Corporate Transparency Act: New Law and New Requirements
Effective January 1, 2024, most new and existing corporate entities in the United States will be required to file reports on their beneficial owners with the federal government. These requirements are part of the Corporate Transparency Act and are expected to impact millions of business entities. Below are some frequently asked questions regarding the new filing requirements.
- What is the Corporate Transparency Act?
- Who is required to report?
- Are there any exemptions?
- When are reports due?
- What must be reported?
- Must initial reports be updated?
- Who is considered a “beneficial owner” of a reporting company?
- Does the CTA apply to a company that is owned by a Trust?
- What happens when ownership changes during the ordinary course of business?
- Are there exceptions to the definition of “beneficial owner”?
- Who is considered a “company applicant”?
- Who has access to the information after it is filed with FinCEN?
- What is the filing process?
- What is the cost to file?
- What are the penalties of not complying with reporting obligations?
- Where can I find additional information related to the CTA?
ANSWERS TO FREQUENTLY ASKED QUESTIONS
1. What is the Corporate Transparency Act?
The Corporate Transparency Act (“CTA”) was enacted on January 1, 2021. It is an expansion of anti-money laundering laws and is intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other unlawful activity. Broadly speaking, it requires most existing and new entities in the United States to file reports with the federal government regarding their beneficial owners. These beneficial ownership information (“BOI”) reports will be filed with the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
Congress believes unlawful actors frequently use entity structures such as shell and front companies to hide their identities and move money through the U.S. financial system. Prior to the CTA, there were no uniform beneficial ownership information reporting requirements in the United States, which hindered law enforcement’s ability to investigate entities being used for illegal purposes.
2. Who is required to report?
Reports must be filed by domestic and foreign “reporting companies,” which are defined as follows:
- Domestic reporting company – any entity that is a corporation, LLC, LP, LLP, LLLP, non-profit corporation, business trust or any other entity that is created by the filing of a document with a secretary of state or similar office.
- Foreign reporting company – any entity formed under the law of a foreign country and registered to do business in any U.S. state by the filing of a document with a secretary of state or similar office.
3. Are there any exemptions?
The definition of “reporting company” is very broad. There are twenty-three (23) exemptions from the definition of “reporting company” in the CTA. These exemptions generally apply to highly regulated businesses. Below is a list of some of the more notable exemptions:
- Banks – banks are excluded from the reporting company definition. Some other bank-type entities are also excluded, such as regulated private trust companies.
- Large Operating Companies – large operating companies are companies that (1) have more than 20 full-time employees in the U.S., (2) have an operating presence at a physical office within the U.S., AND (3) have filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5,000,000 in gross receipts or sales (excluding gross receipts or sales from sources outside the US). Meeting the 20 full-time employees requirement is tested on a per-entity basis, but the gross receipts or sales reported on the tax return requirement can be measured based on the reported gross receipts or sales of a consolidated group on a consolidated tax return.
- Publicly Traded Companies – issuers of securities registered under Section 12 of the Securities Exchange Act of 1934 and issuers of securities required to file supplementary or periodic information under Section 15(d) of the Securities Exchange Act of 1934.
- Tax-Exempt Entities – tax-exempt entities generally include organizations described in Internal Revenue Code (IRC) Section 501(c) and exempt from tax under IRC section 501(a).
4. When are reports due?
The reporting regime goes into effect on January 1, 2024, and it applies to companies that currently are a “reporting company” or will be a “reporting company” when the company is created. The due date for the initial BOI report depends on when the company was created:
- If the company is created on or after January 1, 2024, then the initial report is due within 90 calendar days from the date of receiving actual or public notice of the company’s creation or registration becoming effective to file the initial report.
- If the company was formed before January 1, 2024, then the initial report is due no later than January 1, 2025.
In other words, effective January 1, 2024, new entities will have to file a BOI report within 90 days of their creation. Entities already in existence on January 1, 2024, have until January 1, 2025, to file a BOI report.
5. What must be reported?
Reports include information about (1) the reporting company, (2) the reporting company’s beneficial owners, and (3) “company applicants” who made the filings to create the entity.
Information about the reporting company includes:
- Full legal name
- Any trade name or “doing business as” (d/b/a) name
- Current address
- Jurisdiction of formation
- Federal taxpayer ID number
Information about individual beneficial owners and company applicants includes:
- Full legal name
- Date of birth
- Current address
- Unique identifying number and issuing jurisdiction (e.g., U.S. passport or driver’s license)
- Image of document with identifying number
Alternatively, individuals and entities may apply for and obtain a FinCEN identifier, which can be included on subsequent filings in lieu of this information. This could make the filing process more efficient for frequent filers.
