LEGAL ALERT: Corporate Transparency Act and Its Potential Effect on Your Business

As part of Karr Tuttle Campbell’s commitment to keeping our clients informed about important legal changes, we are bringing your attention to the Corporate Transparency Act (“CTA”).  The CTA is a federal law that was adopted by Congress in 2021, but its implementation was delayed while the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) created reporting directives.

Effective January 1, 2024, the CTA will create significant new legal obligations for companies to report beneficial ownership information to the federal government.  The primary motivation for enacting the CTA is to combat financial crimes and address criminal activities by requiring non-exempt companies to disclose information about their owners and officers to FinCEN.  The CTA seeks to identify Beneficial Ownership Information for individuals with a substantial interest in a Reporting Company.  Unfortunately, the CTA places significant burdens on businesses of all sizes, who will soon be required to collect and report Beneficial Ownership Information (“BOI”), including updates if BOI data changes over time.

Key Definitions

A “Reporting Company” is a business entity formed by filing a document with a Secretary of State or similar office under state or tribal law.  Therefore, LLCs, corporations, and limited partnerships are typically considered Reporting Companies, whereas sole proprietorships and general partnerships would not usually qualify under most states’ laws.  Under the CTA, Reporting Companies include domestic entities and foreign entities registered to do business in the United States.  Additionally, the CTA lists 23 types of entities that are exempt from the beneficial ownership information reporting requirements.  Some noteworthy exempt entities are publicly traded companies, banks, non-profits, and certain large operating companies.[1] “Large operating companies” are generally those that (a) have more than 20 full-time employees; (b) reported more than $5,000,000 of gross receipts or sales on their federal income tax return for the prior year; and (c) has a physical office in the US.  Notably, in the majority of cases, newly formed entities will most likely be Reporting Companies with no exemption.

Reporting Companies will need to file a BOI report on each of their Beneficial Owners.  A “Beneficial Owner” is any individual who, directly or indirectly, either (a) exercises substantial control over a reporting company or (b) owns or controls at least 25% of the ownership interests of a reporting company.

An individual exercises “Substantial Control” over a reporting company if the person serves as a senior officer, has authority over the appointment or removal of certain officers or a majority of the board (or similar body), can make important decisions for the reporting company, or has any other form of substantial influence or control over a Reporting Company.[2]  “Ownership Interests” are defined broadly, and examples include shares of equity, stock, voting rights, or any other mechanism used to establish ownership.

Determination of direct ownership or control will be simple in some cases and difficult in others, especially when there are layers of companies or trusts involved.  BOI reports for trusts must report the trustee, the beneficiary if he or she is the sole recipient of the trust’s income and principal, and/or the grantor of a trust who retains the right to revoke, amend, or withdraw assets from the trust.

Reporting Companies formed after January 1, 2024, must also file BOI reports for their designated “Company Applicant(s)”.  A Reporting Company has a maximum of two Company Applicants.  A “Company Applicant” is the individual who directly files the formation documents (or registration documents for a foreign Reporting Company), as well as the individual primarily responsible for directing the filing.

How to Report and Required Reporting Information 

An entity that qualifies as a Reporting Company must submit an online confidential report to a filing system developed by FinCEN (known as the Beneficial Ownership Secure System, or BOSS).  Reporting Companies and individuals can also register for a unique “FinCEN Identifier,” which can be used in their BOI report filings.  An individual or reporting company may only receive one FinCEN identifier.  These systems are not currently operational and are scheduled to be live on or before January 1, 2024.

A Reporting Company will have to report:

1. Its legal name;
2. Any trade names, “doing business as” (d/b/a), or “trading as” (t/a) names;
3. The current street address of its principal place of business if that address is in the United States (for example, a United States reporting company’s headquarters), or, for reporting companies whose principal place of business is outside the United States, the current address from which the company conducts business in the United States (for example, a foreign reporting company’s United States  headquarters);
4. Its jurisdiction of formation or registration; and
5. Its 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).

Reporting Companies must report the following BOI for each Beneficial Owner and Company Applicant:

1. Full legal name.
2. Date of birth.
3. Current residential address.[3]
4. The person’s identifying number from an acceptable identification document such as a passport or U.S. driver’s license with a photograph, and the name of the issuing state or jurisdiction of identification document.
5. An image of the documents from which the unique ID number was obtained.

