to FinCEN in a timely manner, and how to monitor that information in the future.  As an existing business, the reporting company will have until January 1, 2025, to file.  FinCEN is not accepting reports until January 1, 2024.  However, if the entity is formed in 2024, the company will have 30 days to file.  So, if a company expects that an entity will be formed in 2024 – consider forming the entity in 2023.  There is no fee for reporting to FinCEN.  Businesses should consult with a lawyer of their choosing regarding whether the CTA will apply.  See also – Practical Tips – Getting Ready for CTA.

There are many open questions about the Act, and further guidance is expected in the future.  With that said, for more information, the current guidance covers the following areas (PLEASE FOLLOW THE LINKS):

• Background and the Why?
• Who Must Report?
  • Reporting Company
    • Reporting Company
    • Reporting Company Exemptions
      • Regulated entities exemptions
      • Large operating companies exemption
      • Subsidiaries of certain exempt entities exemption
      • Inactive entities exemption
      • Secretary of Treasury’s exemption
  • Beneficial Owners
    • Beneficial Owners
    • Exceptions
    • Ownership or Control
    • Substantial Control
    • Examples of Beneficial Owners
  • Company Applicant
• Information to be Reported
  • Reporting Company Information
  • Beneficial Owners and Company Applicant Information
  • FinCEN Identifiers
• Timing and Forms of Reporting
  • Initial Filings
  • Updates
  • Corrections
  • Extensions
  • Forms and Certifications
  • Electronic Filing
  • Exempt Entities
• Penalties for Reporting Violations
• Access to FinCEN Reports
• Additional Rulemaking
• Challenge
• Practical Tips – Getting Ready for CTA
• Next Steps

Background and the Why?

The Act was enacted on January 1, 2021, as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for Fiscal Year 2021.  The Act describes who must file a report, what information must be provided, and when a report is due.  These requirements were intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity while minimizing the burden on entities doing business in the United States.  Through the Act, Congress directed FinCEN to establish and maintain a national registry of beneficial owners of entities that are deemed “reporting companies.”  FinCEN believes that collecting beneficial ownership information (“BOI”) will help protect national security and make it harder for criminals and other bad actors to hide from the law.

In December 2021, FinCEN published a Notice of Proposed Rulemaking and sought public comments.  In September 2022, FinCEN issued its final rule on Reports of Beneficial Ownership Information, 31 CFR §1010.380 (the “Final Rule”) with Supplementary Information (“Supplementary Information”) pursuant to the Act, and the Final Rule goes into effect on January 1, 2024, with all initial reporting for existing reporting companies required to be filed by January 1, 2025, or if created on or after January 1, 2024, within 30 days of formation or registration.  The Supplementary Information contains a substantial preamble that explains many features of the final regulation and the basis for the rule.  For purposes of this article, the Final Rule and Supplementary Information will be referred to as the “Final Rulemaking.”

The Final Rulemaking addresses, among other things, who must file, when they must file, and what information they must provide; it also addresses the beneficial owner portion of the Act.  FinCEN expects to issue further clarification and guidance, including FAQs and help lines, to assist in understanding and implementing the Act.  On March 24, 2023, the Department of Treasury issued FAQs clarifying requirements for reporting information on beneficial owners and company applicants, which was updated on August 3, 2023 (“2023 FAQs”).  There will also be additional rules on access and safeguards on the use of BOI, and enhanced consumer due diligence (“CDD”).  Some proposed rules are pending at this time.

Who Must Report

Beginning on January 1, 2024, domestic and foreign reporting companies must file reports with FinCEN identifying all beneficial owners and company applicants.  The name of the Act, “Corporate Transparency Act” is a misnomer; it applies to all “reporting companies.”

Reporting Company

Reporting company means a corporation, limited liability company, or other similar entity that is (a) created by the filing of a document with a Secretary of State or a similar office under the law of a state or Indian Tribe; or (b) formed under the law of a foreign county and registered to do business in the United States by the filing of a document with the Secretary of State or a similar office under the law of a state or Indian Tribe.

• A key factor is the filing of a document with the state’s Secretary of State or a similar office. At this time, further guidance is expected regarding what constitutes a “similar office,” which may include a court.
• Trusts may or may not be a “reporting company” depending on state law. General partnerships will likely not be reporting companies, but limited partnerships, limited liability partnerships and limited liability limited partnerships likely will be.  Sole proprietorships are not usually created by a filing and likely would not be reporting companies. Companies should consult with a lawyer of their choosing to determine whether or not they are a reporting company.
• For the definition of “reporting company, a “state” means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, the U.S. Virgin Islands, and any other commonwealth, territory, or possession of the United States.
• The Act and Final Rulemaking exclude 23 types of entities from the definition of a reporting company, which generally include entities that already have to report similar information to the federal government via other statutes and/or regulations (e.g., banks and financial institutions, dealers in securities, insurance companies, credit unions, tax-exempt entities registered with the IRS, public utilities, and some types of larger companies); or “large operating entities; or subsidiaries or inactive companies. See “What are the exemptions?”
• Tribal businesses – please see “The Corporate Transparency Act: An Overview for Tribal Businesses”
• Alaska Native Corporations – please see “The Corporate Transparency Act: An Overview for ANCs”

