As we look forward to the new year, here is a reminder that the Corporate Transparency Act (CTA) took effect on January 1, 2024. To learn about how this may affect your business, please see below.

What is the CTA?

The U.S. Congress enacted the CTA to combat money-laundering, tax fraud, and financing for illicit activities by requiring companies with significant annual revenue to provide more information about their ownership and/or transactions.

Starting in 2024, all entities doing business in the United States must submit a beneficial ownership information report (BOI report) to the U.S. Treasury’s Financial Crimes and Enforcement Network (FinCEN), unless eligible for an exemption from the CTA. A BOI report summarizes the ownership and control of the reporting entity. There is no filing fee for a BOI report; however, violations of the CTA can carry civil and criminal penalties. Reporting requirements are slightly different for U.S. entities and non-U.S. entities doing business in the U.S.; this article only covers requirements for U.S. corporations, limited liability companies and other similar entities formed in the United States.

What should a BOI report include?

A BOI report must disclose basic information about the reporting entity (such as its name, principal office address, and EIN) as well as certain information about its “beneficial owners” and “applicants”.

• Beneficial owner: any individual who, directly or indirectly, (i) exercises “substantial control” over the reporting entity (e.g., any senior officer), or (ii) owns or controls 25% or more of the ownership interests in the entity.
• Applicant: (i) the person who filed the reporting entity’s formation documents, and (ii) the person primarily responsible for directing such filing (if applicable). [Note that only reporting entities formed on or after January 1, 2024 will need to report applicants of the entity.]

FinCen has provided specific criteria for determining whether an individual exercises “substantial control” for purposes of the CTA. The definition includes (but is not limited to) persons who act as president, chief executive officer, chief financial officer, chief operating officer, chief legal officer of the company, or who perform similar functions.

Persons who fall within the categories above must submit the following information, and must update their information within 30 days of any changes:

• Full legal name;
• Date of birth;
• Current residential street address;
• Unique ID number (such as a passport, state identification, or driver’s license) and a photocopy of that document.

How do I know if I’m exempt from reporting?

The CTA lists 23 types of exempt entities. The most common exemptions are likely to be the following:

• Entities that (1) have more than 20 full-time U.S. employees; (2) reported >$5 million of taxable revenue from U.S. sources for the preceding year; and (3) have an operating presence at a physical location in the United States.
• Most tax-exempt entities (such as nonprofit entities, political organizations and certain tax-exempt trusts).
• Certain types of entities already subject to regulatory oversight (such as public companies, insurance companies, banks, and registered investment companies).
• Wholly owned subsidiaries of exempt entities.

What is the reporting deadline?

• Reporting entities registered before January 1, 2024: January 1, 2025
• Reporting entities registered between January 1, 2024 and January 1, 2025: 90 days after receiving notice of the company’s registration.
• Reporting entities registered after January 1, 2025: 30 days after receiving notice of the company’s registration.

Where do I file the BOI report?

As of January 1, 2024, FinCEN is accepting reports via https://www.fincen.gov/boi.

How often do I need to file a BOI report?

There is no annual or quarterly filing requirement; instead, reports must be submitted when there is a change to the information in the entity’s existing report.

What are the risks of failing to comply with the CTA?

Violations of the CTA may result in:

• Civil penalties: Up to $500 for each day that the violation continues.
• Criminal penalties: Imprisonment for up to two years and/or a fine of up to $10,000.

Senior management (such as senior officers and, in certain cases, directors) can also be held individually liable under the CTA for willful failures to submit a timely and accurate report.

Note that the CTA is not intended to penalize technical, good-faith, or negligent violations. Individual liability only arises under the CTA where the violation was “willfully blind” or the responsible individual “consciously disregarded” the high risk of violation.

If I am a reporting entity, what steps should I take to ensure compliance with FinCen?

Recommended next steps may vary, depending on the circumstances of your company; however, some general recommendations include:

• Amending the company’s agreements with senior officers, directors, and other beneficial owners to ensure that they are contractually required to provide up-to-date information necessary for a BOI report.
• Developing internal processes for determining when stockholders in the entity exceed the 25% ownership threshold and for notifying those stockholders.
• Maintaining detailed records as to how the entity intends to comply with the CTA, and specifically how ambiguities in, and changes to, the CTA will be resolved.

What other resources are available regarding the Corporate Transparency Act?

FinCen – Small Business Resources: https://www.fincen.gov/boi/small-business-resources

FinCen – Fact Sheet Regarding Beneficial Ownership Information (Access and Safeguards Rule): https://www.fincen.gov/news/news-releases/fact-sheet-beneficial-ownership-information-access-and-safeguards-final-rule

For additional assistance, please contact the Focal Corporate Team at corporate@focallaw.com.