Preparing to Comply with the Corporate Transparency Act

On January 1, 2024, beneficial ownership information (“BOI”) requirements under the Corporate Transparency Act (“CTA”) took effect.  These requirements may impact you if you have formed an LLC, corporation, or partnership for any purpose. The stated goal of the CTA is to curtail money laundering and other illicit activity by creating “a secure, nonpublic database” of BOI with the Financial Crimes Enforcement Network (“FinCEN”).  With an estimated 2 million entities being formed each year and tens of millions of existing entities, including many entities created for investment or estate planning purposes, the CTA’s impact is widespread and ongoing.

The information contained in this post is current as of October 1, 2024, and is subject to change as this area of the law evolves.

Who is Required to Report BOI?

Reporting companies (defined below) must report beneficial ownership information for three categories of entities or individuals: (1) reporting companies, (2) beneficial owners, and (3) company applicants.  FinCEN has released a Small Entity Compliance Guide, which provides a number of checklists to help determine reporting obligations:

https://www.fincen.gov/boi/small-entity-compliance-guide

Reporting companies are defined as (1) domestic corporations, limited liability companies, or similar entities or (2) foreign companies registered to do business in the United States.  Each reporting company must report its BOI.  There are 23 exceptions to the definition of a reporting company, including sole proprietorships, inactive entities, and large operating companies (companies with more than 20 full-time employees and previous year gross receipts or sales of at least $5 million).  Notably, trusts are not reporting companies, although there may be reporting requirements if trusts hold ownership interests in reporting companies.  When a reporting company is owned or controlled by a trust, the beneficial owner may include: 

  • A trustee (or any other individual) that has the authority to dispose of trust assets;
  • A beneficiary that is the sole permissible recipient of income and principal from the trust, or has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or
  • A grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.

 

FinCEN has not defined what it means to “dispose of trust assets,” so some of this determination must be done case-by-case.

A beneficial owner is an individual who (at the time of the filing), directly or indirectly, exercises substantial control over a reporting company (e.g., a senior officer or person in control of the company’s voting rights), or who owns or controls at least 25% of the ownership interest of the entity.  In addition, a beneficial owner may include the grantor/settlor of a revocable trust or the beneficiary of the trust when said trust has control over or owns a portion of the entity.

For each reporting company formed after January 1, 2024, there is a maximum of two company applicants, defined as individuals who directly filed the document creating or registering the reporting company and who were directly responsible for directing the filing, e.g., lawyers and paralegals.

What Must Be Filed?

Beneficial ownership information must be reported electronically through FinCEN’s secure filing system.  FinCEN has indicated that reporting companies are not required to use an attorney or CPA to submit their BOI information.  There is no filing fee.

For a reporting company, the filing requirements are as follows:

    • Full legal name, including any trade names or D/B/As;
    • Current street address of its principal place of business in the United States (e.g., a U.S. reporting company’s headquarters), or the current address from which the company conducts business in the United States (e.g., a foreign reporting company’s U.S. headquarters) for reporting companies whose principal place of business is outside the United States;
    • State/jurisdiction of formation or registration; and
    • Taxpayer Identification Number (or, if a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of the jurisdiction).

 

For a beneficial owner, the filing requirements are as follows:

  • Full legal name;
  • Date of birth;
  • Residential street address (not a PO box or lawyer’s address);
  • Unique identification number from an acceptable identification document (e.g., driver’s license or passport) and name of the issuing state/jurisdiction; and
  • An image of the identification document referenced above (e.g., driver’s license or passport).

 

For a company applicant (only necessary for companies not in existence on January 1, 2024), the filing requirements are as follows:

  • Full legal name;
  • Date of birth;
  • Business street address (for a company applicant working in corporate formation, such as an attorney or corporate formation agent) or residential street address for any other company applicant;
  • Unique identification number from an acceptable identification document (e.g., driver’s license or passport) and name of the issuing state/jurisdiction; and
  • An image of the identification document referenced above (e.g., driver’s license or passport).

 

Beneficial owners who are concerned about protecting confidentiality of their personal information or ownership of assets or entities may consider applying for a special FinCEN identifier.  This eliminates the need to submit personal information for multiple entities.

When Must the Report be Filed?

The reporting requirements apply to all existing companies (including entities not having been fully and irrevocably dissolved prior to 2024), whether formed before or after January 1, 2024.  For any reporting company in existence before January 1, 2024, the required information must be provided to FinCEN by January 1, 2025.  For any reporting company formed in 2024, the initial report is due within 90 calendar days (extended from 30 calendar days by FinCEN rule) of the formation of the entity.  For any reporting company formed on or after January 1, 2025, the initial report is due within 30 calendar days of the formation of the entity.

In addition, reporting companies must file amended information when such information changes (e.g., new business address, change in management, etc.).

Where Does the Information Go?

The BOI reports required under the CTA must be sent to FinCEN, which is required to keep the information confidential.  As such, the BOI information can only be disclosed upon receipt of a request from a federal, state, or local law enforcement agency; other regulatory or judicial bodies; or certain financial institutions to comply with due diligence requirements.

What Are the Penalties?

For noncompliance, the CTA provides the following penalties:

  • A civil penalty of not more than $500 per day that the violation continues or has not been remedied; and
  • A fine of not more than $10,000 and imprisonment of not more than two years.

Although FinCEN has indicated that it is focusing on willful violations, the penalties may be invoked regardless of intent.  In addition, the CTA provides penalties for unauthorized disclosure or use violations:

  • A civil penalty of not more than $500 per day that the violation continues or has not been remedied;
  • A fine of not more than $250,000 and imprisonment of not more than five years; or
  • While violating another federal law or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, a fine of not more than $500,000 and imprisonment of not more than 10 years.

Conclusion

FinCEN has released the BOI E-Filing System and Beneficial Ownership Information Report (“BOIR”) on its website, available at: https://boiefiling.fincen.gov/.  FinCEN has also released an extensive set of FAQs, updated most recently as of September 10, 2024:  https://www.fincen.gov/boi-faqs#E_1.

With the deadline approaching, individuals should:

  • Identify all business entities in which they hold an ownership interest or control;
  • Determine whether such entities fall under the definition of a reporting company, or whether they meet an exception;
  • Identify the beneficial owners of any reporting company; and
  • Obtain the required information from any beneficial owners of a reporting company, whether formed before or after January 1, 2024, and collect the same identifying information from company applicants.

 

Please contact us if you have questions regarding these reporting requirements.

 

This blog contains general information about legal matters. The information is not advice, and should not be treated as such. Communication of information by, in, to or through this blog and your receipt or use of it: (1) is not provided in the course of and does not create or constitute an attorney-client relationship; (2) is not intended to convey or constitute legal advice; and (3) is not a substitute for obtaining legal advice from a qualified attorney. Pursuant to Rule 1-400(D)(4), you are notified that this blog may constitute a communication or solicitation concerning the availability for professional employment of a member or a law firm in which a significant motive is pecuniary gain.

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