Reporting Company Exemptions:  The Act and Final Rulemaking exclude 23 categories of entities from being considered a reporting company.  Most exemptions do not directly apply to small businesses and are directed towards larger operating companies. These 23 categories can be divided into five (5) areas: (a) Regulated entities – 20 of the exemptions are generally directed at those entities that are already regulated and report similar information to federal authorities; (b) “Large operating companies” –  entities that meet certain requirements – see below; (c) Certain subsidiaries – entities whose ownership interests are controlled or wholly owned by certain exempt entities – see below; (d) “Inactive entities” – entities that meet certain conditions – see below; and (e) Secretary of Treasury – the Secretary of Treasury may determine to make exemptions, but at this time has chosen not to make any additional exemptions.  The categories are:

(a) Regulated entities exemptions:  Below is a summary list of the 20 types of regulated entities that are exempted, however, please note that specific criteria and additional detail on each exemption is set out in the Final Rulemaking.  Companies, in consultation with their lawyers, should consult the text of the regulations before concluding that an entity qualifies for an exemption:

1. Certain types of securities reporting issuers
2. U.S. governmental authorities, which includes governmental authorities on behalf of the United States, an Indian Tribe, State or political subdivision
3. Certain types of banks
4. Federal or state credit unions as defined in section 101 of the Federal Credit Union Act
5. 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
6. Certain types of money transmitting or money services businesses
7. Any broker or dealer, as defined in section 3 of the Securities Exchange Act of 1934, that is registered under section 15 of that Act (15 U.S.C. 78o)
8. Securities exchanges or clearing agencies as defined in section 3 of the Securities Exchange Act of 1934, and that is registered under sections 6 and 17A of that Act
9. Certain other types of entities registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934
10. Certain types of investment companies as defined in section 3 of the Investment Company Act of 1940, or investment advisors as defined in section 202 of the Investment Advisors Act of 1940
11. Certain types of venture capital fund advisors
12. Insurance companies defined in section 2 of the Investment Company Act of 1940
13. State-licensed insurance producers with an operating presence at a physical office within the United States, and authorized by a State, and subject to supervision by a State’s insurance commissioner or a similar official or agency
14. Commodity Exchange Act registered entities
15. Any public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002
16. Certain types of regulated public utilities
17. Any financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010
18. Certain pooled investment vehicles
19. Certain types of tax-exempt entities – IRC §501(c) organizations that are tax exempt under IRC §501(a) (regardless of whether they have applied for exempt status on IRS Form 1023, 1024, or 1024A), political organizations under IRC §527, and trusts under IRC §4947(a)(1) or (2) (note: common law trusts are not excluded as exempt; rather, they fall outside the definition of Reporting Company).
    • A legal entity that is a church, a charity, a nonprofit entity, or other organization under IRC §501(c) and is exempt from income tax under IRC §501(a) is exempt and will remain exempt for a period of 180 days following the loss of its tax-exempt status.
    • A charitable trust or charitable split interest trust described under IRC §4947(a)(1) or (2) is exempt.
20. Entities assisting a tax-exempt entity described in 19 above

(b) Large operating companies exemption (21):  Any entity that meets the following three employment and/or tax reporting criteria:

• “employs more than 20 full-time employees in the United States, with ‘full-time employee in the United States’ having the meaning provided in 26 CFR 54.4980H-1(a) and 54.4980H-3, except that the term ‘United States’ as used in 26 CFR 54.4980H-1(a) and 54.4980H-3 has the meaning provided in 1010.100 (hhh)”;
  • For purposes of 26 CFR 54.4980H-1(a) and 54.4980H-3: (i) “employee” means “an individual who is an employee under the common-law standard”, but a “leased employee”, a sole proprietor, a partner in a partnership, a 2-percent S corporation shareholder, or a worker described in Section 3508 is not an employee (26 CFR 54.4980H-1(a)(15), and (ii) “full-time employee” within 26 CFR 54.4980H-1(a) and 54.4980H-3 are based on hours of service, monthly equivalency, or weekly rule, depending on the circumstances.
  • The references in the Final Rulemaking look to the Internal Revenue Code and related regulation under the Affordable Care Act to determine whether an employee is “full-time”, such as whether the employee works at least 30 hours per week or 130 hours per month, subject to adjustments and adaptations for salaried and other non-hourly workers, and paid vacation, holidays, jury duty, and similar paid days off are counted toward the 30/130 hour requirement.
  • Note that more than 20 full-time employees must be employed by the reporting company and not by subsidiaries or affiliates.
  • Number of employees is determined as of the date of the report.
• “has an operating presence at a physical office within the United States” – which means an entity regularly conducts its business at a physical location in the United States that the entity owns or leases and that is physically distinct from the place of business of any other unaffiliated entity. The location may be a personal residence; and
• “filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales, as reported as gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under Federal income tax principles. For an entity that is part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504 that filed a consolidated return, the applicable amount is the amount reported on the consolidated return for such group.”
  • “Gross receipts” for this purpose must be from U.S. sources only and must be calculated net of returns or allowances.
  • Receipts and sales of other entities owned by the legal entity and through which the legal entity operates are included in the legal entity’s gross receipts.

