The Corporate Transparency Act (CTA), enacted in 2021, was passed to enhance transparency in entity structures and ownership to combat money laundering, tax fraud, and other illicit activities. It is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market.
The CTA is particularly targeted to smaller businesses.
Reporting companies are identified as either domestic or foreign:
- Domestic reporting companies are corporations, LLPs, or any other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.
- Foreign reporting companies are corporations, LLCs, or any other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or similar office. Sole-proprietorships that don’t use a single-member LLC are not considered a reporting company.
Reporting companies typically include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships (where entities are generally created by a filing with a secretary of state or similar office).
There are twenty-three exemptions from reporting. One of those is a large operating company (employs more than 20 full-time employees in the U.S., has a physical presence in the U.S., and has greater than $5 million in gross receipts within the U.S.).
A beneficial owner can fall into one of two categories defined as any individual who, directly or indirectly, either:
- Exercises substantial control over a reporting company, or
- Owns or controls at least 25% of the ownership interest of a reporting company.
Having two categories is to close any loopholes and ensure all owners are identified. The key difference is that beneficial ownership is categorized as those with ownership interest reflected through capital and profit interest in the company.
The beneficial owners must report to FinCEN their name, date of birth, address, and unique identifier number from a recognized issuing jurisdiction and a photo of the that document. If an individual decides to file their information to FinCEN directly (rather than as part of a company’s filing), they may be issued a “FinCEN” identifier which can be provided on a BOI report instead of the required information.
Company applicants can only be:
- The individual who directly files the document that creates the entity, or the document that first registers the entity to do business in the United States.
- The individual is primarily responsible for directing or controlling the filing of the relevant document by another.
The CTA goes into effect on January 1, 2024. Reporting companies that are in existence on the effective date must file their initial reports within one year, by January 1, 2025.
Reporting companies created after the effective date have 90 days after receiving notice of their creation or registration during 2024. Companies created after 2024 will have 30 days to report under current guidance.
Reports must be updated within 30 days of a change to the beneficial ownership, e.g., through the sale of a business, merger, acquisition, or death, or 30 days upon becoming aware of or having reason to know of inaccurate information previously filed.
The reporting requirements are ongoing as illustrated by this example from the Q&A issued by FinCEN. This is only one of many reasons that a report must be updated:
If a beneficial owner obtained a new driver’s license or other identifying document that includes a changed name, address, or identifying number, the reporting company also would have to file an updated beneficial ownership information report with FinCEN, including an image of the new identifying document.
Therefore, it appears that a reporting company must constantly in real time monitor and report information on its beneficial owners.
The reporting is done through the FinCEN website, and there is no filing fee. Noncompliance could result in civil penalties of up to $500 per day of violation and criminal penalties of up to $10,000, imprisonment for up to two years, or both.
Please keep in mind this is a general discussion and that you should contact us for specific questions.