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I. What is the Corporate Transparency Act?

In 2021, Congress enacted the Corporate Transparency Act (CTA), which created a requirement for most companies conducting business in the US effective January 1, 2024 to report information regarding its ownership. The government’s objective is to promote transparency in the ownership of entities conducting business in the US to further the government’s efforts to combat crimes like money laundering.

Companies that must comply with the CTA, or “Reporting Companies”, are (i) any domestic entity that is created by filing a document with a secretary of state or any similar office under the law of a state or Indian tribe and (ii) any foreign entity registered to do business in any U.S. state or Indian tribe by such a filing.

There are twenty-three (23) types of entities that are exempt from the beneficial ownership information reporting requirements, including publicly traded companies, banks, insurance companies, certain tax-exempt entities, large operating companies (as defined under the CTA), and inactive entities formed before January 1, 2020 that meet specific criteria.

Reporting Companies must adhere to filing deadlines for compliance with the CTA. An entity formed prior to January 1, 2024 must file its beneficial ownership information report (BOIR) before January 1, 2025. However, an entity formed in 2024 must file its BOIR within 90 days of its date of formation.

Violations of the reporting requirements may result in an approximately $500 per day fine (adjusted annually for inflation). Additionally, a willful failure to file a report or a willful filing of false information may result in up to two years of imprisonment and a fine of up to $10,000.

II. Understanding Beneficial Ownership

A Reporting Company formed after January 1, 2024 will have to report information about its:

(i) Beneficial Owners – The individuals who own or control the company, such as an individual that

  • directly or indirectly owns or controls 25% or more of the ownership interests of an entity, and/or
  • who exercises substantial control over the entity.

(ii) Company Applicant(s) – The individual(s) who:

  • directly files the document that creates or registers the company or
  • directs/controls that filing by another person, if more than one person was involved in the filing.

A Reporting Company formed prior to January 1, 2024 only needs to report information about its beneficial owners, not its company applicants.

The definition of “Beneficial Owner” includes individuals with ownership or rights related to:

  • equity, stock or voting rights
  • capital or profit interests (including partnership interests)
  • convertible instruments
  • options or privileges
  • other options, instruments, contracts, agreements, mechanisms or privileges to acquire equity, capital, or other interests

While the identification of Beneficial for many Reporting Companies is straightforward, for entities that have multiple members, partners, or shareholders or members, partners, or shareholders that are not individuals, such as entity or trust members, the analysis will need to be conducted at different levels.

A Beneficial Owner can only be an individual. Therefore, if there is an entity member, that entity must be included in the analysis to determine if there are any beneficial owners who indirectly meet the definition of a Beneficial Owner. For trust members that meet the “Beneficial Ownership Test” absent the fact that a trust is not an individual, the Beneficial Owners likely are: the grantor (or settler), a beneficiary that has the right to withdraw or demand substantially all of the assets of the trust, the trustee(s), or any other individual that has the authority to dispose of the trust assets.

A comprehensive analysis of Beneficial Ownership is important to avoid fines and penalties imposed due to the filing of an inaccurate BOIR.

III. Streamlining the Filing Process

While ninety (90) days may seem like a long period of time to submit a report for a newly formed entity, the preparation prior to the submission of the BOIR requires proactive action to ensure the timely submission of a complete and accurate report. There are a number of steps that need to be taken.

(i) Identifying beneficial owners.

  • Analyzing the ownership structure of an entity and any external rights, options, or instruments that may define an individual as a Beneficial Owner (directly or indirectly).

(ii) Gathering required information.

  • For each beneficial owner or company applicant (for new entities), companies must report the individual’s:
    • Full legal name
    • Date of birth
    • Current address
      • For beneficial owners, Reporting Companies must report the individual’s residential address.
      • For company applicants that are in the business of forming entities, Reporting Companies must report the individual’s business address.
    • Government issued identification number and an image of the identification (state driver’s license, US passport, etc.)
  • Alternatively, individuals can request a special ID from FinCEN to be used in lieu or their personal information in filings, so that they do not have to provide Reporting Companies with their personal information. However, their personal information will still need to be submitted to FinCEN to obtain the special ID.

(iv) Identifying/obtaining a tax identification number for the entity.

(v) Filing the complete and accurate report.

IV. Additional Considerations for Reporting Companies

  •  Governing Documents

Reporting Companies should consider including provisions in their operating agreements, partnership agreements, and shareholder agreements that require beneficial owners to provide true and correct information to the reporting company in a timely manner when requested.

The penalties and fines associated with failure to comply with the CTA are primarily imposed on the Reporting Companies and/or their senior officers. It is necessary for those parties to ensure that the likelihood of negligence or willful misconduct with respect to a BOIR is decreased.

  • Updates Regarding the CTA

(i) Litigation:

In March of 2024, a district court in Alabama held that Congress lacks the authority to require companies to disclose beneficial ownership information to FinCEN. There are other similar lawsuits that have been filed across the U.S. Currently, that court’s holding only applies to the named plaintiffs in that lawsuit and FinCEN is still implementing the CTA against all other Reporting Companies.

(ii) Protect Small Business and Prevent Illicit Financial Activity Act

The U.S. House of Representatives passed a bill in December of 2023 (i) to permanently extend the deadline for new companies to submit beneficial ownership reports from 30 to 90 days and (ii) to extend the deadline for companies that existed prior to 2024 from January 1, 2025 to January 1, 2026. This bill is stalled and has not yet passed in the U.S. Senate.

  • Other Deadlines

If there is a change in the beneficial ownership of a Reporting Company or a change in the Reporting Company’s information, then the Reporting has 30 days from the date of the change to submit an updated BOIR.

If a BOIR is filed with inaccurate information, then the Reporting Company has 30 days from the date of its discovery of the inaccuracy to file a report. If the corrected BOIR is filed within 90 days of the submission of the initial BOIR, there are no penalties.

V. Next Steps

The deadlines for filings under the CTA arrive sooner than anticipated. It is imperative that Reporting Companies and their senior officers are diligently prepared to comply with the CTA to avoid fines and penalties, both civil and criminal.

Our firm has a streamlined proprietary process to help our clients (i) form entities and (ii) prepare and submit the required BOIRs. Please contact Angela Baldwin if you have any questions regarding how we can help you comply with the CTA.

Visit the below links to stay up to date on the latest guidance and resources from FinCEN:

 

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