The Corporate Transparency Act (“CTA”), effective January 1, 2024, is recent federal legislation enacted in order to combat money laundering and terrorism financing through United States entities. The CTA requires certain business entities to file Beneficial Ownership Information (“BOI”) and Reporting Company Information with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Beneficial ownership information refers to identifying information about the individuals who directly or indirectly own or control a company.
Reports must be submitted electronically. FinCEN has developed an online system to submit the information, named the “Beneficial Ownership Secure System (BOSS).”
A BOI filing integrates three classes of participants: Reporting Companies, Beneficial Owners, and Applicants.
“Reporting Companies” are Required to Report
Only companies falling under the definition of Reporting Companies are required to report BOI and entity information to FinCEN. A “Reporting Company” is a domestic or foreign entity that is (i) a corporation, (ii) a limited liability company, or (iii) any entity created (or a foreign entity registered in the U.S.) by the filing of a document with a secretary of state, or any similar office under the law of a state or Indian tribe. It does not matter how long ago the entity was formed.
Generally, under the Corporate Transparency Act, trusts are exempted from reporting, as are 23 categories of exempt entities. The 23 exempted entities include (i) securities reporting issuers, (ii) governmental authorities, (iii) banks, (iv) credit unions, (v) depository institution holding companies, (vi) money services businesses, (vii) brokers or dealers in securities, (viii) securities exchanges or clearing agencies, (ix) other Exchange Act registered entities, (x) investment companies or investment advisers, (xi) venture capital fund advisers, (xii) insurance companies, (xiii) state-licensed insurance producers, (xiv) Commodity Exchange Act registered entities, (xv) accounting firms, (xvi) public utilities, (xvii) financial market utilities, (xviii) pooled investment vehicles, (xix) tax-exempt entities (e.g. organizations formed under 501(c), 527(e)(1) or 4947(a)), (xx) entities assisting tax-exempt entities, (xxi) large operating companies, (xxii) subsidiaries of certain exempt entities, and (xxiii) inactive entities.
For a company to qualify for the “large operating company” exemption, the company must have (i) more than 20 full-time employees in the U.S., (ii) more than $5 million in gross receipts or sales from U.S. sources, as evidenced from the federal income tax return filed in the previous year, and (iii) operations in a physical office located in the U.S. All of these conditions must be met to qualify for this exemption. The large operating company exemption requires that the entity itself employee more than 20 full-time employees in the United States; consolidation of this employee count across multiple entities is not permitted.
To qualify for the “inactive entity” exemption under the Corporate Transparency Act, the entity must (i) have been formed prior to January 1, 2020, (ii) not have engaged in any business activity, (iii) not be owned by a foreign person and not have had a change of control in the prior 12 months; (iv) not have paid or received funds in an amount greater than $1,000 in the prior 12 months; and (v) hold no assets or interests in any other entity (i.e. not a shell company). Again, all of these conditions must be met to qualify for this exemption.
To qualify for the “tax- exempt entity” exemption under the Corporate Transparency Act, any of the following four criteria must apply: (a) the entity is an organization that is described in section 501(c) of the Internal Revenue Code (“Code”) and exempt from tax under 501(a) of the Code, (b) the entity is an organization that is described in section 501(c) of the Code, but lost its tax-exempt status less than 180 days ago, (c) the entity is a political organization, as defined in 527(e)(1) of the Code or (4) the entity is a trust described in paragraph (1) or (2) of section 4947(a) of the Code.
Who are Beneficial Owners?
A “Beneficial Owner” under the Corporate Transparency Act is any individual who owns or controls 25% or more of the ownership interest in the Reporting Company and/or any individual who exercises “substantial control” over the Reporting Company.
It is important to note that all Beneficial Owners are individuals. In the event an owner is an entity (such as a corporation or LLC), the Reporting Company must look through the entity to its individual owners.
For example, assume the Reporting Company has three owners: Individual A at 50% ownership, Individual B at 40% ownership, and Individual C at 10% ownership, as well as a President who owns no equity. In such a case, Beneficial Ownership Information filings must include Individual A and Individual B (based on ownership of 25% or more) and the President (based on substantial control).
If we assume the same scenario, but assume the owners are Individual A at 50% ownership, Entity B at 40% ownership (Entity B being held 50% each by Individual X and Individual Y), and Individual C at 10% ownership, then the filing obligations will change. Individual X and Individual Y, by virtue of each owing 50% of Entity B, are each deemed to own 20% of the Reporting Company (i.e. Entity B’s 40% of Reporting Company multiplied by their 50% interest in Entity B = 20%). Thus, under this revised set of facts, only Individual A will be deemed to exceed the 25% ownership threshold.
