In 2021, Congress passed the Corporate Transparency Act (CTA) on a bipartisan basis. This law creates a new beneficial ownership information reporting requirement as part of the U.S. government’s efforts to make it harder for bad actors to hide gains through shell companies or other ownership structures. The reporting rule increases the ability of The Financial Crimes Enforcement Network (FinCEN) and other agencies to protect U.S. national security and the U.S. financial system from illicit use and provide essential information to aid national security, intelligence, and law enforcement agencies in preventing drug traffickers, fraudsters, and corrupt actors from laundering or hiding money and other assets in the United States. When fully implemented, it will create a database of beneficial ownership information within FinCEN.

The reporting rule requires certain entities to file beneficial ownership information (BOI) reports with FinCEN. The affected entities include domestic corporations, limited liability companies, and other entities that filed a document with a secretary of state or any similar office and were formed under the laws of the United States, as well as foreign companies formed under foreign law but registered to do business in a U.S. state by filing a document with a secretary of state or any similar office (i.e., “reporting companies”). Reporting is not required if the entity qualifies for one of 23 exemptions. Most of the exemptions relate to entities that already are subject to federal or state regulation, the premise being that beneficial ownership of those entities already is known. Examples of exemptions include banks, credit unions, insurance companies, as well as a “large operating company” exemption. Unlike many other federal business statutes, the compliance burden largely will be borne by small to medium-sized businesses, as the larger entities likely will find a qualifying exemption.

BOI reports contain information about the reporting company itself, the company applicants, and the beneficial owners of the company. The “company applicant” is the person who files the formation documents to register the company. An entity formed before January 1, 2024, does not need to report its company applicant. However, any entity formed on or after January 1, 2024, is required to report its company applicant. There is a maximum of two company applicants, both must be individuals. There is the “direct filer”, who is the person who physically submits the filing to the state, and the one who controls the filing action.

A “beneficial owner” is any individual who, directly or indirectly: exercises substantial control over a reporting company; or owns or controls at least 25 percent of the ownership interests of a reporting company. An individual exercises substantial control over a reporting company if the individual meets any of four general criteria: (1) the individual is a senior officer; (2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company; (3) the individual is an important decision-maker; or (4) the individual has any other form of substantial control over the reporting company. Reporting companies are required to identify all individuals who own or control at least 25 percent of the ownership interests of the company. Any of the following may be an ownership interest: equity, stock, or voting rights; a capital or profit interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership.

Each BOI report must disclose certain information about the reporting company (e.g., name, address, taxpayer identification number) and its beneficial owners and company applicants (e.g., full legal name, date of birth, address and passport or driver’s license number, with a photocopy of such document). Existing companies must file their BOI reports before January 1, 2025. As presently drafted, companies formed in 2024 must file their BOI reports within 30 days of creation/registration.

However, in another important development, on September 27, 2023, FinCEN proposed an amendment to the Final Rule that would temporarily extend the deadline for initial reports by reporting companies created or qualified on or after January 1, 2024 from 30 days after creation or qualification to 90 days. This will likely become part of the Final Rule by year’s end, however, the 90-day period would only apply through 2024 and would revert to 30 days on January 1, 2025.

Filings open January 1, 2024. FinCEN will publish instructions and other technical guidance on how to complete the BOI report, as well as the form itself, which will be available at: www.fincen.gov/boi. After the initial report, there is no annual or quarterly filing requirement. However, reporting companies must file an amendment within 30 days after any change to their reported information. If an inaccuracy is identified in a BOI report, the reporting company must correct it no later than 30 days after the date the company became aware of the inaccuracy or had reason to know of it.

Finally, under the CTA, the willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fail to file a required BOI report may be held accountable for that failure.

If you have any questions regarding the CTA and how it might impact your business, please contact our office.

*****
This post is for informational purposes only, and merely recites the general rules of the road. Lots of legal rules have exceptions, however, and every case is unique. Never rely solely on a blog post in evaluating your situation — always contact an attorney when your legal rights and obligations are on the line.