Ansell Grimm
November 10, 2024
By Thomas J. Gironda
On January 1, 2024, approximately 36 million American business owners woke up to find a new, complicated, and potentially burdensome federal reporting obligation on their compliance plate. That was the effective date of the Corporate Transparency Act (CTA), a law passed in 2021 as part of a major effort to stop money laundering and related crimes. The CTA attempts to accomplish this objective by requiring about 90% of American businesses to make mandatory and detailed disclosures regarding their “Beneficial Ownership Information” (BOI) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) division.
Unless your business falls under one of the exemptions outlined in the CTA – and it probably doesn’t – you need to understand and comply (or have complied) with the CTA’s reporting obligations by the dates detailed below. Failure to do so comes with significant consequences, including hefty fines.
FinCEN issued its Final Rule implementing the CTA on September 29, 2022, clarifying what entities are subject to the Act’s reporting requirements and what specific information those entities must provide. Since then, FinCEN has published extensive, detailed, and regularly updated FAQs to provide much-needed clarity and guidance about who is subject to the law, what information must be reported, and when it must be reported.
While hardly comprehensive, the following overview can help you make sense of the CTA and provide the foundation for timely compliance.
Is Your Business a “Reporting Company” That Must Comply With the CTA?
Under the Final Rule, a “Reporting Company” is either a corporation, limited liability company or any other entity – no matter how small – created by filing a document (e.g., Articles of Incorporation) with a secretary of state or any similar office. This means that entities that can be established without such filings, like sole proprietorships and general partnerships, are not subject to the CTA’s reporting requirements.
Section(a)(11)(B) of the CTA contains a list of 23 entity types that are exempt from the law’s reporting requirements. Most exceptions apply to companies that already have ownership reporting obligations under other regulatory schemes, such as securities dealers, banks and other financial institutions, and public companies.
These types of entities do not have to comply with the CTA’s BOI reporting requirements:
- Banks.
- Bank holding companies.
- Credit unions.
- Insurance companies.
- Issuers of securities registered under Section 12 of the Securities Exchange Act of 1934 or that must file supplementary and periodic information under Section 15(d) of the 1934 Act.
- Brokers, dealers, and any other entities registered with the SEC under the 1934 Act.
- Registered investment advisors under the Investment Advisers Act of 1940.
- Public accounting firms.
- Companies employing more than 20 people full-time in the U.S. or that filed a federal income tax return in the prior year showing more than $5 million in gross sales or receipts and have an operating presence in the U.S.
- Any entity that:
- Has existed for over one year.
- Has not sent or received funds over $1,000 or experienced an ownership change in the previous 12 months.
- Is not actively engaged in business.
- Is not owned by a foreign individual
and
-
- Does not otherwise hold any assets, including ownership interests, in any corporation, limited liability company, or other entity.
“Applicants” and “Beneficial Owners” Whose BOI Must Be Reported
In addition to basic corporate information such as name, address, and tax ID number, Reporting Companies covered by the CTA must provide FinCEN with BOI for two categories of individuals: “Applicants” and “Beneficial Owners.”
“Company Applicants”
The Final Rule defines a “company applicant” as “the individual who directly files the document that first creates the domestic reporting company” as well as “the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.” Effectively, the person who established the entity by filing the necessary paperwork will likely be an “Applicant” whose BOI must be disclosed.
“Beneficial Owner”
While identifying an Applicant is relatively straightforward, determining an entity’s “Beneficial Owners” can be far more complicated.
The Final Rule defines a “Beneficial Owner” as any individual who, directly or indirectly, either:
- Owns or controls at least 25 percent of the ownership interests of a reporting company or
- Exercises “substantial control” over a reporting company.
The Final Rule and FinCEN’s FAQs discuss what qualifies as “ownership interests” and “substantial control” that would make an individual a “Beneficial Owner” under the CTA.
Substance of Reporting
Non-exempt Reporting Companies must give FinCEN the following information regarding Applicants and Beneficial Owners:
- Full legal name.
- Date of birth.
- Street addresses (identified as a current residential or business street address).
- Non-expired state identification document or passport.
Compliance Deadlines
The Final Rule established different compliance deadlines for specific categories of covered entities. However, those original deadlines were modified in November 2023 for entities created or registered on or after the Rule’s effective date of January 1, 2024, and before January 1, 2025, to “give those entities additional time to understand the new reporting obligation and collect the necessary information to complete their filings.”
Accordingly, new domestic or foreign Reporting Companies formed during calendar year 2024 must submit their BOI report within 90 days after the date of the entity’s formation (i.e., the filing date of its Articles or Certificate). Prior to the adoption of the Final Rule, all such entities had to file their reports within 30 days after the date of their formation.
For all covered entities formed either before or after 2024, the CTA’s deadlines for submitting BOI reports to FinCEN are:
- Existing domestic or foreign Reporting Companies formed before January 1, 2024: On or before January 1, 2025 (one year after the effective date of the CTA.)
- New domestic or foreign Reporting Companies formed on or after January 1, 2025: Within 30 days after its date of formation (i.e., the filing date of its Articles or Certificate).
Penalties for Non-Compliance
There are significant penalties for non-compliance or fraud involving CTA reporting. Any person or entity that “willfully provides, or attempts to provide, false or fraudulent information or willfully fails to report when required” faces civil penalties of up to $500 per day for each violation, up to $10,000 in criminal fines, and up to two years in prison.
Assistance With CTA Compliance
As noted, FinCEN has been updating its CTA FAQs regularly, and we recommend that business owners review that guidance for additional information and clarification regarding their compliance obligations. We also recommend that entities work with experienced and credible vendors who focus on assisting entities with preparing and filing required reports. Two such vendors are VCorp Services and CSC Global.
If you have questions about the CTA, please contact Thomas Gironda at Ansell Grimm & Aaron.