For purposes of LLCs and other entities issuing capital or profit interests (including entities treated as partnerships for federal income tax purposes), ownership interests are based on the individual's capital and profit interests in the entity…a right to receive 25% or more of distributions will trigger a Beneficial Ownership Information filing requirement, even if ownership is less.
For example, if five members of an LLC each hold a 20% ownership interest in the LLC, but the profits are split 30%, 30%, 30%, 5%, 5%, then the company will need to make BOI filings on the three members receiving 30% profit distributions. If either of the 5% owners is in a substantial control position, such as a manager, a Beneficial Ownership Information filing will need to be filed for that individual as well.
The definition of “ownership interest” under the Corporate Transparency Act is very broad, including any ownership of (i) stock, (ii) capital or profits interest (“units”) in an LLC or partnership, (iii) any convertible instrument (i.e., convertible debt, SAFEs), (iv) any puts, calls, options, and warrants, and (v) anything else used to establish ownership. There are no exceptions for future/contingent conversion rights.
Individuals having “substantial control”, as defined in the Corporate Transparency Act, include (i) senior officers, (ii) those with authority to appoint or remove certain officers or a majority of directors, (iii) other important decision-makers, including any individuals with any other form of significant influence over the Reporting Company. In short, the definition seeks to require a Beneficial Ownership Information filing for anyone who is able to make important decisions on behalf of the Reporting Company.
Examples of direct ways to exercise substantial control over a Reporting Company include: being represented on the board, ownership or control of a majority of the voting power, or rights that are associated with financing or interest. Examples of indirect ways to exercise substantial control over a Reporting Company include: controlling one or more intermediary entities that separately or collectively exercise substantial control over a Reporting Company, or exerting control through arrangements or financial or business relationships with other individuals acting as agents.
Beneficial Owners can own or control a Reporting Company through trusts. They can do so by either exercising substantial control over a Reporting Company through a trust arrangement or by owning or controlling the ownership interests of a Reporting Company that are held in a trust. If the trust is a Beneficial Owner, the trustees are to be reported. The registration of a trust with a court of law merely to establish the court’s jurisdiction over any disputes involving the trust does not make the trust a Reporting Company.
Filing Exemptions
Under the Corporate Transparency Act, exceptions of individuals who are exempted from the reporting requirements are (1) minor children (2) nominees, intermediaries, custodians or agents (3) employees, (4) inheritors, and (5) creditors.
An individual qualifies for a minor child exception if they are a minor child residing in the state that the Reporting Company was first created, and where a parent or legal guardian’s information is being reported in lieu of the minor child’s information.
An individual qualifies for the nominees, intermediaries, custodians or agents exception if they are performing ordinary advisory or other contractual services (such as tax professionals or attorneys) to the Reporting Company.
Employees are exempt from filing if (i) any substantial control is derived solely from their employment status and (2) that employee is not a senior officer of the Reporting Company.
If an individual’s only interest in the Reporting Company is a future interest through a right of inheritance, they qualify for the inheritor’s exception.
An individual qualifies for the creditor exception if the individual is entitled to payment from the Reporting Company to satisfy a loan or a debt, so long as this entitlement is the only ownership interest that the individual has in the Reporting Company.
Homeowners’ associations (HOAs) may be required to report if they are not recognized by the IRS as a section(c)(4) organization and are incorporated by filing documents with a secretary of state or a similar office.
Who are Company Applicants?
An “Applicant”, as defined in the Corporate Transparency Act, is the individual (i) who directly files the document that first forms or registers the entity, or (ii) who is primarily responsible for directing or controlling the filing of the relevant document by another. A Reporting Company may not have more than two (2) Applicants.
Applicants of preexisting entities that were formed prior to January 1, 2024, are exempted from any filing requirement.
What are the Reporting Requirements?
As to the company itself, the Reporting Company must report the following information:
• Full legal name & any trade name;
• Principal place of business address;
• Jurisdiction of formation / registration; and
• Tax Identification Number.
As to the Beneficial Owners and Applicants, the Reporting Company must report the following information:
• Required Applicant/Beneficial Owners Information:
• Full Legal Name;
• Date of Birth;
• Current Residential Address; and
• Non-Expired U.S. Identification Document, or a Foreign Passport (including an image of the identification document).
When is the Reporting Due?
The reporting requirements are phasing in during 2024. For those Reporting Companies that were formed or registered before January 1,2024, they must report BOI for their Beneficial Owners (but not any Applicants) no later than January 1, 2025.
However, for Reporting Companies formed or registered on or after January 1, 2024, they must report Beneficial Ownership Information for both their Beneficial Owners and Company Applicants within 90 days after formation or registration. Starting January 1, 2025, reporting is due within 30 days after formation or registration.
If there are any changes in the identities of Beneficial Owners or to any Beneficial Ownership Information (including change of address, passport numbers, etc.), a Reporting Company must file an updated report with FinCEN within 30 days of the change, regardless of when the Reporting Company learns of it.
