What is the Corporate Transparency Act?
The Corporate Transparency Act (“CTA”) came into effect on January 1, 2024, impacting numerous small businesses throughout the United States. The claimed objective of the CTA is to address the covert nature of corporate ownership, a facet exploited for various illicit activities such as money laundering, terrorism financing, and other financial wrongdoings. Under the newly enacted legislation, businesses meeting specific but common criteria are obligated to submit a Beneficial Ownership Information (“BOI”) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). This report furnishes details and requires the production of documents identifying individuals associated with the reporting company.
Who is Required to Report under the CTA?
The CTA refers to one required to report under the CTA as a “reporting company.” The CTA then very broadly defines a “reporting company” as any corporation, limited liability company, or similar entity created through documentation filed with the Secretary of State or a comparable office in any state, territory, federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to conduct business in the United States. The reporting company is required to report and file documentation demonstrating the identity of each “beneficial owner” of the reporting company.
Are There Exceptions to Those Required to Report?
Focusing on shell companies and entities with limited or no operations, the CTA includes exceptions for entities exempt from reporting, such as those in regulated industries (where existing regulatory frameworks already cover beneficial ownership reporting), publicly traded companies, investment vehicles operated by investment advisors, nonprofits, and government entities.
Additionally, there is also an exception from required reporting for an entity that (1) employs more than twenty employees; (2) filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales; (3) has an operating presence at a physical office within the United States and other qualifications are met. Furthermore, entities that are subsidiaries of such exempt companies are also exempt from these reporting obligations. There are twenty-three categories of exceptions to the CTA reporting requirements. A list of the specific exceptions is available at the website link reported toward the end of this article. For the most part though, many small businesses formed through the offices of the Secretary of State or similar government offices of their state are required to report.
Beneficial Owner Defined:
According to the CTA, an individual qualifies as a “beneficial owner” if they possess a significant ownership stake in a company, either directly or indirectly. This person wields substantial influence over the reporting company’s decisions or operations, owns a minimum of 25% of the company’s shares, or holds a comparable level of control over the company’s equity. The legislation explicitly excludes certain individuals from the beneficial ownership definition, such as (1) a minor child (with the condition that the child’s parent’s or guardian’s information is reported); (2) an individual acting as an intermediary or agent on behalf of another; (3) a person whose control over a reporting company stems solely from their employment; (4) an individual whose sole interest in a reporting company is through a right of inheritance; or (5) a creditor of a reporting company (unless they qualify as a “beneficial owner” due to substantial control or equity ownership).
Beneficial Ownership Information (“BOI”) Report:
The document that reporting companies are required to file with government authorities is known as the “Beneficial Ownership Information Report” or “BOI Report.” Reporting companies must include specific details in the BOI Report, and these requirements vary depending on the business’s establishment date. There is a link below to “Frequently Asked Questions Regarding the CTA”, as well as to the form to be filled out. It is recommended that you look over the filing requirements and the form itself and gather the information and documents necessary to fill out and submit the form and attachments before attempting to fill out the form online.
When Must the BOI Report Be Filed?
Businesses registered or established after January 1, 2024, are required to provide comprehensive information about the business, its beneficial owners, and its company “applicants.” This information includes names, addresses, birthdays, identification numbers (such as a license or passport number), and the jurisdiction of the documents for both owners and applicants (if applicable). However, businesses established before January 1, 2024, can omit information regarding company applicants. Additionally, reporting companies must promptly update their beneficial ownership information within a year of any changes. Therefore, this reporting requirement is not a one-time requirement. It must be revisited on at least an annual basis when there has been any change in the information previously provided.
Starting January 1, 2024, reporting companies face specific deadlines for filing their initial BOI reports. For qualifying reporting companies established before January 1, 2024, the filing deadline is January 1, 2025. Companies created between January 1, 2024, and January 1, 2025, have a 90-day window from either the actual notice of formation or the public announcement, whichever occurs first, to submit their reports. Businesses established on or after January 1, 2025, must file their first report with FinCEN within 30 days from the notification or public announcement of their formation.
What Information Must be Provided in the BOI Report?
Reporting companies are generally required to furnish to FinCEN the following four pieces of information about each beneficial owner:
- Name;
- Date of birth;
- Address; and
- The identifying number and issuer from either a non-expired U.S. driver’s license, a non-expired U.S. passport, or a non-expired identification document issued by a State (including a U.S. territory or possession), local government, or Indian tribe. If none of those documents exist, a non-expired foreign passport can be used. An image of the document must also be submitted.
The company must also submit certain information about itself, such as its name(s) and address. In addition, reporting companies created on or after January 1, 2024, are required to submit information about the individuals who formed the company (“company applicants”).
Penalties for Violating CTA:
Willfully providing false information to FinCEN or failing to report complete information to FinCEN can result in fines up to $10,000 and imprisonment for up to two years. (Id. § 6403(c)(3)(A).) The CTA contains a safe harbor from such civil and criminal liability for the submission of inaccurate information if the person who submitted the report voluntarily and promptly corrects the report within 90 days.
How to File the BOI Report:
A great deal of information can be obtained from the following website maintained by the US Treasury Financial Crimes Enforcement Network. The link provides answers to frequently asked questions, lists entities exempt from reporting requirements and provides further links to access the BOI Report form, which can be filled out electronically online: (https://www.fincen.gov/boi). The BOI Report essentially functions as an online questionnaire, allowing you to answer questions and submit the electronic form with minimal technological competency. There is a great deal of information on the website regarding the CTA and reporting requirements.
Article by Marco N. Sarkovich, Esq. in 2024. Mr. Sarkovich is an Associate Attorney at Porter Law Group, Inc. in Gold River, California. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com. The information contained in this article is not intended to be, nor is the information, legal advice. ©2024.
