At the beginning of this year, the Corporate Transparency Act (“CTA”) became effective. The CTA is intended to aid law enforcement in combating illicit activity, such as money laundering and terrorist financing, conducted through anonymous shell companies. It does so by mandating certain entities, primarily small or medium size businesses, to report “beneficial owner” information to the Financial Crimes and Enforcement Network (“FinCEN”). The CTA authorizes FinCEN, a Bureau of the US Treasurer Department, to collect, protect and disclose this information to authorized governmental authorities and financial institutions in certain circumstances.
Reporting companies under the CTA include corporations, limited liability companies (LLCs), and other legal entities created by a filing with a secretary of state. There are a number of exemptions from the definition of reporting companies. Many of the exemptions are entities already regulated by federal or state governments and, as such, already disclose beneficial ownership information. There are twenty-three categories of exempt entities. They include large operating companies, public companies, insurance companies and producers, public accounting firms, and tax-exempt entities. The CTA also exempts certain highly regulated entities from reporting, including banks, credit unions, security brokers or dealers, and regulated public utilities.
A reporting company must disclose information to FinCEN, including its individual beneficial owners, and its company applicant for entities created after the beginning of this year. A company applicant is an individual who either directly files a document that creates the domestic reporting company or is primarily responsible for directing or controlling the filing of the relevant document by another.
As to each individual beneficial owner and company applicant, a reporting company must disclose:
- Their full legal name.
- Their date of birth.
- Their complete current address.
- A unique identifying number.
- An image of the document with the unique identifying number.
The unique identifying number must come from one of the following non-expired documents issued to that individual:
- A US passport issued by the US government.
- A state, local government or Indian tribal identification document issued to identify the individual.
- A state-issued driver’s license.
- If an individual does not have one of the above, a passport issued to them by a foreign government.
An individual may obtain a FinCEN Identifier on or after the Act’s effective date by providing to FinCEN the same information as the reporting companies are required to provide regarding its beneficial owner on its initial Beneficial Ownership Interest (“BOI”) report. A reporting company may then report the individual’s FinCEN ID on its BOI report in lieu of listing the specific information described above regarding the individual.
The CTA imposes different filing deadlines depending upon whether a reporting company is in existence as of or formed after the CTA’s effective date. So, a reporting company that was created before January 1, 2024, must file its initial BOI report on or before January 1, 2025. However, a reporting company must file within 90 days of its formation if created or registered in 2024 and within 30 days if created or registered on or after January 1, 2025.
The reporting company must file updates to the BOI reports within 30 days of any change to the information therein. For example, an update may be filed if there is a change of name or address of any beneficial owner. A reporting company also has 30 days to correct any inaccuracies in its BIO report if it becomes aware or has reason to know of an inaccuracy.
With the CTA introducing a new and expansive reporting routine, now is the time to evaluate the implications for your organization. Some questions and comments to consider include:
- Is your business subject to the CTA, or do you qualify for any exemptions?
- If your company is not exempt, how do you calculate the percentages of “ownership interests” to determine which owners meet the threshold for reporting purposes?
- How do you assess and determine each person who exercises “substantial control over the reporting company”?
- What new processes and procedures should the reporting company put in place to become aware of future changes and timely file updated reports to FinCEN?
Please note that reporting companies will need to rely on beneficial owners to provide timely updates on reportable changes to their information (for example, ownership changes, moves, marriages, divorces, etc.). As a result, a reporting company’s operative document, such as the operating agreement for an LLC, should be reviewed and may need to be revised to include provisions related to the CTA, such as representations, covenants, indemnifications and consent clauses. For example, the Operating Agreement of a limited liability company may require:
- A representation by each member or other owner, as applicable, that they will be in compliance with or are exempt from the CTA;
- A covenant by each owner requiring continued compliance with and disclosure under the CTA (or to provide evidence of exemption from its requirements);
- Indemnification obligations for each owner to the reporting company and its other owners for a failure to comply with the CTA or for providing false information; and
- A consent by each disclosing party for the reporting company to disclose identifying information to FinCEN to the extent required by the law.
Please note that the penalties for willfully violating the CTA reporting’s requirements include (1) civil penalties of up to $500.00 per day that a violation is not remedied; (2) a criminal fine of up to $10,000.00, and/or (3) imprisonment of up to 2 years.
For additional information regarding the beneficial ownership reporting requirements under the CTA, you may refer to FinCEN’s frequently asked questions document at https://www.fincen.gov/boi-faqs. The CTA is not part of the tax code, and your compliance with it may require professional guidance and direction.
If you have additional questions, please Contact Us.
Jeffrey L. Rehmeyer II
Shareholder | Attorney
Jeffrey Rehmeyer II was CGA Law Firm’s President for many years. He is fueled by a belief that planning today creates protection for businesses and families tomorrow. Jeff forms relationships with his clients, which include large and small businesses, municipalities, families and individuals. His work begins by developing an understanding of their situation, actual or anticipated challenges, and goals. Jeff sees the client first, not the case. Over the course of his legal career, Jeff has led many clients through different legal needs, from business to family to estate and individual, which gives his clients a remarkable advantage through a multi-faceted approach to the law and legal issues.
Read Jeff’s Bio Page in full HERE.