On January 1, 2024, the U.S Treasury Department's Corporate Transparency Act (CTA) will go effective. The CTA will require many foreign and domestic entities to disclose specific information about the entity, its beneficial owners and all related company applicants who filed the entity's formation documents. Failure to comply with the CTA can result in fines of up to $10,000 and two years in prison. Compliance is critical!
This client alert will describe what is known about the Act to date, who is required to comply with it, and what information will have to be disclosed.
BENEFICIAL OWNERSHIP INFORMATION REPORT
The CTA will require all reporting companies to file a Beneficial Ownership Information (BOI) Report to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department. The BOI Report will require, for all entities, information on the reporting company and its beneficial owners, and, for entities formed after January 1, 2024, the company applicants. For existing entities, the BOI Report should incorporate current, but not historic, information of the company and owners.
The finalized version of the BOI Report remains outstanding. Once created, it will be a free, electronic, cloud-based system for filing. FinCEN has yet to confirm how third-party submission will be able to certify the information is complete and verified, and if personal information included on documents that is not required on the form will be allowed to be redacted, and FinCEN has not clarified either point yet.
REPORTING COMPANIES
A reporting company is defined as a "corporation, LLC or other similar entity that is created by the filing of a document with the Secretary of State or a similar office under the law of a state or Indian Tribe; or formed under the law of a foreign country and registered to do business in the US by the filing of a document with such a filing office." The term "other similar entity" is a catch all for any entity created by the filing of a document with the relevant state or tribe authority, including LLPs, LPs, and Statuary Trusts. This definition also includes any international companies that are registered as foreign entities doing business in the United States. There are exemptions to certain entities who do not have to file, which will be expanded upon later.
A reporting company will be required to disclose the following information:
- Company true name;
- Any assumed names (including registered or unregistered DBAs);
- State of formation;
- Physical address of principal place of business; and
- Tax ID/ EIN number.
BENEFICIAL OWNERS
A "beneficial owner" is defined as "an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, exercises substantial control over the entity, or owns or controls 25 percent or more of the ownership interests of the entity or receives substantial economic benefits from the assets of the entity" The term "substantial" is not defined, but appears to be intentionally broad so as to prevent the circumvention based on any specific numerical requirement.
Exclusions to Beneficial Owners include: minors whose guardian's information is provided in the form, custodians acting on behalf of another, inheritors, and certain creditors.
Beneficial Owners will be required to disclose the following information:
- Full legal name;
- Date of birth;
- Residential address;
- Unique identifying number (such as state ID card, driver's license, US passport number, or foreign passport number); and
- A scan of the foregoing identifying document.
COMPANY APPLICANTS
For entities formed after January 1, 2024, company applicant information will be required in addition to company and beneficial ownership information. A "company applicant" is defined as "any individual who files an application to form a corporation, limited liability company or other such entity under the laws of a state or Indian Tribe; or registers or files an application to register a corporation, limited liability company or other similar entity formed under the laws of a foreign country to do business in the US." The definition includes "the individual who directly files the document to create or register the reporting company, and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing."
Many law firms and filing agencies have sought further clarifying details. As of the time of this alert, FinCEN has noted that if a law firm files the organizational documents directly with the Secretary of State, both the attorney who ordered the filing of the document, and the paralegal who physically files the documents are the Company Applicants. If the paralegal sends it to a service company such as Cogency Global or CT, the Company Applicants are the attorney at the law firm who directed the filing, and the service company. Company Applicants cannot have their information removed from the BOI Report, even if they are no longer associated with the company.
Company Applicants will be required to disclose the following information:
- Full name;
- Date of birth;
- Business address (if company formation was required in the course of the individual's employment) or residential address;
- Unique identifying number (such as state ID card, driver's license, US passport number, or foreign passport number); and
- Scan of said identifying document.
DUE DATES
If a company is formed on or after January 1, 2024, the company will have 30 days from the date when they receive notice of the company's creation becoming effective. Existing companies will have until January 1, 2025 to complete the filing.
Any amendments or corrections in information will be required within 30 days of the inaccuracy or need for amendment being discovered. Failure to report or purposefully providing wrong information have penalties up to $10,000 and 2 years in prison.