(c) Subsidiaries of certain exempt entities exemption (22):   Any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities described in exemptions 1, 2, 3, 4, 5, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 19, or 21.  See below for interpretation of “controlled or wholly owned, directly or indirectly.”

• Legal entities that are wholly owned or controlled by one or more Large Operating Companies (or are wholly owned or controlled by a combination of one or more Large Operating Companies and any one or more of the types of Act-exempt legal entities) are also exempt.
• There is no corresponding exemption for a parent company or holding company of a Large Operating Company.

(d) Inactive entities exemption (23):   Any entity that: (A) was in existence on or before January 1, 2020; (B) is not engaged in active business; (C) is not owned by a foreign person, whether directly or indirectly, wholly or partially; (D) has not experienced any change in ownership in the preceding twelve-month period; (E) has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding twelve-month period; and (F) does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

(e) Secretary of Treasury’s exemptions:  Congress gave the Secretary of Treasury, with the written concurrence of the Attorney General and the Secretary of Homeland Security, the ability, by regulation, to determine if there are other entities or classes of entities that should be exempt because the reporting (i) would not serve the public interest; and (ii) would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes.  At this time, FinCEN has not included any additional exemptions.

Beneficial Owners

Beneficial Owners:  If the company is a reporting company, then it must report all its “beneficial owners.” Beneficial owners are those individuals who, directly or indirectly, (A) own or control at least 25% of the ownership interests of a reporting company, or (B) exercise “substantial control” over the reporting company (regardless of any actual ownership of the legal entity).  “Substantial control” over a reporting company is based on a variety of facts and circumstances, and multiple individuals can have substantial control, all of whom are beneficial owners for purposes of the Act.  “Substantial control” includes (a) service as a senior officer, (b) has authority over appointment or removal of any senior officer or a majority of the board of directors (or similar body), and (c) the ability to direct, determine, or have substantial influence over important decisions made by the reporting company as specified below.  There are also some limited exceptions.  Overall, the elements to determine a “beneficial owner” include:  (i) ownership and control; and (b) substantial control.

Exceptions:  The term “beneficial owner” does not include:

• A minor child, as defined under the law of the State or Indian tribe in which a domestic reporting company is created or a foreign reporting company is first registered, provided the reporting company reports the required information of a parent or legal guardian of the minor child as specified in the Act;
• An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
• An employee of a reporting company, acting solely as an employee, whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee, provided that such person is not a senior officer;
• An individual whose only interest in a reporting company is a future interest through a right of inheritance;
  • In the Supplementary Information, FinCEN emphasized that once an individual has acquired an ownership interest in an entity through inheritance, that individual owns that ownership interest and is potentially subject to the BOI reporting requirements. FinCEN noted that an individual who may in the future come to own an ownership interest in an entity through a right of inheritance does not have ownership interests until the inheritance occurs, and that such a future or contingent interest may exist through wills or other probate mechanisms that solely provide a future interest in an entity.  However, FinCEN also noted that once an ownership interest is inherited and comes to be owned by an individual, that individual has the same relationship to the entity as any other individual who acquires an ownership interest through another means.  FinCEN stated that the precise moment at which an individual acquired an ownership interest in an entity through inheritance may be subject to a variety of existing legal authorities, such as the terms of the will, the terms of a trust, applicable state laws, and other valid instruments.  FinCEN intends the application of the inheritor exception and the meaning of a “right of inheritance” to conform to the governing legal authorities, and should those authorities not provide sufficient direction for purposes of the inheritor exception, FinCEN is prepared to consider supplemental guidance or FAQs.
• A creditor of a reporting company, that is an individual who solely through rights or interests for the payment of a predetermined sum of money, such as a debt incurred by the reporting company, or a loan covenant or other similar right associated with such right to receive payment that is intended to secure the right to receive payment or enhance the likelihood of repayment.
• “FinCEN does not envision that the performance of ordinary, arms-length advisory or other third-party professional services to the reporting company” would cause the individual providing those services to be a beneficial owner.

