On Sept. 29, 2022, the Financial Crimes Enforcement Network (“FinCEN”) released the final rulemaking regarding the Beneficial Ownership Information (“BOI”) and Reporting Requirements of the Corporate Transparency Act (“CTA”) that was enacted into law as part of the National Defense Authorization Act in 2021. This client advisory focuses on the new reporting requirements for the majority of legal entities registered to do business in the United States and acts as a high-level summary of the new requirements. Any specific questions should be directed to your Sherman & Howard attorney.

Overview

The purpose of the CTA is to protect the United States financial system from illicit use through the abuse of legal entities by the implementation of BOI reporting for certain types of corporations, limited liability companies, and other similar entities registered to do business in the United States.  Through this reporting process, FinCEN is targeting anonymous shell corporations and other entities used by illicit actors to launder money through the United States financial system.

Who Must Report

Reporting Companies

Beginning Jan. 1, 2024, the CTA will require certain domestic corporations, limited liability companies and other entities formed by filing a document with the secretary of state and certain foreign corporations, limited liability companies, and other entities formed under the law of a foreign country registered to do business in the United States  (collectively, “reporting companies”) to provide BOI to FinCEN. Because the purpose of this act is to collect information on entities that are not otherwise subject to oversight, there are 23 exceptions excusing entities from providing BOI. Notable exceptions include:

• Publicly-traded companies;
• Banks and credit unions;
• Investment companies and advisers;
• Insurance companies;
• Accounting firms;
• Tax-exempt entities under section 501(c) of the Internal Revenue Code; and
• Charitable trusts.

FinCEN also provides an exemption for “large operating companies” that employ more than 20 full-time employees, have an operating presence within the United States, and received more than $5 million in gross receipts or sales in the previous 12 months. All other entities that do not fall within one of the 23 exceptions are required to report BOI to FinCEN.

Beneficial Owners

The final rule defines a beneficial owner as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interests.”  By defining a person who exercises “substantial control” as any senior officer, anyone with the ability to appoint or remove senior officers, or anyone who directs or determines important decisions like the nature, scope, and attributes of the company, FinCEN believes that each reporting company will have at least one beneficial owner.

Company Applicants

A company applicant under the final rule includes “any individual who directly files the document that creates the domestic reporting company.” For purposes of BOI reporting, FinCEN noted that the company applicant can include both the individual directing the filing and the individual that physically files the document. In many cases, the company applicant may be a lawyer or filing service. Because of this, only reporting companies formed after Jan. 1, 2024 will need to provide BOI for company applicants, initial reports for existing reporting companies will be exempted from this requirement.

What Must be Reported?

Under the CTA, all reporting companies will be required to provide an initial report stating the BOI for the company, every individual who is a beneficial owner of the company, and each individual who is a company applicant. Additionally, the reporting company will have an ongoing obligation to update any information provided to FinCEN.

For the reporting company, the initial report must include the following: (1) the full legal name of the reporting company; (2) any trade name or “doing business as” name; (3) the current street address of the principal place of business (or for a foreign reporting company, the address of the location in the United States where it conducts business); (4) the jurisdiction in which the reporting company was formed; and (5) the IRS Taxpayer Identification Number (“TIN”) including an Employer Identification Number (“EIN”) of the reporting company.

Beneficial owners and company applicants will need to provide: (1) their full legal name; (2) their date of birth; (3) a current residential address (or in the case of a company applicant, a  business address); and (4) the unique identifying number from a document, such as a non-expired passport or driver’s license, and the image of said document.

When do I Need to Report?

Starting Jan. 1, 2024, all new reporting companies will have 30 days from the date of formation to file an initial report with FinCEN. For all reporting companies existing before Jan. 1, 2024, FinCEN has given one year to submit an initial report. Once an initial report is filed, the reporting company will have an ongoing obligation to update any information that changes with respect to beneficial owners or the reporting company within 30 days of the change.

Questions Moving Forward

In the upcoming months, FinCEN is expected to engage in further rulemakings to establish who may access reported BOI and why. While the CTA will not go into effect for another year, companies should begin to compile BOI with respect to any beneficial owners so that they will be ready to file an initial report with FinCEN when the time comes. Because of the many exceptions and variations between reporting companies and non-reporting companies in the CTA, it may not be immediately clear if your entity will be subject to these new reporting requirements.