The Corporate Transparency Act
Effective January 1, 2024, many businesses became subject to the Corporate Transparency Act (CTA), which was passed by Congress to combat the use of shell companies that participate in money laundering, terrorist financing, and fraud. Business owners and management should pay close attention to the CTA reporting requirements as noncompliance can result in significant penalties.
What Entities Must File Reports?
For purposes of the CTA, most corporations, limited liability companies, or other entities created by the filing of a document with the secretary of state are considered to be “reporting companies.” Foreign companies are also required to report if registered to do business with the secretary of state of a U.S. state.
Sole proprietorships and general partnerships are not required to report under the CTA.
Are there Exceptions?
The CTA currently lists 23 categories of entities that are exempt from the definition of “reporting company.” These exemptions include banks, credit unions, investment advisers, insurance companies, tax-exempt entities, and accounting firms. Another significant exception is for “large operating companies.” A “large operating company” is defined as an entity which employs more than 20 employees in the United States, has filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales, and operates at a physical office within the United States. However, most entities do not fall under these exemptions.
Of specific note, not-for-profit entities including homeowners’ associations are not excepted from this reporting requirement unless they have current tax-exempt status granted by the I.R.S. (or were tax-exempt and lost their tax-exempt status within the last 180 days).
What Information Must be Reported?
Reporting companies are required to report the name, date of birth, residential address, and government ID number (with uploaded image of ID) to the Financial Crimes Enforcement Network (FinCEN) via a dedicated online portal for each of their “beneficial owners” (more on what this means below).
Reporting companies formed on or after January 1, 2024 must report also the same categories of information about their “company applicant” (defined below).
Reporting companies are also required to report the full legal name (and any trade name or DBA) of the company itself, the current principal place of business address, state or country of formation, and IRS tax ID number.
Reporting companies are required to update their Beneficial Ownership Information (“BOI”) reports any time there are changes to their beneficial owners.
What is a Beneficial Owner and Company Applicant?
Under the CTA, a “beneficial owner” is any individual who, directly or indirectly, either (a) exercises substantial control over a reporting company, or (b) owns or controls at least 25 percent of the ownership interests of a reporting company. Senior officers such as company president, CEO, COO, CFO, or general counsel, individuals with authority to appoint or remove officers or directors, and important decision-makers over the company’s business, finances, and structure for a reporting company all have “substantial control” and must be reported (and kept updated).
A “company applicant” is the individual who either (a) directly files the document that creates the reporting company or (b) is primarily responsible for directing or controlling the filing of such document by another.
When Must Reports Be Made?
Reporting companies existing or registered before January 1, 2024 must file their complete BOI reports with FinCEN by January 1, 2025.
Reporting companies formed or registered in the calendar year 2024 must file their report within 90 days of the date the formation or registration.
Reporting companies formed or registered on or after January 1, 2025 must file their report within 30 days of the date the formation or registration.
Updated reports of changes to beneficial owners and their information must be filed within 30 days after the date on which the change occurs.
How are Reports Made?
FinCEN has launched a dedicated website for filing BOI reports: https://boiefiling.fincen.gov/
Companies can access the portal and undertake the required BOI filings themselves (the portal is secure and only law enforcement is allowed access to the registration information). If the company prefers to have help, FinCEN allows third parties to provide assistance. Companies such as CT Corporation and CSC offer BOI filing services for a fee. Or, a company may wish to engage their attorney to assist with the BOI filing process.
What if a Reporting Company Fails to Make a Timely or Accurate Report?
Willfully reporting inaccurate information or failing to timely make or update a report may result in criminal or civil penalties, including fines of up to $500 per day for each day the violation is not corrected.
What Steps Should Entities Consider Now?
Entities should first review the CTA to determine whether they need to file a report with FinCEN. If your entity is a reporting company, then you must determine the beneficial owners of the company and collect the necessary information from the beneficial owners to file a report.
If you have questions about the CTA or need advice or assistance developing a plan to meet your reporting requirements, the business attorneys at Martin Pringle are available to help.
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