Ownership or Control:

• “Ownership interest” is broadly defined and means:
  • any equity, stock, or similar instrument; preorganization certificate or subscription; or transferable share of, or voting trust certificate or certificate of deposit for, an equity security, interest in a joint venture, or certificate of interest in a business trust; in each such case, without regard to whether any such instrument is transferable, is classified as stock or anything similar, or confers voting power or voting rights;
  • any capital or profit interest in an entity;
  • any related instrument convertible, with or without consideration, into the “equity” described above, or any future on such instrument, any warrant or right to purchase, sell, or subscribe to such share or interest, regardless of whether characterized as debt,
  • any put, call, straddle, or other option or privilege of buying or selling any of such “equity” described above with some exception; or
  • “any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.”
• Ownership or control of ownership interest. An individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship, or otherwise, including:
  • joint ownership with one or more other persons of an undivided interest in such ownership interest;
  • through another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual;
  • with regard to a trust or similar arrangement that holds such ownership interest: (1) as a trustee of the trust or other individual (if any) with the authority to dispose of trust assets; (2) as a beneficiary who: (i) is the sole permissible recipient of income and principal from the trust; or (ii) has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or (3) as a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust;
    • Examples in the Supplementary Introduction include:
      • an individual trustee of a trust (or similar arrangement), or other individual, with the power to dispose of trust assets. The reference to “other individual” in this context seems to imply that individuals serving in such fiduciary positions with regard to the trust, such as investment directors, advisors, or committee members, or even in non-fiduciary positions, such as trust protectors or persons holding veto powers over certain actions of the trustee, could be deemed to have beneficial ownership depending upon the circumstances.
      • a beneficiary of a trust who is the sole permissible recipient of income or principal of the trust or who can withdraw substantially all of the assets from the trust.
      • the grantor of any trust will be deemed to control or own the ownership interest of the reporting company if the grantor has the right to revoke the trust or otherwise withdraw assets of the trust.
    • through ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control the ownership interests of the reporting company.
• Calculation of the total ownership interests of a reporting company: In determining whether an individual owns or controls at least 25 percent of the ownership interests of a reporting company, the total ownership interests that an individual owns or controls, directly or indirectly, are calculated as a percentage of the total outstanding ownership interests of the reporting company as follows:
  • ownership interests of the individual are calculated at the present time (meaning the date of the report), and any options or similar interests of the individual are treated as exercised;
  • for reporting companies that issue capital or profit interests (including entities treated as partnerships for federal income tax purposes), the individual’s ownership interests are the individual’s capital and profit interests in the entity, calculated as a percentage of the total outstanding capital and profit interests of the entity;
  • for corporations, entities treated as corporations for federal income tax purposes, and other reporting companies that issue shares of stock, the applicable percentage is the greater of: (1) the total combined voting power of all classes of ownership interests of the individual as a percentage of total outstanding voting power of all classes of ownership interests entitled to vote, or (2) the total combined value of the ownership interests of the individual as a percentage of the total outstanding value of all classes of ownership interests;
  • if the facts and circumstances do not permit the calculations described above to be performed with reasonable certainty, any individual who owns or controls 25 percent or more of any class or type of ownership interest of a reporting company is deemed to own or control 25 percent or more of the ownership interests of the reporting company; and
  • if the individual owns any interest in the reporting company through an Act exempt legal entity but also owns an interest outside of its interest in the Act exempt legal entity, then the interests of the individual are to be aggregated with the interest held through the Act exempt legal entity to ascertain whether the individual is a beneficial owner. For example, if the individual owns a 23% interest in the reporting entity through one or more Act exempt legal entities and a 2% director interest in the reporting company, that individual is a beneficial owner for purposes of the Act.

Substantial Control:

Substantial Control includes three aspects:  (a) service as a senior officer; (b) authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); and (c) ability to direct, determine, or have substantial influence over important decisions:

• Service as a senior officer: Senior officers are all deemed to have substantial control.  The term “senior officer” means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function.
• Authority over appointment or removal of any senior officer or a majority of the board of directors (or similar body): any individual with this authority has substantial control.
• Ability to direct, determine, or have substantial influence over important decisions: The ability to direct, determine, or have substantial influence over important decisions includes two aspects: (a) the important decision; and (b) the direct or indirect exercise of substantial control.
  • Important Decisions: The Final Rulemaking provides a non-exclusive list, which includes decisions regarding:
    • the nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;
    • the reorganization, dissolution, or merger of the reporting company;
    • major expenditures or investments, issuance of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;
    • the selection or termination of business lines, or ventures, or geographic focus, of the reporting company;
    • compensation schemes and incentive programs for senior officers;
    • the entry into or termination, or the fulfillment or non-fulfillment of significant contracts;
    • amendments of any substantial governance documents of the reporting company, including articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or
    • has any other form of substantial control over the reporting company.
  • Direct or indirect exercise of substantial control: an individual may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through:
    • Board representation;
    • Ownership or control of the majority of the voting power or voting rights of the reporting company;
    • Rights associated with a financing arrangement or interest in a company;
    • Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;
    • Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or
    • Any other contract, arrangement, understanding, relationship, or otherwise.

