What You Need to Know Before Jan. 1, 2024;
If You Own a Business, This Act Will Likely Affect You!
Effective Jan. 1, 2024, most U.S. corporate entities will be required to report to U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The Corporate Transparency Act (CTA) was enacted by Congress in 2021, as an expansion of the anti-money laundering laws, intended to prevent terrorist financing, corruption, tax fraud, and other illicit activity.
The CTA requires a Reporting Company to file reports to identify the company’s owners and those who filed the documents creating or registering the company with the state. As of now, there is no general federal registry and few states require companies to disclose this information.
Proponents of the CTA argue the updated transparency requirements will prevent bad actors from utilizing corporate structures such as shell companies for illicit purposes. Nonetheless, this regulation creates an additional burden on all entrepreneurs, business owners, and leaders to collect the pertinent information and file reports with the federal government.
Key Terms and Definitions:
- A “Reporting Company” is a corporation, limited liability company, or any other similar entity that is created by the filing of a document with a secretary of state or a similar office under the law of a state, or a foreign entity formed under the law of a foreign country, and registered to do business in any U.S. state or in any Tribal jurisdiction. This includes currently existing entities, regardless of their date of formation.
- The CTA establishes uniform reporting requirements for a “Beneficial Owner” defined as anyone who (1) directly or indirectly exercises substantial control over the Reporting Company, or (2) owns or controls at least 25% of the ownership interests of the Reporting Company. Substantial control is determined by the power an individual may exercise, such as the ability to direct, determine, or exercise substantial influence over important decisions for the Reporting Company. This will include senior officers, such as the CEO, COO, CFO, president, and general counsel, among others, even if they have no ownership stake in the company.
- A Reporting Company created or registered on or after 1, 2024 will also be required to report its “Company Applicant.” The Company Applicant may be up to two individuals who include: 1) the individual who is primarily responsible for directing or controlling the filing an application to form or register a corporation, limited liability company, or other similar entity under the laws of a state or Indian Tribe; and 2) the individual who directly files the document to create or register the Reporting Company.
What Information Needs to be Reported?
A Reporting Company will be required to report:
- its legal name;
- any trade name or assumed name (DBA);
- its address;
- the jurisdiction in which it was formed or first registered; and
- its taxpayer identification number.
A Beneficial Owner and each Company Applicant of a Reporting Company will be required to file a Beneficial Owner Information Report (BOI Report):
- the individual’s full legal name;
- residential address (if the individual engages in the business of corporate formation [i.e. an attorney] then the Company Applicant’s business address may be used);
- the unique identifying number from a non-expired driver’s license, identification document, or U.S. passport (a non-expired foreign passport can be used if the individual does not possess one of the other documents); and
- an image of the identification document.
However, the CTA will not apply to all companies. The CTA lists 23 exemptions, such as companies in heavily regulated industries, like federal and state credit unions, certain banks, insurance companies, and nonprofits. Also, large operating companies with at least 20 full-time employees, more than $5 million in gross receipts or sales, and an operating presence at a physical office within the United States are exempt. Click here for the complete list.
When and How Should the BOI Report Be Filed?
BOI Reports will be filed electronically through a secure, cloud-based filing system. FinCEN is designing and building the Beneficial Ownership Secure System “BOSS”. Reports will not be accepted prior to Jan. 1, 2024. A Reporting Company created or registered with the appropriate authority before Jan. 1, 2024, will have one year to file its initial BOI Report. A Reporting Company created or registered on or after Jan. 1, 2024, will have 30 days to file its initial BOI Report. Companies will have 30 days to report any changes to the reported information.
How Will This Information Be Used?
The CTA specifically authorizes FinCEN to disclose the Beneficial ownership information in certain circumstances, specifically to:
- U.S. federal agencies engaged in national security, intelligence, and law enforcement;
- State and local law enforcement with court authorization;
- U.S. Department of Treasury;
- Financial institutions using the information to conduct legally required customer due diligence;
- Federal and state regulators assessing financial institutions for compliance with legally required customer due diligence obligations; and
- Foreign law enforcement agencies and certain other foreign authorities who submit a qualifying request for the information through a U.S. federal agency.
How Will The CTA Be Enforced?
Violations of the reporting requirements can be harsh, to include civil penalties of $500 per day (up to $10,000) and imprisonment for up to two years.
What Do Businesses Need to Do Now?
It is imperative for all business owners and leaders to determine how FinCEN’s reporting requirements impact you. Identify Beneficial Owners and familiarize yourself with the rules and requirements. The reporting requirement may cause some consternation and hesitation among business owners and leaders who may want to shield assets, or refuse to provide information. It is important to consult a professional if you have questions about reporting requirements.
Further clarification likely will be issued over the next several months. We will continue to track the compliance and reporting obligations under the CTA.
- In March, FinCEN published “Beneficial Ownership Reporting – Key Questions” and “Beneficial Ownership Information Reporting – FAQs” in response to inquiries pertaining to the September 2022 “BOI Final Rule.”
- “FinCEN Beneficial Ownership Information Reporting”
About Sean Buckley: Adams and Reese Associate Sean Buckley practices in corporate services, real estate, and mergers and acquisitions. He advises clients with matters related to entity selection and formation, corporate governance, and real estate transactions to identify proactive solutions and to mitigate risks.