The Corporate Transparency Act: A Brief Overview

Chief Executives and Business Owners, as we near the end of Q1 are you aware, and prepared?

Beginning on January 1, 2024, many legal entities in the United States now have to report to the federal government information about their beneficial owners—i.e., the individuals who ultimately own or control the company through the Corporate Transparency Act. The information will be stored in a secure nonpublic federal government database. Here are the key takeaways for you and your business.

What is the Corporate Transparency Act (CTA)?

  • The CTA is a new reporting requirement that allows the Financial Crime Enforcement Network (FinCEN) to collect information about Reporting Companies, Beneficial Owners, and Company Applicant(s).
  • The CTA’s primary purpose is to assist FinCEN with pursuing financial crimes.
  • The CTA went into effect on January 1, 2024, concurrent with the launch of FinCEN’s BOI E-Filing portal where Reporting Companies can file Beneficial Ownership Information reports electronically. To date, FinCEN has not issued additional guidance for entities or individuals who are not able to submit reports electronically.
  • Reporting Companies created or registered prior to January 1, 2024, must complete an initial report with FinCEN before January 1, 2025.
  • Reporting Companies created or registered on or after January 1, 2024, but before January 1, 2025, must complete an initial report within 90 days, and Reporting Companies created or registered on or after January 1, 2025, must complete an initial report within 30 days. 1
  • Inaccurate reports, whether by error or by a change in underlying information that requires updating, must be filed within 30 days of the change or the discovery of the inaccuracy. 2
  • The reporting requirement for Company Applicant(s) Information only applies to companies created on or after January 1, 2024. Entities created prior to January 1, 2024, are only responsible for reporting information from the following categories: (1) Reporting Company Information and (2) Beneficial Ownership Information.

Who does it impact?

  • Under the CTA, only those companies deemed Reporting Companies are required to report information to FinCEN.
  • Reporting Companies fall into one of two categories: (1) domestic Reporting Companies and (2) foreign Reporting Companies.
  • Domestic Reporting Companies are any corporation, limited liability company, or other similar entity that is created by the filing of a document with a secretary of state or a similar office of a U.S. state (including any commonwealth, territory, or possession of the United States) or Indian tribe, unless exempt under the CTA.
  • Foreign Reporting Companies are any corporation, limited liability company, or other similar entity formed under the law of a foreign country and registered to do business in any U.S. state or tribal jurisdiction by the filing of a document with a secretary of state or a similar office of a U.S. state or tribe, unless exempt under the CTA.

What are the exemptions?

  • The CTA currently recognizes 23 exemptions 3 to the reporting requirement, including the exemption for large operating companies.
    • Large operating company: An entity that (i) employs more than 20 full-time employees (e.g.,  each employee works an average of at least 30 hours per week), (ii) more than 20 full-time employees are employed in the United States, (iii) the entity has an operating presence at a physical office within the United States, and (iv) the entity filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales sourced from inside the United States, and reported this amount on an applicable IRS form.

What information must be reported?

  • The CTA requires that Reporting Companies report the following three categories of information:
    • (1) Reporting Company Information: Either (A) FinCEN Identifier, or (B) an Identifier which requires  (i) full legal name used to establish the entity; (ii) any trade names or “doing business as” name, whether registered or not; (iii) address (for a domestic Reporting Company, the street address of the principal place of business, and for a foreign reporting company, the primary location in the United States where the Reporting Company conducts business); (iv) jurisdiction of formation (for a foreign Reporting Company, the state or tribal jurisdiction where the company first registers); and (v) IRS taxpayer identification number (TIN) or, if a TIN has not yet been issued for a foreign Reporting Company, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.
    • (2) Beneficial Ownership Information: Either (A) FinCEN Identifier, or (B) an Identifier which requires  (i) full legal name; (ii) date of birth; (iii) current residential street address; (iv) identification number (e.g., a unique identifying number and the issuing jurisdiction of a non-expired U.S. passport, non-expired driver’s license, or other non-expired identification document issued by a state, local, or tribal jurisdiction, or, if none of those is available, then a non-expired passport issued by a foreign jurisdiction); and (v) image of identification document. Beneficial Ownership Information must be provided for any individual who, directly or indirectly: (A) exercises substantial control over the Reporting Company, or (B) owns or controls 25 percent or more of the ownership interests of the Reporting Company.
      • Substantial control: An individual exercises substantial control over a reporting company if the individual serves as a senior officer; has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); directs, determines, or has substantial influence over important decisions; or, has any other form of substantial control.
      • Owns or controls 25 percent or more of the ownership interests: Ownership interests include equity, stock, voting rights, a capital or profit interest, convertible instruments, options, other non-binding privileges to buy or sell any of the foregoing, and any other instrument, contract, or mechanism used to establish ownership.
    • (3) Company Applicant(s) Information: For the person who directly files the formation or registration document of the Reporting Company and the person who was primarily responsible for directing or controlling the filing, either (A) FinCEN Identifier, or (B) which requires  (i) full legal name; (ii) date of birth; (iii) current business/residential street address; (iv) identification number (e.g., a unique identifying number and the issuing jurisdiction of a non-expired U.S. passport, non-expired driver’s license, or other non-expired identification document issued by a state, local, or tribal jurisdiction, or, if none of those is available, then a non-expired passport issued by a foreign jurisdiction); and (v) image of identification document.

Penalties for Noncompliance:

  • Those who willfully fail to report, fail to update reports, willfully submit or attempt to provide false or fraudulent reports, cause the failure to file a required report, or were a senior officer at the time of the failure to file may face civil and/or criminal penalties.
  • Civil fines of $500 per day will be assessed for each day a violation continues.
  • Criminal penalties include imprisonment for up to two years and/or fines of up to $10,000 per violation.

Connect with Ice Miller for More Details:

For questions regarding this alert or the CTA in general, please contact Leslie Johnson, Caroline Pontius, Jay Geiss, Huidi Shu, Sarah Sweet, or any Ice Miller lawyer and visit the dedicated CTA section of Ice Miller’s website (available by 1/1/2024).

1  On 11/29/2023, FinCEN amended its initial ruling and extended the reporting deadline for Reporting Companies created or registered within calendar year 2024, from 30 days to 90 days. This change was made to give those entities additional time to understand the new reporting obligation and collect the necessary information to complete their filings. For Reporting Companies created or registered within calendar year 2025 or after, the reporting deadline will revert to 30 days.
2  Safe harbor is available if a corrected report is filed within 90 days of the deadline for the original report.
3  The CTA currently recognizes 23 exemptions to the reporting requirement: (1) Securities Exchange Act of 1934 issuer; (2) Governmental authority; (3) Bank; (4) Credit union; (5) Depository institution holding company; (6) Money services business registered with FinCEN; (7) Broker/Dealer in securities; (8) Securities exchange or clearing agency; (9) Other Exchange Act registered entity; (10) Investment company or investment adviser registered with the SEC; (11) Venture capital fund adviser; (12) Insurance company; (13) State-licensed insurance producer; (14) Commodity Exchange Act registered entity; (15) Public accounting firm; (16) Public utility; (17) Financial market utility; (18) Pooled investment vehicle; (19) Tax-exempt entity; (20) Entity assisting a tax-exempt entity; (21) Large operating company; (22) Subsidiary of certain exempt companies; or (23) Inactive Entity.

This publication is intended for general purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
 

Similar Posts