Upcoming Filing Deadlines and Mandatory BOI Reporting Updates

Non-exempt companies created before January 1, 2024, must file their initial BOI reports before January 1, 2025, while companies created or registered on or after January 1, 2024, must file reports within 30 days after formation.[4]  Reporting Companies that qualify for a CTA exemption do not need to file.  Filings do not need to be renewed.  However, if there is any change to the required information about your company or its beneficial owners in a BOI report that your company filed, the reporting company must file an updated report no later than 30 days after the date of the change.  Thus, it will be imperative for Reporting Companies to closely monitor for changes in BOI that will trigger a need to file updated BOI reports.  Occurrences that trigger required updates to BOI reports can be as mundane as an officer receiving a renewed passport or the Reporting Company registering a new business name or a beneficial owner’s change of address.  

Who Has Access to BOI Reports?

While the reported information will be accessible to law enforcement agencies and certain government entities, it will not be publicly disclosed.  FinCEN will permit federal, state, local and tribal officials, as well as certain foreign officials who submit a request through a United States government agency, to obtain beneficial ownership information for authorized activities related to national security, intelligence and law enforcement.  With customer consent, financial institutions will also have access to the information for “Know Your Customer” purposes.

The Internal Revenue Service (“IRS”), as a federal agency under the Treasury Department, will have access to BOI for tax administration purposes, including for purposes of tax collection, enforcement of tax laws and criminal investigations.  However, until FinCEN releases more detailed regulations, there is uncertainty surrounding the procedures and rules that the IRS will need to follow to use BOI information gathered by FinCEN.  The IRS has not released an official stance on the topic, which leaves tax professions unsure regarding the extent to which BOI data will become a key element in tax audits and investigations.  

Penalties

The CTA provides for civil and criminal penalties for willfully providing false or fraudulent BOI or to willfully fail to report complete or updated BOI.  Civil penalties may be up to $500 per day and a fine of not more than $10,000 and/or imprisonment for up to two years.

Be Aware of Potential Fraudulent Scams 

FinCEN has recently issued an alert about fraudulent attempts to solicit information from individuals and entities subject to the CTA.  The CTA scam uses fraudulent correspondence that may be titled “Important Compliance Notice” or something similar and asks the recipient to click a link or scan a QR code. Do not click, scan, or respond to e-mails or letters attempting to solicit CTA information.  Note that FinCEN does not send communications requesting CTA information from individuals and entities.  In addition, FinCEN does not even start accepting reports under the CTA before January 1, 2024.

Future Planning Considerations 

All entities formed by a filing with the Secretary of State or other filing authority are potentially subject to the BOI reporting obligations under the CTA.  This includes entities formed to manage family businesses, estate planning entities, real estate ownership, and other businesses formed in or operating in the United States.  Since the CTA can impose considerable penalties on non-compliant companies, existing companies must evaluate whether the CTA applies to them while also being aware that collecting BOI from their Beneficial Owners may be a time-consuming process.

Navigating compliance with the CTA will be a formidable challenge and potentially costly endeavor.  Compliance will require fact specific inquiry into the applicable CTA requirements, company structures, control features, and more.  Substantial time and effort will be required to analyze, obtain, and report the beneficial owner information reports.

KTC attorneys are closely monitoring the implementation of the CTA and are ready to assist you in ensuring compliance with its provisions.  Should you believe that your company may be subject to these new reporting requirements, or if you have any questions about the implications of the Act for your business, please contact the KTC attorney with whom you typically work.

[1] A list of all 23 entity exemptions can be found on FinCEN’s website.

[2] Further information on what constitutes “any other form of substantial control” is further explained in FinCEN’s Small Entity Compliance Guide.

[3] The difference between required reporting information for a Beneficial Owner and Company Applicant is the Company Applicant does not have to provide their residential address if the person “forms or registers an entity in the course of such company applicant’s business, the street address of such business.”

[4] FinCEN accepted a proposed rule to extend this filing deadline from 30 to 90 days for some new companies formed in 2024.