Examples of Beneficial Owners:  In the 2023 FAQs, FinCEN said that it expects that the majority of the reporting companies will have a simple ownership and control structure.  It then provided a few examples of how to identify beneficial owners in 2023 FAQ #9:

• “Example 1: The reporting company is a limited liability company (LLC). You are the sole owner and president of the company and make important decisions for the company. No one else owns or controls ownership interests in your company or exercises substantial control over your company.

You are a beneficial owner of the reporting company in two different ways, assuming no other facts. First, you exercise substantial control over the company because you are a senior officer of the company (the president) and because you make important decisions for the company. Second, you are also a beneficial owner because you own 25 percent or more of the reporting company’s ownership interests.

Because no one else owns or controls ownership interests in your LLC or exercises substantial control over it, and assuming there are no other facts to consider, you are the only beneficial owner of this reporting company, and your information must be reported to FinCEN.”

• “Example 2: The reporting company is a corporation. The company’s total outstanding ownership interests are shares of stock. Three people (Individuals A, B, and C) own 50 percent, 40 percent, and 10 percent of the stock, respectively, and one other person (Individual D) acts as the President for the company, but does not own any stock. [GRAPH INTENTIONALLY OMITTED]

Assuming there are no other facts, Individuals A, B, and D are all beneficial owners of the company and their information must be reported. Individual C is not a beneficial owner.

Individual A owns 50 percent of the company’s stock and therefore is a beneficial owner because they own 25 percent or more of the company’s ownership interests.

Individual B owns 40 percent of the company’s stock and therefore is a beneficial owner because they own 25 percent or more of the company’s ownership interests.

Individual C is not a company officer and does not directly or indirectly exercise any substantial control over the company.

Individual C also owns 10 percent of your company’s stock, which is less than the 25 percent or greater interest needed to qualify as a beneficial owner by virtue of ownership interests. Individual C is therefore not a beneficial owner of the company.

Individual D is president of the company and is therefore a beneficial owner. As a senior officer of the company, Individual D exercises substantial control, regardless of whether the individual owns or controls 25 percent or more of the company’s ownership interests.”

• “Example 3: The reporting company is a corporation owned by four individuals who each own 25 percent of the company’s ownership interests (e.g., shares of stock). Four other individuals serve as the reporting company’s CEO, CFO, COO, and general counsel, respectively, none of whom hold any of the company’s ownership interests.

In this example, there are eight beneficial owners. All four of the individuals who each own 25 percent of the company’s ownership interests are beneficial owners of the company by virtue of their holdings in it, even if they exercise no substantial control over it. The CEO, CFO, COO, and general counsel are all senior officers and therefore exercise substantial control over the reporting company, making them beneficial owners as well.”

Company applicant

A Company applicant is any individual who (i) directly files the document that creates or registers a reporting company; and (ii) is primarily responsible for directing or controlling the filing if more than one individual is involved in the filing of the document.  There can be up to two individuals who qualify as company applicants: (a) the individual who directly files the document that creates, or first registers, the reporting company; and (b) if more than one person is involved with filing of the document, the individual who is primarily responsible for directing or controlling the filing.

• Note: For all reporting companies created or registered prior to the effective date of January 1, 2024, information related to company applicants need not be reported.  If the company is created or registered on or after January 1, 2024, the company applicant or applicants must be reported.
• Note: The Supplementary Information notes that for most law firms, there will be two company applicants – the paralegal or legal assistant that files the document; and the lawyer primarily responsible for directing or controlling the filing.
• In the 2023 FAQ #11, FinCEN stated “[n]o reporting company will have more than two company applicants. If only one person was involved in filing the relevant document, then only one person should be reported as a company applicant.”  FinCEN then provided the following examples to illustrate how to identify company applicants in common company creation or registration scenarios:
  • “Example 1: Individual A is creating a new company. Individual A prepares the necessary documents to create the company and files them with the relevant state or Tribal office, either in person or using a self-service online portal. No one else is involved in preparing, directing, or making the filing.

Individual A is a company applicant because Individual A directly filed the document that created the company. Because Individual A is the only person involved in the filing, Individual A is the only company applicant. State or Tribal employees who receive and process the company creation or formation documents should not be reported as company applicants.

• Example 2: Individual A is creating a company. Individual A prepares the necessary documents to create the company and directs Individual B to file the documents with the relevant state or Tribal office. Individual B then directly files the documents that create the company.

Individuals A and B are both company applicants—Individual B directly filed the documents, and Individual A was primarily responsible for directing or controlling the filing. Individual B could, for example, be Individual A’s spouse, business partner, attorney, or accountant; in all cases, Individuals A and B are both company applicants in this scenario.”

