With More Mandatory Reporting Deadlines Rapidly Approaching, Has Your Business Complied With Its Obligations Under the Corporate Transparency Act?

On January 1, 2024, approximately 36 million American businesses had a new, complicated, and potentially burdensome federal reporting obligation to comply with. That was the effective date of the Corporate Transparency Act (CTA), a law passed in 2021 as part of an expansive federal government effort to stop money laundering and related crimes. The law attempts to accomplish this goal by requiring about 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. Unless your business falls within one of the 23 specific exemptions set forth in law, you must comply (or should have complied) with the CTA’s reporting obligations by the dates below. Failure to provide BOI to FinCEN can result in substantial penalties.

Since publishing the Final Rule, FinCEN has published extensive, detailed, and regularly updated FAQs that provide a plethora of information about the who, what, when, and how of CTA compliance. While business owners should consult with counsel regarding any questions they have about reporting information under the CTA, the following is an overview of the Act that can serve as a foundation for protecting your business from running afoul of the law’s requirements.

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 businesses that areestablished without such filings, like sole proprietorships, are not subject to the CTA.

Section(a)(11)(B) of 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.

These types of entities do not have to comply with the CTA’s BOI reporting requirements, if they meet specific requirements under the CTA:

  • Banks.
  • Bank holding companies.
  • Credit unions.
  • Insurance companies.
  • Issuers of securities registered under Section 12 of the Securities Exchange Act of 1934 or that must file supplementary and periodic information under Section 15(d) of the 1934 Act.
  • Brokers, dealers, and any other entities registered with the SEC under the 1934 Act.
  • Registered investment advisors under the Investment Advisers Act of 1940.
  • Public accounting firms.
  • Certain tax exempt entities.
  • Companies employing more than 20 people full-time in the U.S., which filed a federal income tax return in the prior year showing more than $5 million in gross sales or receipts and have an operating presence in the U.S.
  • Any entity that meets all of the following requirements:
    • Was in existence on or before January 1, 2020;
    • Has not sent or received funds over $1,000;
    • Is not actively engaged in active business;
    • Is not owned by a foreign person;
    • Has not experienced a change of ownership in the preceding 12 month period; and
    • Does not otherwise hold any assets, whether in the United States or abroad, including ownership interests, in any corporation, limited liability company or other entity.

A very good summary of the specific criteria for each exception, in a check-the-box format, can be found starting on Pages 4 and 5 of the following linked document:

https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf

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 for two categories of individuals: “Applicants” and “Beneficial Owners.”

“Company Applicants”

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.

“Beneficial Owner”

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 percent 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.

 Ownership

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.

“Substantial Control”

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 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.

Compliance Deadlines

The Final Rule established different compliance deadlines for specific categories of covered entities. However, those original deadlines were modified in November 2023 for entities created or registered on or after the Rule’s effective date of January 1, 2024, and before January 1, 2025, to “give those entities additional time to understand the new reporting obligation and collect the necessary information to complete their filings.”

Accordingly, new domestic or foreign Reporting Companies formed during calendar year 2024 must submit their BOI report within 90 days after the date of the entity’s formation (i.e., the filing date of its Articles or Certificate). Prior to the adoption of the Final Rule, all such entities had to file their reports within 30 days after the date of their formation.

For all covered entities formed either before or after 2024, the CTA’s deadlines for submitting BOI reports to FinCEN are:

  • Existing domestic or foreign Reporting Companies formed before January 1, 2024: On or before January 1, 2025 (one year after the effective date of the CTA.
  • New domestic or foreign Reporting Companies formed on or after January 1, 2025: Within 30 days after its date of formation (i.e., the filing date of its Articles or Certificate).

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.

Beware of CTA Scams

Because each report requires personal information, we recommend that clients personally complete each report for the business entities that they control. Part of the reason for that recommendation is to prevent your business from being scammed by those who prey on your unfamiliarity with the CTA.

FinCEN has warned of fraudulent attempts to solicit information from individuals and entities who may be subject to the reporting requirements under the CTA. Please be on guard for illegitimate correspondence, links, and requests.

FinCEN has provided the following examples of fraudulent CTA activities:

  • Correspondence requesting payment. There is NO fee to file BOI directly with FinCEN. FinCEN does NOT send correspondence requesting payment to file BOI. Do not send money in response to any mailing that claims to be from FinCEN or another government agency.
  • Correspondence that asks the recipient to click on a URL or to scan a QR code. Those emails or letters are fraudulent. Do not click any suspicious links or attachments or scan QR codes in emails, websites, or unsolicited mailings.
  • Correspondence referencing a “Form 4022” or an “Important Compliance Notice.” This correspondence is fraudulent. FinCEN does not have a “Form 4022.” Do not send BOI to anyone by completing these forms.
  • Correspondence or other documents referencing a “U.S. Business Regulations Dept.” This correspondence is fraudulent; there is no government entity by this name.

If you have questions or concerns about your company’s obligations under the Corporate Transparency Act, please contact Dan McGlinn at Kreis Enderle.

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