The Corporate Transparency Act is coming: What you should know

After nearly two years of buildup, certain reporting companies will be required to comply with the Corporate Transparency Act (CTA) starting January 1, 2024. Initially passed in 2021, the CTA seeks to combat anonymous shell companies and/or opaque ownership structures used to facilitate money laundering, terrorist financing, sanctions evasion, the sheltering of illicit funds in the US, and other crimes.

Under the CTA, certain domestic and foreign companies will be required to disclose certain information about their beneficial owners (BOs) and individuals who file corporate paperwork on the companies’ behalf (company applicants) to the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

Companies subject to the CTA will be required to file disclosures regarding BOs and company applicants on a cloud-based Beneficial Ownership Secured System (BOSS). The beneficial ownership information (BOI) will be made available to the following groups: (a) federal, state, local, and Tribal officials and foreign officials who request access for activities related to national security, intelligence, and law enforcement; (b) financial institutions in certain circumstances with the consent of the reporting company; and (c) regulators, when they supervise those financial institutions.

While there are still additional regulations surrounding access to BOI and customer due diligence under the CTA pending, how should both US and non-US companies prepare?

1. What companies qualify as a “reporting company”?

A domestic reporting company (RC) is a corporation, LLC, LP, or similar entity created by filing a document with any US state, territory, or Indian Tribe. A foreign RC is a corporation, LLC, LP, or similar entity formed under the laws of a foreign country and registered to do business in any US state, territory, or Tribal jurisdiction.

2. Are there exemptions?

Yes. The CTA provides 23 exemptions from the RC definition, which generally apply to already highly regulated businesses. There are also exemptions for large operating companies, pooled investment vehicles, subsidiaries of certain exempt entities, and inactive entities. Although FinCEN provides a helpful small business guide, consulting counsel prior to submitting BOI is important.

3. When do I need to report?

It depends. If your company was created or registered before January 1, 2024, you will have until January 1, 2025 to file. RCs created or registered in 2024 will have 90 days to file their initial BOI. RCs created or registered on or after January 1, 2025 will have only 30 days to file their initial BOI after receiving actual or public notice of their creation or registration becoming effective.

4. What BOI do I need to provide?

The RC must provide: (1) its legal name; (2) any trade names; (3) current street address of principal place of business; (4) jurisdiction of formation or registration; and (5) taxpayer identification number (or equivalent issued by a non-US jurisdiction).

For its BOs, the RC must provide: (1) the individual’s name; (2) date of birth; (3) residential address; and (4) a photo of acceptable identification such as a passport or US driver’s license.

For RCs created after January 1, 2024, the RC must provide this information about its company applicant or applicants.

5. Who are beneficial owners and company applicants?

BOs include anyone who, directly or indirectly, either exercises substantial control over the RC or owns or controls at least 25 percent of the ownership interests of the RC. Substantial control refers to control over important decisions of the Reporting Company. This includes senior officers or anyone who has authority to appoint or remove officers or directors, among others.

Company applicants are those who directly file the document to create or register the reporting company and the individual who is primarily responsible for directing and controlling the filing. There can only be two such individuals.

6. Do I need to report changes to BOI?

Yes. You must file updated and/or corrected reports within 30 days of any change. This includes companies that become exempt after filing BOI. If you are currently exempt, you do not need to file BOI claiming an exemption. However, you should consider preserving records relevant to your exemption determination.

Additionally, if you become aware that a report is inaccurate or have reason to know about the inaccuracy, you must correct the report within 30 days.

7. Are the BOI reports public?

No. BOI will be available to law enforcement, state, and local government agencies with a court order, federal financial regulators, and financial institutions with consent of the RC.

8. Are there penalties for noncompliance?

Yes. Both RCs and senior officers who willfully fail to file or update a report are subject to a fine of $500/day for continuing violations, up to $10,000 and/or imprisonment for two years. There is a safe harbor for RCs that voluntarily correct an inaccurate report “promptly,” ie, within 90 days of filing the report.

Additionally, anyone who knowingly discloses BOI without authorization is subject to a fine of $500/day, up to $250,000 and/or imprisonment up to five years. There are increased fines (up to $500,000) and imprisonment (up to ten years) if the unauthorized disclosure of BOI involved a pattern of other unlawful activity involving more than $100,000 in a 12-month period or while violating another US law.

9. What should I do now?

If you believe you may qualify as an RC, practice good corporate housekeeping by:

• Identifying all business entities that are wholly or partially owned or controlled by the RC
• Determining which entities may qualify for an exemption
• If no exemption applies, determining BOs for each entity and determining if any entities will need separate tax identification numbers
• Identifying the company applicant(s)
• Dissolving any unneeded, non-exempt entities by the end of 2023
• Forming new entities prior to January 1, 2024 to benefit from the one-year deadline to report
• Establishing record keeping and CTA compliance processes

To learn more, please contact any of the authors.