Information to be Reported

Reporting Company Information:  The initial reports by a reporting company must include the following information for the company itself:

• the full legal name of the reporting company
• any trade name, “doing business as” (dba or d/b/a), or “trading as” (t/a) name of the reporting company
• a complete current address consisting of (a) the street address of the principal place of business of the reporting company in the United States and (b) in all other cases, the street address of the primary location in the United States where the reporting company conducts business. This requirement is not satisfied by supplying a P.O. Box or the address of a third party, such as a company formation agent;
• the jurisdiction of formation (State, Tribal, or foreign);
• for a foreign reporting company, the State or Tribal jurisdiction where such company first registers; and
• the Internal Revenue Service Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)), or where a foreign reporting company has not been issued an TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction. Note:  Due to the need for reporting companies to include a TIN in the provided information, a TIN will need to be obtained within 30 days of formation in order to fulfill reporting obligations.

Beneficial Owner and Company Applicant Information: Each beneficial owner and company applicant must provide similar information to that above, including:

• a full legal name;
• the date of birth;
• the individual’s residential street address. FinCEN recognizes that there may be situations in which the individual feels unsafe disclosing their residential street address, such as victims of domestic violence or other violent crimes.  If general future guidance does not address this issue, FinCEN will review each situation on a case-by case basis;
  • In the 2023 FAQ #13, FinCEN noted that: (i) for a beneficial owner, the reporting company must report the residential street address; and (ii) for a company applicant, the reporting company must report the individual’s residential street address; however, if an individual engages in the business of a corporate formation (e.g., as an attorney or corporate formation agent) and files the formation or registration document in the course of that business, then the reporting company must report the current street address of the company applicant (for example, if the company applicant is a paralegal who filed the document while working at a law firm, the reporting company must report the business address of the law firm where the paralegal worked when filing the document.)
• the entity’s current business street address, if the company applicant is an entity that forms or registers legal entities in the course of such company applicant’s business;
• a unique identifying number and the issuing jurisdiction from one of the following documents: (a) a non-expired passport issued to an individual by the United States government; (b) a non-expired identification document issued to the individual by a State, local government, or Indian Tribe for the purpose of identifying that individual; (c) a non-expired driver’s license issued to the individual by a State; or (d) only if the individual does not have a document described in (a) to (c), a non-expired passport issued by a foreign government (“Acceptable Identification Document”); and
• an image of the document from which the unique identifying number was obtained, with the individual’s photograph.

Special reporting rules exist for reporting companies owned by exempt entities, ownership by minor children, foreign pooled investment vehicles, and company applicants for companies in existence prior to the effective date.

FinCEN Identifiers:  Both individuals and reporting companies can obtain what has been named a “FinCEN identifier” by submitting to FinCEN an application containing the information that would normally be required under the reporting obligations. FinCEN identifiers can be included in reports to FinCEN by the reporting company in lieu of providing the underlying information for that particular individual. Note that a reporting company may also secure its own FinCEN identifier, but only after submitting its initial report.  Individuals and entities that obtain FinCEN identifiers must update/correct the information within and in the same manner as required for updated/corrected reports under the Final Rule.  Most individuals likely will prefer to use the FinCEN identifier process.

Timing and Forms of Reporting

Initial Filings:  Entities formed or registered before the January 1, 2024, effective date must submit their initial report to FinCEN by January 1, 2025. Reporting companies formed or registered on or after January 1, 2024, must submit their initial report within 30 calendar days of the earlier of the date on which the reporting company receives actual notice that its creation (or registration) has become effective or the date on which the Secretary of State or similar office first provides public notice, such as through a publicly accessible registry, that the domestic reporting company has been created or the foreign reporting company has been registered.  Entities that no longer meet the criteria for any exemption must file a report within 30 calendar days after the date that it no longer meets the criteria for any exemptions.  FinCEN will consider additional guidance or FAQs, if there is a need for further clarification.

Updates:  It is the responsibility of the reporting company to keep the report current with FinCEN.  This is not an annual filing requirement; updates are required as often as there are changes.  Any changes to required information previously submitted to FinCEN concerning the reporting company or beneficial owner (including any change with respect to who is a beneficial owner or information reported for any particular beneficial owner) require an updated report be filed with FinCEN within 30 calendar days after the date on which such change occurs.  No update is needed for company terminations or dissolutions.  Updates are needed for newly exempt entities, when the estate of the deceased beneficial owner is settled, when a minor child attains the age of maturity, and any change to the name, date of birth, address, or unique identifying number changes on the provided image of an identifying document. Notably, the provisions for updated reports only apply to reporting companies themselves and their beneficial owners. Updates to company applicant information need not be reported.

Corrections:  Inaccurate information reported to FinCEN must be remedied via a corrected report, filed within 30 days after the date on which the reporting company becomes aware of or has reason to know of the inaccuracy.  However, there is a safe harbor for any person who has reason to believe that any report submitted by the person contains inaccurate information and voluntarily and promptly submits a report containing corrected information no later than 90 days after the date on which the person submitted the inaccurate report.  The Act is clear that the safe harbor is only available for the 90-day period, even if the reporting company files a correction promptly after becoming aware or having reason to know that a correction is needed.

