Passed in 2021, the Corporate Transparency Act (CTA) is part of an expansive federal government effort to stop money laundering and related crimes. The law attempts to accomplish this goal by requiring approximately 90% of American businesses to make mandatory and detailed disclosures regarding their “Beneficial Ownership Information” (BOI) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) division.
FinCEN issued its Final Rule implementing the CTA on September 29, 2022, clarifying what entities are subject to the act’s reporting requirements and what specific information those entities must provide. This started the compliance clock clicking towards the Final Rule’s January 1, 2024, effective date for businesses that are considered “Reporting Companies” under the CTA.
Odds are your business is one of those “Reporting Companies” that must comply with the CTA’s disclosure requirements. Unlike most federal regulatory schemes that focus on larger companies, the CTA targets “smaller, more lightly regulated entities.” This focus on small businesses is one reason FinCEN estimated that approximately 36,581,506 entities may be subject to the CTA’s reporting requirements in 2024.
Is Your Business a Reporting Company Covered by the CTA?
Under the Final Rule, a “Reporting Company” is either a corporation, limited liability company, or any other entity – no matter how small – created by filing a document (e.g., Articles of Incorporation) with a secretary of state or any similar office. This means that entities that can be established without such filings, like sole proprietorships and general partnerships, are not subject to the CTA.
The CTA contains a list of 23 types of entities that are exempt from the law’s reporting requirements. Most of those exceptions apply to companies that already have ownership reporting obligations under other regulatory schemes, such as securities dealers, banks and other financial institutions, and public companies. You can see the full list of exemptions in Section(a)(11)(B) of the CTA.
Who Is a “Beneficial Owner,” and What Information Must Reporting Entities Provide?
In addition to basic corporate information such as name, address, and tax ID number, Reporting Companies must provide FinCEN with BOI about two categories of individuals: “Applicants” and “Beneficial Owners.”
The Final Rule defines a “company applicant” as “the individual who directly files the document that first creates the domestic reporting company” as well as “the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.” Effectively, the person who established the entity by filing the necessary paperwork will likely be an “Applicant” whose BOI must be disclosed.
While identifying an Applicant is relatively straightforward, determining the entity’s “Beneficial Owners” is more complicated.
The Final Rule defines a “Beneficial Owner” as any individual who, directly or indirectly, either:
- Owns or controls at least 25% of the ownership interests of a reporting company; or
- Exercises substantial control over a reporting company.
The Final Rule contains a detailed discussion about what qualifies as “ownership interests” and “substantial control” that would make an individual a “Beneficial Owner under the CTA.
Notably, “ownership interests” include direct or indirect ownership, meaning that ownership through intermediary entities qualifies as ownership of the Reporting Company.
As outlined in the Final Rule, “ownership interests” that could make an individual a Beneficial Owner include equity and other types of interests, such as capital or profits interests, convertible instruments, warrants or rights, or other “options or privileges to acquire equity, capital, or other interests.” The Rule also provides specific criteria for calculating the 25% ownership threshold.
Under the Final Rule, an individual has “Substantial Control” over an entity and is thus a “Beneficial Owner” if they:
- Serve as a senior officer of the reporting company.
- Have authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); or
- Direct, determine, or have substantial influence over important business decisions.
Substance and Timing of Reporting
Non-exempt Reporting Companies must give FinCEN the following information regarding Applicants and Beneficial Owners:
- Full legal name.
- Date of birth.
- Street addresses (identified as a current residential or business street address).
- Non-expired state identification document or passport.
Reporting Companies created on or after January 1, 2024, must report their BOI within 30 calendar days of their creation. Entities created before January 1, 2024, must deliver their BOI to FinCEN by January 1, 2025.
Penalties for Non-Compliance
There are significant penalties for non-compliance or fraud involving CTA reporting. Any person or entity that “willfully provides, or attempts to provide, false or fraudulent information or willfully fails to report when required” faces civil penalties of up to $500 per day for each violation, up to $10,000 in criminal fines, and up to two years in prison.
If you have questions or concerns about your company’s obligations under the Corporate Transparency Act, please contact one of the Business Law attorneys at Kreis Enderle.