The Corporate Transparency Act: It Applies to More Than Just Corporations!

Published: December 8, 2023

On January 1, 2024 the Corporate Transparency Act (“CTA”) goes into effect, creating a new reporting requirement for the vast majority of small businesses and family entities in the U.S. The CTA will require these entities– that are not generally subject to regulation– to report the identity of their “beneficial owners” upon formation and upon any change in ownership.  The “beneficial owners” are anyone who owns at least 25% of the entity or who exercises substantial control over the entity (such as officers, directors, managers, etc.).

The following entities will not have to comply: (i) larger operating businesses (those with more than 20 employees) and (ii) highly regulated entities (e.g., banks and financial institutions, securities dealers, insurance companies, credit unions, certain tax-exempt organizations, public utilities, and publicly traded companies).

Entities formed before January 1, 2024 will have to file a report with the U.S. Treasury Department no later than January 1, 2025.  For entities formed in 2024, the reports must be filed within 90 days of the date of formation of the entity. For all entities formed on or after January 1, 2025, the reports must be filed within 30 days of the date of formation of the entity.  Failure to comply with these rules can result in material fines and, in certain cases, up to a two-year prison term.

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Following is a brief overview of what is currently understood about the Corporate Transparency Act (the “CTA”). Please note, however, many of the operational aspects of the reporting process have yet to be clarified and defined. We will provide additional information as the full nature and extent of the CTA and its reporting obligations become clearer.

What is the Corporate Transparency Act?

As part of the Anti-Money Laundering Act of 2020, Congress enacted the CTA to help prevent money laundering, terrorist financing, and other illegal activities. The logic behind the bill is that by requiring a wider variety of business entities (which includes corporations, limited liability companies, most partnerships and other forms of business entities) to increase the information they provide and report, the CTA will curb the exploitation of such entities for criminal enterprises and assist law enforcement in uncovering criminal activity.

How This Affects You

As a result of the CTA’s enactment, “Reporting Companies” will be required to file “Beneficial Ownership Information Reports” (or “BOI Reports”) with the Financial Crimes Enforcement Network (“FinCEN”) regarding “Beneficial Owners” and “Company Applicants” beginning on January 1, 2024. The BOI Report will be filed electronically using FinCEN’s secure filing system. For Reporting Companies formed prior to January 1, 2024, the initial report will not be due until January 1, 2025. For Reporting Companies formed in 2024, the initial report is due 90 calendar days after the entity is created or registered. For Reporting Companies formed on or after January 1, 2025, the initial report is due 30 calendar days after the entity is formed or registered. Following the initial report, if there are any corrections or changes of ownership, a new report must be filed within 30 days of the correction or change.

Inadvertent failure to file the report results in daily fines of “not more than $500” for each day that the violation persists after the due date. Willful failure to file the report results in a fine of “not more than $10,000” and/or imprisonment for “not more than 2 years,” with enhanced penalties when the failure is combined with other illegal activity.

What is a Reporting Company?

For purposes of the CTA, a “Reporting Company” is any corporation, limited liability company, or other entity that is either (1) 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, or (2) formed under the law of a foreign country and registered to do business in any State or tribal jurisdiction by the filing of a document with such an office.

However, the CTA exempts 23 types of entities from the definition of “Reporting Company,” including:

1. those entities which already have to report similar information to the federal government (e.g., banks and financial institutions, securities dealers, insurance companies, credit unions, certain tax-exempt entities, public utilities, and publicly traded companies);
2. “large operating entities;”
3.  subsidiaries whose ownership interests are controlled or wholly owned, directly or indirectly, by an entity which falls under one of the other exemptions; and
4.  “inactive entities.”

Exemption status may change without warning, and generally once an entity loses its exemption, that change in status will trigger a 30-day clock to file a report.

What is a Beneficial Owner?

The term “Beneficial Owner” means, with respect to a reporting company, any individual who directly or indirectly either:

1. owns or controls at least 25 percent of the ownership interests of such reporting company, or
2. exercises “substantial control” over such entity.

In this context, an individual exercises “substantial control” over a reporting company if that individual:

1. serves as a senior officer of the reporting company,
2. has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body),
3. directs, determines, or has substantial influence over important decisions made by the reporting company, or
4. has any other form of substantial control over the reporting company.

What is a Company Applicant?

A “Company Applicant” is the person who “directly files the document” that created or registered the Reporting Company and, if more than one individual is involved in the filing of the document, the individual who is primarily responsible for directing or controlling such filing. Entities created prior to January 1, 2024 do not need to include information on Company Applicants in the BOI Report.

What Information Must Be Included in the Beneficial Ownership Information Report?

Each reporting company must file a report that discloses, for its Company Applicant (unless the entity was created prior to January 1, 2024) and each Beneficial Owner:

• Full legal name
• Date of birth
• Current residential street address
• Unique identifying number, which may be any obtained from any one of the following:
  • Non-expired United States passport
  • Non-expired identification document issued to the individual by a State, local government, or Indian tribe for the purpose of identifying the individual
  • Non-expired driver’s license issued to the individual by a State
  • If the individual has none of the above, a non-expired passport issued by a foreign government
• An image of the document from which the unique identifying number was obtained.

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Reporting Links & FAQ:

Reporting is not currently available, but you may follow the implementation of the CTA at the following website:  https://www.fincen.gov/boi.

FinCEN has also provided some direction and answered questions posed by the financial and legal communities at the following website:  https://www.fincen.gov/boi-faqs.

If you have questions regarding the Corporate Transparency Act and whether your entity would be classified as a Reporting Company or whether you would be classified as a Beneficial Owner or Company Applicant for an entity you are involved with, please contact a member of Dean Mead’s Tax Department.