Extensions:  At this time, there are no provisions for extensions.  However, FinCEN indicated that it may consider providing guidance or relief as appropriate, depending on the facts and circumstances.  

Forms and Certifications:  FinCEN will dictate the form of the reports.  All reports must be certified by the person filing the report or the application that the information provided is “true, correct and complete.”  FinCEN views this as a certification by the reporting company itself and not the individuals signing on behalf of the reporting company.

Electronic Filing:  Reports are to be filed electronically using FinCEN’s secure filing system.  However, there may be exceptions and FinCEN is continuing to consider how to address such cases.  FinCEN is in the process of devising an online reporting mechanism.  FinCEN will store reports in a secure national database called the Beneficial Ownership Secure System (“BOSS”) and access will only be available to certain law enforcement agencies, taxing authorities, and a limited number of other potential users for specified purposes upon request.

Exempt Entities:  Exempt entities that have always been exempt have no filing requirement.  There is no procedure for such legal entity to secure a “certification” of its Act exempt status.  FinCEN “will continue to consider” whether to offer such a certification in the future.

Penalties for Reporting Violations

For reporting violations, the CTA authorizes a civil penalty of up to $500 for each day that the violation continues or has not been remedied and a fine of up to $10,000 and/or imprisonment (not more than two years).  It is unlawful for any person to willfully provide, or attempt to provide false or fraudulent reports or willfully fail to report complete or updated information. During the comment period, a number of commenters requested that FinCEN add protections for any reporting violations via negligence or other non-willful conduct, but FinCEN declined to alter the standard set by the CTA. In the Supplemental Information, FinCEN stated that “[w]illfulness is a legal concept that is well established in existing caselaw, and FinCEN will consider all facts relevant to a determination of willfulness when deciding whether to pursue enforcement actions.”  FinCEN also noted that the Act does not prohibit the application of other available criminal or civil provisions to the extent that they are applicable.  The Final Rule states that a person is considered to have failed to report complete or updated information if: (A) the entity is required to report the information; (B) the reporting company fails to report such information; and (C) such person either causes the failure or is a senior officer of the entity at the time of the failure.  FinCEN did note that “[a]ny assessment as to whether false information was willfully filed would depend on all of the facts and circumstances surrounding the certification and reporting of the BOI, but as a general matter, FinCEN does not expect that an inadvertent mistake by a reporting company acting in good faith after diligent inquiry would constitute a willfully false or fraudulent violation.”

Safe harbor:  A safe harbor is provided for persons who submit incorrect information if the correction is made within 90 days of the original incorrect filing.  Any correction that is filed within both the 30 calendar-day timeframe and the 90-day timeframe is deemed to satisfy the safe harbor.  The safe harbor is not available to anyone who provided the incorrect information to deliberately evade the CTA reporting requirements or who actually knew that the information was incorrect when filing the report.

Access to FinCEN Reports

The information in the reports is confidential.  The CTA imposes strict confidentiality, security, and access restrictions on that information.  Reports submitted to FinCEN pursuant to the CTA and Final Rulemaking are to be accessible only by federal agencies and state, local, and tribal government agencies for national security, law enforcement, and intelligence purposes. The CTA limits the disclosure of beneficial ownership information by FinCEN to requests “through appropriate protocols” to be promulgated by the Secretary of the Treasury from:

• federal agencies for national security, intelligence, or law enforcement purposes if the agency is engaged in such activities;
• state, local, or tribal enforcement agencies, but only if authorized by a court of competent jurisdiction in connection with a criminal or civil investigation;
• federal agencies acting on behalf of a foreign prosecutor, judge, or law enforcement agency pursuant to a treaty, convention, or similar agreement;
• a Federal functional regulator or other appropriate regulatory agency, if certain conditions are met; and
• financial institutions to facilitate the compliance of financial institutions with customer due diligence requirements under applicable law, but only with the consent of the reporting company and if certain conditions are met.

The CTA requires the Secretary of the Treasury to maintain the information contained in CTA-related reports in a secure, nonpublic database and to establish protocols to protect the security and confidentiality of the reported beneficial ownership information and ensure governmental authorities access the beneficial information only for authorized purposes. In the 2023 FAQ #16, FinCEN noted that it is: (a) developing the policies and procedures that will govern access to and handling of beneficial ownership information; and (b) building a secure and confidential IT system to store the information consistent with Federal law, which will be cloud-based and meet the highest Federal Information Security Modernization Act levels.  FinCEN is to maintain beneficial ownership information required under the CTA relating to each reporting company for not fewer than five years after the date on which the reporting company terminates.

The Department of the Treasury has a larger scope of access to the beneficial ownership information, including access to the information for tax administration purposes.

The improper use or disclosure of the information is subject to (a) civil penalties of up to $500 per day for each day a violation continues and is not remedied, and (b) either (i) a fine of not more than $250,000, imprisonment for not more than 5 years, or both; or (ii) while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, a fine of not more than $500,000, imprisonment for not more than 10 years, or both.