There is no annual or periodic reporting necessary, so long as all information is up to date and accurate for the company and its beneficial owners.
EXEMPTIONS
23 exemptions exist for entities which, in many circumstances, are already monitored by a government authority. As of the time of this alert, there is still no information on how a company is intended to report their respective exemption. The exemptions are as follows:
- Securities Reporting Issuer
- Is the entity an issuer of a class of securities registered under Sec 12 of Security Exchange Act?
- Is the entity a securities issuer required to file supplementary and periodic information under Sec 15d of the Securities Exchange Act?
- Governmental Authority
- Does the entity exercise governmental authority on behalf of the US, any such Indian tribe, or a state or political subdivision?
- Banks
- Credit Unions
- Depository Institution Holding Company
- Is the entity a bank holding company as defined in section 2 of the bank holding company act?
- Is the entity a savings and loan holding company as defined in section 10 of the homeowners loan act?
- Money Transmitting Business
- Is the entity a money transmitting business registered with the secretary of the treasurer?
- Is the entity a money services business registered with the FinCEN under 31 CFR 1022.390?
- Broker or Dealer in Securities
- Securities Exchange or Clearing Agency
- Is the entity an exchange or clearing agency as those terms are defined in Section 3 of the Securities Exchange Act AND registered under Sections 6 or 17A of the Securities Exchange Act?
- Other Exchange Act Registered Entity
- Is the entity an entity other than a securities reporting issuer, broker, etc. that is still registered with the SEC under the Security Exchange Act?
- Investment Company
- Investment Advisor
- Insurance Company
- State-Licensed Insurance Producer
- Commodity Exchange Act Registered
- Is the entity a registered entity as defined in Section 1a of the Commodity Exchange Act?
- Accounting Firm
- Public Utility
- Financial Market Utility
- Pooled Investment Vehicle
- Is the entity a pooled investment vehicle as defined in 31 CFR 1010.380f7 that is operated or advised by a bank, credit union, broker or dealer in securities, investment company/adviser, or a venture capital fund advisor?
- Tax Exempt Entity
- Is the entity an organization that is described in Section 501c of the Internal Revenue Code of 1986, and exempt from tax under Section 501a?
- Is the entity a political organization that is exempt from tax under Section 527a?
- Is the entity a trust described in paragraph 1 or 2 of Section 4947a?
- Entity Assisting a Tax-Exempt Entity
- Is the entity one that operates exclusively to provide financial assistance to, or hold governance rights over, any entity described in Exemption 19?
- Large Operating Company
- Does the entity have more than 20 full time employees in the US AND have a operating presence at a US office AND filed a tax return in the previous year showing $5 million in gross receipts or sales
- NOTE: It's been mentioned that this exemption will be impossible to claim for a new entity formed after 2024, since there will be no prior tax returns. Entities that apply for this exemption after their first year may not need to update, but since the regulation requires the filing within one month of formation, the original information will remain on record.
- Subsidiary Entity
- Is the entity's ownership controlled or wholly owned by an entity that is already exempt?
- Inactive Entity
- Was the entity in existence before 1/1/2020, has not engaged in active business, is not owned by a foreign person, has not had a leadership change since January 1, 2023, has not sent or received funds greater than $1,000 since January 1, 2023, AND does not hold any type of assets including ownership interest in any companies?
FINCEN IDENTIFIERS
For those applicants or owners who are involved with multiple entities and do not wish to produce their information for each subsequent report, they are able to apply for a FinCEN identifier. This is a one-time application for a company or individual, which will immediately issue an identifying number that can be included on an entity's BOI report. To obtain the FinCEN identifier, all the same information requested above is still required, and must be amended for any changes within 30 days of the update.
CONCLUSION
With the effective date of the CTA fast approaching, and many questions and specifics still waiting to be clarified with the release of the official BOI Report form, there are things that can be done now to ease into the new requirements. This includes:
- Confirm any assumed names and DBAs of your entity;
- Find your entity's Tax ID number, or contact the IRS for assistance obtaining it;
- Confirm all current Beneficial Owners as defined above;
- Begin collecting your Beneficial Owners' information, and;
- Begin scanning in the identifying documentation necessary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.