Beginning on January 1, 2024, your business may have new reporting requirements under the Corporate Transparency Act (the “CTA”). On September 29, 2022, the Financial Crimes Enforcement Network (“FinCEN”) issued a final rule implementing the CTA’s beneficial ownership reporting provisions. The final rule requires anyone who is considered a “beneficial owner” or “company applicant” of a “reporting company” to provide certain information, including their name, birthdate, address, and an image of an acceptable identification document.

The CTA was created as a mechanism to combat various types of illegal activity, including tax fraud, money laundering, terrorist financing, corruption, and similar illicit acts perpetrated by the use of “opaque legal structures.” FinCEN maintains that the CTA is designed to improve U.S. national security; nevertheless, the CTA’s impact on business owners will be unavoidable.

Do I Own a Reporting Company Subject to the CTA?

Unless specifically identified as an exempt entity (discussed immediately below), the final rule classifies all companies, including corporations, limited liability companies, limited liability partnerships, business trusts, limited partnerships, and any other entities that register to do business by the filing of a document with the secretary of state or similar office, as a “reporting company.” This classification applies to both foreign and domestic entities. However, the CTA will generally not apply to a trust if the trust does not result from a state filing. If your company is a reporting company and is not subject to one of the exemptions listed below, you will need to complete a beneficial ownership report for any beneficial owner or company applicant for your company.

Is My Company Exempt From the CTA’s Reporting Requirements?

Your company is considered a reporting company, and therefore subject to all of the reporting requirements of the CTA, unless it falls into one of the twenty-three exemptions listed below:

  1. Securities reporting issuers
  2. Governmental authorities
  3. Banks
  4. Credit unions
  5. Depository institution holding companies
  6. Money services businesses
  7. Brokers or dealers in securities
  8. Securities exchanges or clearing agencies
  9. Other Exchange Act registered entities
  10. Investment companies or investment advisers
  11. Venture capital fund advisers
  12. Insurance companies
  13. State-licensed insurance producers
  14. Commodity Exchange Act registered entities
  15. Accounting firms
  16. Public utilities
  17. Financial market utilities
  18. Pooled investment vehicles
  19. Tax-exempt entities
  20. Entities assisting a tax-exempt entity
  21. Large operating companies
  22. Subsidiaries of certain exempt entities
  23. Inactive entities

Keep in mind that many of these twenty-three exemptions have nuanced requirements, which are not listed here. For example, some of the additional requirements needed to claim the large operating company exemption include (but are not limited to): i) employing more than twenty full-time employees in the United States, (ii) having an “operating presence” within the United States at a physical location, and (iii) filing a Federal U.S. income tax showing more than $5,000,000 in gross receipts or sales in the previous year. Close attention to the language of the CTA is critical in evaluating whether your company is a reporting company. Involving a business attorney at this step is advisable to avoid the potential civil and criminal penalties associated with non-reporting under the CTA.

If I Have a Reporting Company, Who Are the Beneficial Owners?

A beneficial owner refers to anyone who (i) exercises “substantial control” over a reporting company, or (ii) owns 25% or more of the ownership interest of a reporting company. A reporting company will always have at least one beneficial owner. Like the reporting company exemptions, these rules can be complex. For example, while “substantial control” can refer to the senior officers of the reporting company (e.g., president, CEO, CFO, COO, and other officers), substantial control can also refer to individuals who can assert substantial influence over significant business decisions, such as the sale of principal assets, major capital expenditures or investments, issuing equity, entering into and terminating significant contracts, and other similar acts.

Likewise, ownership interest is broadly defined to include all equity, stock, or similar instruments that establish ownership. This includes convertible instruments, futures, warrants, or rights to purchase equity. When determining whether the 25% threshold has been met, the definition of ownership interest assumes all equity options have been exercised.

If I Have a Reporting Company, Who Are the Company Applicants?

The company applicant is any individual who files an application to initially form or register a reporting company. This definition includes not only the person actually making the filing, but also the person who directs the filing.

What Information Do the Beneficial Owners and Company Applicants Need to Provide?

All of the information required by the beneficial ownership interest report, including each party’s name, date of birth, address, unique identifying number taken from an acceptable identification document, and a picture of such identification document (e.g., a driver’s license, passport, state ID, etc.). This information will be submitted using a beneficial ownership information report (a “BOI Report”) provided by FinCEN. A FinCEN identifier may be available for individuals who are beneficial owners of multiple entities to minimize the reporting burden imposed by the CTA.

When Does a BOI Report Need to be Filed?

For companies in existence prior to January 1, 2024, a BOI Report must be filed no later than January 1, 2025. For companies created or registered after January 1, 2024, a BOI Report must be filed within 30 days from the date such company receives notice of its formation. However, as of September 28, 2023, FinCEN has proposed an amendment which, if enacted, could extend this 30-day period to a 90-day period.

Does My Company Have To Do Anything After Filing an Initial BOI Report?

Yes. If beneficial ownership information changes (e.g., a new owner, a new address of an existing owner, etc.), such change must be reported within 30 days from the date the reporting company knows, or should know, of such change.

What Happens if I Do Not File a BOI Report?

You could be fined up to $500 per day, not to exceed $10,000. In the event of willful violations of the CTA’s reporting requirements, non-compliance could result in criminal penalties, including imprisonment for up to two years.

What Are My Next Steps?

The CTA is a significant development in the business world and, for better or for worse, is likely here to stay. Due to the significant penalties that can result from non-compliance, business owners need to be confident of their company’s reporting requirements under the CTA. Furthermore, business owners should take steps to make certain they can readily collect all of the necessary information from any beneficial owner or company applicant to ensure future compliance with the CTA.

Rhoades McKee can assist in determining whether your business is a reporting company, whether any of the reporting exemptions discussed above apply, and which individuals need to be reported as beneficial owners or company applicants. Rhoades McKee can also assist in revising your company’s corporate documents, including its operating agreement, shareholder agreement, or other similar documents, to facilitate cooperation from all parties necessary to satisfy any future reporting requirements under the CTA. The requirements enacted under the CTA continue to evolve, and future updates are anticipated.

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