6. Must initial reports be updated?
If there is any change with respect to information previously reported, the reporting company is required to file an updated report within 30 calendar days after the date on which the change occurs. Examples of changes that would require an updated report include the following:
- Changes in who is a beneficial owner, caused by transfers of ownership or sales of additional ownership interests
- A reporting company becoming exempt from the reporting requirements
- Transfers of ownership interests due to an owner’s death
- Transfers of ownership when a minor child reaches the age of majority
- Any changes to an identifying document previously submitted, e.g. changes in name, address, or identifying number
In addition, if the reporting company becomes aware of mistakes or inaccuracies in a report that has already been filed, it must file a corrected report within 30 calendar days after the date on which the reporting company becomes aware or has reason to know of the inaccuracy.
7. Who is considered a “beneficial owner” of a reporting company?
A beneficial owner is any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, either exercises “substantial control” over the company or owns or controls at least 25% of the company’s ownership interests.
An individual exercises “substantial control” over a company if the individual (A) serves as a manager or senior officer of the company; (B) has authority over the appointment or removal of any manager, senior officer or a majority of the board; or (C) directs, determines, or has substantial influence over important decisions made by the reporting company. Thus, managers, senior officers and other individuals with control over the company are “beneficial owners” under the CTA, even if they have no equity interest in the company.
Individuals may exercise control directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control. Indirect ownership or control of a company or its ownership interests may include the following:
- Joint ownership with one or more other persons
- Through another individual acting as a nominee, intermediary, custodian, or agent
- As trustee, grantor/settlor, or beneficiary of a trust
- Through ownership or control of one or more intermediary entities that separately or collectively own or control ownership interests of the reporting company
8. Does the CTA apply to a company that is owned by a Trust?
Companies owned by a trust will have to report the name of the trustee and any beneficiaries designated to receive more than a 25% beneficial interest in the trust. Essentially, anyone who has authority to dispose of trust assets will be deemed a “beneficial owner.”
9. What happens when ownership changes during the ordinary course of business?
The reporting company has 30 days to file an updated report.
10. Are there exceptions to the definition of “beneficial owner?”
The following are not considered beneficial owners of a reporting company:
- Minor children (however, the reporting company must report information regarding the minor child’s parent or legal guardian)
- An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual (in which case that individual would be the beneficial owner)
- An employee of the reporting company, acting solely as an employee, whose substantial control over or economic benefits from the entity are derived solely from the employment status (provided that the person is not a manager or senior officer of the entity)
- An individual whose only interest in a reporting company is a future interest through a right of inheritance
- A creditor of the reporting company
11. Who is considered a “company applicant”?
The “company applicant” is the individual who directly files the document that creates the reporting company. It also includes the individual who is primarily responsible for directing or controlling the filing if more than one individual is involved in the filing of the document.
In many cases, the company applicant will also be a beneficial owner of the company. Third parties such as attorneys and paralegals may also be considered company applicants if they file corporate formation documents on behalf of clients.
Entities created prior to January 1, 2024, do not need to include information on company applicants.
12. Who has access to the information after it is filed with FinCEN?
Reports filed with FinCEN will not be accessible to the public and are not subject to requests under the Freedom of Information Act. The following government agencies will have access to the information:
- Federal agencies engaged in national security, intelligence, and civil and criminal law enforcement
- The Department of the Treasury in connection with its official duties, including tax administration
- State and local law enforcement agencies in connection with criminal or civil investigations
If the reporting company consents, FinCEN may also disclose information to financial institutions to assist in their anti-money laundering compliance activities.
13. What is the filing process?
FinCEN is currently designing and building a new IT system called the Beneficial Ownership Secure System “BOSS” to collect and store CTA reports. This system is not yet available, and reports will not be accepted prior to January 1, 2024.
14. What is the cost to file?
There is no fee associated with filing under the CTA.
15. What are the penalties of not complying with reporting obligations?
Willful reporting violations carry a $500 per day civil penalty up to $10,000 and or imprisonment for not more than two (2) years.
16. Where can I find additional information related to the CTA?
- FinCEN’s Frequently Asked Questions: https://www.fincen.gov/boi-faqs
- FinCEN’s Small Entity Compliance Guide: https://www.fincen.gov/boi/small-entity-compliance-guide
- FinCEN’s BOI Webpage: https://wwwfincen.gov/boi
For more information or questions, please contact Michael G. Whittaker at email@example.com.
This information related to the Corporate Transparency Act is provided for informational purposes only; it is not offered, nor should it be construed, as legal advice or an opinion on specific situations. Receipt of or review of this information does not create or continue an attorney-client relationship. Providing legal advice and/or services regarding the Corporate Transparency Act is not included in engagement agreements that clients currently have in place or had in place with McDonald Carano LLP.
About McDonald Carano
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