FinCEN Identifiers
Under the Corporate Transparency Act Reporting Companies, Beneficial Owners and Applicants can each obtain a numerical “FinCEN Identifier” which may be supplied to the filer instead of the detailed information. For example, an attorney filing the entity (and who, by doing so, becomes an Applicant), may choose (for privacy or security reasons) to provide the Reporting Company with his or her FinCEN Identifier, instead of providing the Reporting Company with his or her date of birth, passport, and residence.
In the event someone is a Beneficial Owner of multiple Reporting Companies, a FinCEN Identifier will be a more efficient way of providing information. Further, if any changes need to be made, the change can be made to the FinCEN Identifier, instead of having to update each Reporting Company filing.
Foreign Entities
In addition to companies that are in the 50 states and the District of Columbia, a company that is created or registered to do business in a U.S. territory is required to report beneficial ownership information to FinCEN. U.S. territories are the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, and the U.S. Virgin Islands.
A foreign entity needs to report beneficial ownership information to FinCEN if they are registered to do business in the United States by filing a document with a government agency to obtain (1) an IRS employer identification number (2) a fictitious business name, or (3) a professional or occupational license that does not create a new entity.
Who Can Use BOI Information?
The information collected pursuant to Corporate Transparency Act filings is collected on a secure, nonpublic database. While the information will not be made public, it will be available to federal, state, local, and trusted foreign agencies for law enforcement purposes. The information is not subject to requests under the Freedom of Information Act.
Those who may access the Corporate Transparency Act information include:
• Federal agencies, if engaged in national security, intelligence, and civil and criminal law enforcement
• State, local, and tribal law enforcement agencies, if “a court of competent jurisdiction” rules that those agencies should be allowed access to that information
• “Trusted” foreign law enforcement, if obtained via an intermediary U.S. federal agency
• The Department of the Treasury, if in connection with its official duties, including tax administration
• Financial institutions, in order to meet customer due diligence requirements under applicable law, but only if the Reporting Company consents to the search
Beneficial ownership information reported to FinCEN will be stored in a secure, non-public database using rigorous information security methods and controls typically used in the Federal government to protect non-classified yet sensitive information systems at the highest security level. FinCEN will work closely with those authorized to access beneficial ownership information to ensure that they understand their roles and responsibilities in using the reported information only for authorized purposes and handling in a way that protects its security and confidentiality.
What if a Reporting Company Fails to Report?
Under the Corporate Transparency Act, penalties may attach when there is a failure to report, or a failure to report accurately. It is unlawful for any person to willfully provide false or fraudulent Beneficial Ownership Information, or to willfully fail to report a complete BOI and update that BOI when information changes. However, no penalties will attach in the event an individual who provides inaccurate information (i) did not know about the inaccuracy, (ii) was not attempting to evade reporting requirements; and (iii) corrects inaccurate information “voluntarily and promptly,” but no more than 90 days after submission of the inaccurate filing.
FinCEN will consider all facts relevant to a determination of willfulness when deciding whether to pursue enforcement actions. Civil reporting penalties are currently $500 per day for each day of an outstanding violation, up to $10,000. Criminal penalties are currently up to a maximum of 2 years imprisonment.
If an individual misuses the Corporate Transparency Act filing information, it can result in criminal fines up to $250,000 and 5 years imprisonment.
What if previously reported information changes?
Under the Corporate Transparency Act, if there are any changes to the required information about the Reporting Company or its Beneficial Owner, your company must file an updated BOI report no later than 30 days after the date on which the change occurred. The same 30-day timeline applies to changes in information submitted by an individual in order to obtain a FinCEN identifier.
The following are examples of changes that would require an updated Beneficial Ownership Information report: (i) any change to the information reported for a Reporting Company, such as registering a new DBA, (ii) a change in beneficial owners, such as a new Chief Executive Officer or as sale that changes the ownership interest threshold of 25 percent ownership (iii) or any change a Beneficial Owner’s name, address, or unique identifying number provided in a BOI report.
Further, when a Beneficial Owner that was a minor child reaches the age of majority, you must file an updated Beneficial Ownership Information report, identifying the individual as a Beneficial Owner.
Updated BOI reports should be filed electronically though the secure filing system. There is no requirement to report a Reporting Company’s termination or dissolution.
Senior Officer Liability
Importantly, senior officers of a Reporting Company that fails to file a required Beneficial Ownership Information report may be held personally accountable for that failure. For example, should the Reporting Company fail to file, and then be assessed a $10,000 fine, the senior officers may be responsible for paying the fine in the event the Reporting Company lacks the means to do so.
For questions about the Corporate Transparency Act, please contact Jay Landrum at 408.286.5800 or jay.landrum@berliner.com.