On January 1, 2024 the Corporate Transparency Act, which imposes reporting requirements on small businesses, went into effect. The purpose of the CTA is to require most small business entities to disclose to a bureau of the U.S. Treasury Department called the Financial Crimes Enforcement Network, or FinCEN, information that previously went undisclosed. Congress determined that disclosure is necessary because the anonymity of small business entities facilitated engaging in illegal activities.
Unless an exemption applies, (i) all legal entities created by a filing with a secretary of state and (ii) all foreign entities registered to conduct business in a US state, whether created or registered before or after the January 1, 2024, are required to submit an online filing called a Beneficial Ownership Information Report, or BOIR, to FinCEN. In practical terms, the CTA applies to limited liability companies, corporations, and limited partnerships. The CTA refers to legal entities subject to its requirements as “reporting companies.” A reporting company’s BOIR must include information about the company itself, its “beneficial owners”, and, for reporting companies formed after 2023, its “company applicants.”
The information that a reporting company must disclose about itself, referred to simply as reporting company information, consists of its name, any registered or unregistered trade names it uses, its business address, its state of legal formation, and its federal employer identification number.
A “beneficial owner” is any individual who, directly or indirectly, (i) exercises substantial decision-making authority over the reporting company, such as an LLC manager or corporate president, CEO, CFO, or director, or (ii) owns, directly or indirectly, twenty-five percent (25%) or more of the ownership interests or voting rights in the reporting company. Many individuals who act in a fiduciary capacity for a trust that owns a 25% or greater interest in a reporting company will also be considered beneficial owners. In most but not all cases, trust beneficiaries are not beneficial owners. The information that a reporting company must disclose about each of its beneficial owners is his or her name, residential address, date of birth, and passport or driver’s license number.
A company applicant is (i) the person who directly filed the legal formation or registration document of a reporting company with a secretary of state and/or (ii) the person who was primarily responsible for the filing. Applicant information required to be provided in a BOIR is the same as beneficial owner information, except that a business address rather than a residential address may be used.
A reporting company formed before January 1, 2024 must submit its initial BOIR to FinCEN on or before January 1, 2025, which must include reporting company information and beneficial owner information.
A reporting company formed during 2024 must submit its initial BOIR to FinCEN within ninety (90) days of formation. That BOIR must include (1) reporting company information, (2) beneficial owner information, and (3) applicant information. A reporting company formed after 2024 must provide that information within thirty (30) days of formation.
In addition to the initial filing obligation imposed on reporting companies under the CTA, if any information disclosed in an initial or updated BOIR changes, the reporting company must file an updated report within thirty (30) days of such change taking effect.
FinCEN has identified 23 exemptions from the CTA, most of which apply to large, heavily regulated businesses. One exemption available to any type of business is the “large company exemption”, which applies to a business with more than twenty (20) full-time U.S.-based employees and more than $15 million in annual gross receipts or sales from U.S. sources.
Failure to comply with a CTA reporting obligation may result in a fine of $500 for each day of noncompliance and/or up to two (2) years in prison.
A reporting company required to submit a BOIR by January 1, 2025, should consider filing well in advance of the deadline. Many accounting and legal professionals do not submit BOIRs for their clients, and those that do may be unable or unwilling to provide assistance after a deadline well before January 1, 2025. Professional filing services have cropped up, but none provide assistance other than to complete a BOIR with information that the reporting company provides. Prompt action by a reporting company will reduce the possibility of being unable to find assistance later.