The Corporate Transparency Act (CTA) was enacted on Jan. 1, 2021, and will require new beneficial ownership reporting for U.S. and foreign companies. Reporting requirements under 31 U.S.C. § 5336 are anticipated to begin Jan. 1, 2024.
The CTA aims to reduce terrorist financing, money laundering, and other illicit activities by requiring corporations, limited liability companies, and other filing entities to register and disclose information relating to their owners, officers, and controlling persons with the Financial Crimes Enforcement Network (FinCEN).
What Entities Will Be Required to Report?
Any entity considered a “reporting company” will be required to file a beneficial ownership information report (BOI report) with FinCen’s new Beneficial Ownership Secure System (BOSS). Reporting companies are generally defined within the CTA as domestic entities created by the filing of a document with a secretary of state, or foreign entities that register to do business in the U.S. Most small businesses, family investment companies, and real estate holding companies will be required to file a BOI report.
There are over 20 types of businesses that are exempt from reporting under the CTA, including publicly traded companies, banks, and insurance companies. However, the most popular exemption will be for large operating companies with a U.S. office that employ over 20 full-time employees in the U.S. and have over $5,000,000 in gross receipts or sales. Subsidiaries of large operating companies will also be exempt from CTA compliance.
What Information Will Be Reported?
A company’s initial BOI report will include detailed information on its beneficial owners and the company applicant. Beneficial owners are individuals who, directly or indirectly, either exercise substantial control over a reporting company or own or control at least 25% of the ownership interests of a reporting company.
The CTA is designed to look through complex ownership structures to determine the ultimate beneficial owners who own and control a company. For example, trustees and the beneficiaries of trusts or holders of unexercised, incentive equity awards that represent over 25% of a company’s equity will all be required to report. Because of the degree of control that they exercise over a company’s decision making, a company’s senior officers and directors are also considered beneficial owners and will be required to report.
A company applicant is an individual who files the application to form a domestic entity or register a foreign reporting company in the U.S. This includes attorneys, paralegals, or filing services who form entities on behalf of a client. Applicant information is only required for reporting companies formed on or after Jan. 1, 2024.
As part of the BOI report, beneficial owners and applicants are required to disclose their personally identifiable information, including current address, date of birth, and an unexpired passport number, state identification document, or driver’s license number. FinCEN will issue a unique FinCEN identifier to individuals who are required to make multiple BOI reports upon request.
When Must a Report Be Filed?
Starting on Jan. 1, 2024, most newly formed entities will be required to file a BOI report within 30 calendar days after formation. For example, if a reporting company is created on Jan. 7, 2024, that entity will have to file its BOI report on or before Feb. 7, 2024. Reporting companies created prior to Jan. 1, 2024, will have until Jan. 1, 2025, to file their initial report with FinCEN.
If there is a subsequent change to a reporting company or its beneficial owners, the reporting company must file an updated report within 30 calendar days after the change occurs.
Note: On Sept. 28, 2023, FinCEN issued a Notice of Proposed Rulemaking to extend the deadline for reporting companies formed in 2024. According to the proposed regulation, reporting companies formed in 2024 would have 90 days to file initial reports, instead of 30 days. Reporting companies formed on or after Jan. 1, 2025, would have 30 days to file their initial BOI reports. FinCEN is accepting written comments through Oct. 30, 2023.
Who Will Have Access?
FinCEN’s proposed regulations provide that five types of institutional actors will have access to the BOSS database:
- Federal agencies engaged in national security, intelligence, or law enforcement activities;
- State, local, and tribal enforcement agencies with court authorization;
- Foreign law enforcement agencies;
- Financial institutions; and
- The U.S. Department of the Treasury.
The BOSS database will contain reporting company information and the personally identifiable information of the beneficial owners, officers, and control persons of every reporting company. Because of the number of actors who will have access to the BOSS database, there should be no assumption of privacy of ownership information for reporting companies after the CTA is implemented.
Ongoing Monitoring and Compliance
FinCEN recently released its Small Entity Compliance Guide in preparation for beneficial ownership information reporting, which contains practical guidance on reporting and exemptions. Clark Hill is available to provide guidance in determining whether your entity is considered a “reporting company.”
The CTA reporting requirements and FINCEN are receiving pushback from at least one lawsuit and from within government. See Nat’l. Small Bus. Ass’n vs. Yellen, No. 5:22-CV-01448 (N.D. Ala. 2022). On Aug. 1, 2023, the Protect Small Businesses and Prevent Illicit Financial Activity Act (H.R. 5119) was introduced in the U.S. House of Representatives. H.R. 5119 proposes to give reporting companies an additional year to comply with the CTA.
FinCEN is expected to issue additional regulations pertaining to access to the beneficial ownership information database and due diligence prior to the end of the year.