Additional Rulemaking

FinCEN intends to issue additional rulemaking related to the CTA as well as continue developing its reporting system and related protocols. In particular, proposed rulemaking on Beneficial Ownership Information Access and Safeguards and Beneficial Ownership Information Collection was published in December 2022 and January 2023, and final rulemaking is expected.  Additional rulemaking on changes to a 2016 rule on customer due diligence requirements is also expected.

Challenge

In November 2022, the National Small Business Association filed a lawsuit in the U.S. District Court for the Northern District of Alabama alleging that the CTA, among other things, is unconstitutional because it infringes on the protected rights of state sovereignty, privacy, and due process. Currently, a motion to dismiss the case or, alternatively, grant the defendant’s summary judgment, is pending.

Practical Tips – Getting Ready for CTA

Determine if the business is a “reporting company”:  In consultation with a lawyer of their choosing, companies should review the applicable law to determine whether the business is exempt or a “reporting company.”  This requires an analysis of the company’s structure and certain factors.  Document the results to support the determination.

Timing for Existing Reporting Companies:  If the reporting company is in existence before January 1, 2024, the company will have until January 1, 2025, to comply with the initial informational filing requirement.  The CTA requires companies to gather and report information on a timely basis or face substantial monetary penalties and criminal sanctions.  Companies should start educating their officers, directors, employees, and beneficial owners on the need for the information and for ongoing monitoring.  Companies should develop a process for gathering and storing the information and soliciting information updates from the individuals that have to be included on reports submitted to FinCEN, such as address changes, ownership changes, etc.

Expecting to Form an Entity in 2024 or Later:  Consider whether to form the entity in 2023 in order to take advantage of the end-of-year 2024 deadline.  If your entity is formed in 2023 the initial report must be filed by January 1, 2025.  Otherwise, the company will have 30 calendar days from its “formation” to make its initial report (“Formation” is the earlier of the date on which the reporting company receives actual notice that its creation (or registration) has become effective, or the date on which the Secretary of State or similar office first provides public notice, such as through a publicly accessible registry, that the domestic reporting company has been created or the foreign reporting company has been registered).

Real-Time Monitoring Systems:  Most companies and their officers, directors, and owners are familiar with annual regulatory updates.  However, the CTA will require more real-time filings, i.e. filings within 30 calendar days of changes to the company’s previously reported information.  Failure to comply may result in a civil penalty of no more than $500 for each day the violation continues and a fine of no more than $10,000 or imprisonment, or both.  This will require companies to have monitoring systems, processes to gather the necessary information for timely updates, and some method of policing compliance.

Amending and Preparing Documents: For policing purposes, some companies are considering amending and preparing governance documents and limited liability agreements, and including provisions in employment agreements with employees subject to reporting, to require disclosures by owners and employees, with some consequences for failing to comply.

Revisit the Company Structure or Consolidate Entities:  The CTA will also have some companies reviewing their operating structures and entity selections to avoid having to comply with the CTA.  Some considerations include consolidations and trusts versus limited liability companies.

Revisiting A Company’s More Than 20 Full-Time Employees Status:  Many companies will evaluate whether the “large operating entities” exemption is available, and in particular the more than 20 full-time employees requirement.  In consultation with their lawyer, companies should review the various other federal, state, and other employment or SBA-related laws before altering or considering changes to full-time employee status numbers so they do not inadvertently trigger other consequences.

Consider and Secure FinCEN Identifiers:  To protect the privacy of persons who will be considered beneficial owners or company applicants, these individuals should consider securing a FinCEN identifier when they are available.

Re-evaluate the Benefit of Single Member LLCs:  Creating special-purpose entities, such as single-member LLCs, particularly when they may not have employees (or more than 20 employees), may subject the company to reporting obligations under the CTA.  Companies should consider whether the benefit of using such special purpose entities outweighs the reporting obligations, especially when profit distribution is not an issue.

Large Operating Companies Analysis: For companies that fall within the “large operating company” exemption, the reporting company will need to monitor employee count and gross receipts and sales.  Each company will need its own system for this type of compliance.

Adding this Form to the Company’s Regulatory Compliance Calendar or Checklist:  Reporting companies will need to modify their businesses’ regulatory compliance calendars and checklists to remind them of the reporting requirements and monitor the need for updating.  Triggers include changes in board or senior officer composition, changes in employee count, changes in gross receipts or sales based on IRS filings, changes in ownership, changes in governance and operational control, changes in beneficial owners’ information, etc.

Financing and M&A Related Items:  All companies should expect that lenders and potential buyers will require assurances of compliance or exemptions with the CTA and perhaps copies of analysis and filings.

Next Steps

The CTA is effective January 1, 2024, and will require most small businesses and entities to file timely information by January 1, 2025.  Now is the time to analyze whether the CTA applies and what steps a business should take to ensure compliance, and businesses should consult with a lawyer of their choosing regarding those important issues.  Stay tuned for further developments and updated information.