In an effort to combat money laundering and the funding of terrorism in the United States, the U.S. Department of Treasury has implemented the Corporate Transparency Act (“CTA”), which was enacted as part of the Anti-Money Laundering Act of 2020. The CTA is effective January 1, 2024 and will require qualifying companies to report and file certain information with the Financial Crimes Enforcement Network (“FinCEN”). FinCEN plans to store this information in a secure nonpublic database called the Beneficial Ownership Secure System (“BOSS”), however, FinCEN is still developing the infrastructure of this system.
Who Must Report
The CTA requires entities qualifying as “reporting companies” to report the information noted below to FinCEN. Reporting companies are domestic corporations, limited liability companies, or other similar entities (or foreign entities that have filed to do business in the U.S.) that: (1) have 20 or fewer employees, (2) have less than $5,000,000 in gross receipts or sales as reflected in the previous year’s federal tax return, and (3) do not otherwise meet the requirements of one of the exemptions described in the CTA.
The CTA provides 23 exemptions to the definition of “reporting company”. Entities meeting the requirements of one of these exemptions will not have to submit reports to FinCEN. The CTA specifies all of the exemptions, which generally includes entities that are already subject to substantial Federal or State regulations, entities that are already required to report information to a governmental authority, or large reporting companies. A large reporting company is one that has more than 20 employees, more than $5,000,000 in gross receipts or sales as reflected in the previous year’s federal tax return, and a physical presence in the U.S. It is important to note that entities that once qualified as exempt from registration but are no longer exempt, will have to report within 30 days of becoming nonexempt.
What Information Must Be Reported
Reporting companies need to report to FinCEN information regarding the company itself, its beneficial owners, and the company applicant (a “BOI Report”). Regarding the company itself the reporting company must submit the following information to FinCEN:
- the full legal name that was used to establish the entity,
- any trade names through which the company conducts its business,
- the current street address of the principal place of business (or the primary place of business in the United States for companies with a principal place of business outside of the U.S.),
- the company’s taxpayer identification number (TIN), including an employer identification number (EIN), and
- the company’s state, tribal, or foreign jurisdiction of formation.
Reporting companies must submit to FinCEN the following information about its beneficial owner(s), and for those companies incorporated or formed after January 1, 2024, its company applicant(s):
- Full legal name;
- Date of birth;
- Current, as of the date on which the report is delivered, residential or business street address;
- Unique identifying number from an acceptable identification document (such as a nonexpired passport or nonexpired U.S. driver’s license); and
- An image of the document from which the unique identification number was obtained.
A “beneficial owner” is defined as any individual who, directly or indirectly, exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests of the reporting company.
The term substantial control under the CTA is not necessarily the same as the concept of control under other federal statutes, including the federal securities laws. Under the CTA, an individual exercises substantial control over a reporting company if the individual: (1) serves as a senior officer of the reporting company (e.g President, CEO, CFO, COO, General Counsel); (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, such as the nature and scope of the reporting company’s business, the sale or lease of principal assets, major expenditures or investments, issuance of any equity, incurrence of significant debt, the selection or termination of business lines or ventures, or geographic focus, of the reporting company, approval of the reporting company’s operating budget, compensation schemes and incentive programs for senior officers, entry into or termination of significant contracts, or amendments of any of the reporting company’s substantial governance documents; or (4) has any other form of substantial control over the reporting company.
The term ownership interests is defined broadly and includes any stock, membership interests, capital or profits interest, convertible debt, options, and other similar instruments.
A company applicant is the individual who directly files the document creating the domestic reporting company or who first registers a foreign entity to do business in the United States, or who is primarily responsible for directing or controlling the filing.
When Reports Must Be Filed
Entities formed or incorporated before January 1, 2024 have a full year, until January 1, 2025, to file the initial BOI report. Entities formed or incorporated after January 1, 2024 have only 30 days after their formation or incorporation to file the initial BOI Report. Reporting companies are also responsible for updating and correcting information reported to FinCEN within thirty days after the report that contained outdated or inaccurate information was submitted.
Companies can face penalties of fines (up to $10,000) and/or up to 2 years of imprisonment for reporting inaccurate or incomplete information. However, the CTA also provides a safe harbor for companies that file corrected reports within 30 days after becoming aware or having reason to know that a previously submitted report contained inaccurate information.