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Your Business May Need to Comply With New Corporate Transparency Act

By: Chris Wehner

There’s a new law that should be on the radar screen of most small- and medium-sized business owners. The Corporate Transparency Act (CTA), passed in 2021, will require many businesses to take action in 2024.

Now is the time for business owners to be aware of what’s coming down the pike with the new law, understand how they might be affected and the steps they need to take to comply.

What Is the Corporate Transparency Act?

The objectives of the new law are twofold: (1) to combat money laundering and other illegal activity that is being hidden within the corporate world and (2) to understand who the beneficial owners are of operating business entities.

Compliance will entail a large effort of initially registering all reporting companies (defined below) in 2024 and timely maintaining that registration if ownership or control circumstances change. This information will be reported via an online portal to the Department of the Treasury’s Financial Crimes Enforcement Network, or FinCEN.

Does Your Businesses Need to Comply With the New Law?

Corporations, limited liability companies or any other entities or businesses that register with a state or foreign country to do business in the United States need to comply with the CTA and report Beneficial Ownership Information (BOI) except for the following:

  • SEC-reporting companies

  • Regulated financial services companies like banks or registered investment advisors

  • Insurance companies

  • PCAOB-registered accounting firms

  • Tax-exempt entities

  • Entities that meet all of the following criteria:

    1. Were created before January 1, 2020

    2. Are not engaged in an active business

    3. Are not owned by a foreign person

    4. Have not had a change of ownership in the previous 12 months

    5. Have not sent or received funds greater than $1,000 within the previous 12 months

  • Subsidiaries of exempt entities

  • Entities that meet all of the following criteria:

    1. Have more than 20 full-time employees in the United States

    2. Have an operating presence at a physical location in the United States

    3. Demonstrate more than $5 million in domestic gross receipts or sales on their federal income tax return

Companies that do not meet any of the exceptions above are “reporting companies” and must comply with the CTA.

Registration Requirements for Reporting Companies

If your business meets the definition of a reporting company, you will need to register and report information to FinCEN.

You will need to register the following information for your business:

  1. Full legal name

  2. Current address

  3. Jurisdiction of formation

  4. Federal employer identification number

Information about the reporting company’s “beneficial owners” will also be required:

  1. Owner’s legal name

  2. Owner’s current residential address

  3. Owner’s date of birth

  4. Owner’s identifying number and documentation (for example, a driver’s license, a copy of which would also be submitted)

FinCEN also offers the option for entities and individuals to obtain a unique FinCEN identifying number, which may make subsequent compliance easier.

Are You Considered a Beneficial Owner?

A beneficial owner is any individual who, directly or indirectly, either exercises substantial control over the company or owns or controls at least 25% of the company’s ownership interests except for the following:

  1. Minor children (must report information of the parent or guardian)

  2. An individual acting as a nominee, intermediary, custodian or agent on behalf of another individual (must report information on the individual on whose behalf the nominee is acting)

  3. An employee of the reporting company, acting solely as an employee whose substantial control over or economic benefits from the entity are derived solely from the employment status provided that the person is not a senior officer of the entity

  4. An individual whose only interest in a reporting company is a future interest through a right of inheritance

  5. A creditor of the reporting company

“Substantial control” is defined as:

  1. A senior officer of the company

  2. An individual who has the authority over the appointment or removal of any senior officer or a majority of the board

  3. An individual who directs, determines or has substantial influence over important decisions made by the reporting company

All reporting companies will have a minimum of one individual who exercises substantial control.

Many businesses have multiple layers or tiers of ownership and will need to evaluate the ownership and management structures of parent and subsidiary companies to determine who, if any, meets the definition of a beneficial owner. Companies will need to develop a reporting structure for lower-tier owners to report transactions listed below to the upper-tier companies.

Beneficial ownership also considers ownership that a business or individual may obtain through the exercise of stock options, calls and straddles, and other instruments or agreements with equity-embedded features.

Company Applicant

For entities created after January 1, 2024, reporting companies will also need to report information about the “company applicant.” Information about the company applicant is not required for reporting companies created before January 1, 2024.

The company applicant is defined as the individual who files an application to form a domestic entity or registers a foreign entity to do business in the United States. The reporting company will submit information about the company applicant that is similar to the information required to be submitted about the beneficial owners as listed above.

Registration Maintenance

Once a reporting company is registered with FinCEN, the following types of transactions must be reported within 30 days of the change:

  1. Changes in who is a beneficial owner (for example, if an interest is sold or transferred)

  2. A company meets one of the exemption criteria listed above

  3. A beneficial owner dies and ownership is transferred

  4. A minor child reaches the age of majority and ownership is transferred

  5. Demographic data changes, such as a change of address

  6. Correction of previously submitted erroneous information (typos, misspellings, wrong addresses, etc.)

Although the information filed to comply with the CTA will not be publicly available, it will be accessible by various government agencies.

FinCEN is still developing the reporting mechanics (the Beneficial Ownership Secure System or BOSS) but will have the system online by January 1, 2024. Non-compliance could result in civil and criminal penalties.

Compliance Deadlines

Reporting companies created before January 1, 2024, must register before January 1, 2025. Reporting companies created after January 1, 2024, need to register within 30 days of creation. (Update September 27, 2023: there is a Notice of Proposed Rulemaking that would extend this deadline to 90 days.) All companies, even those that may not be required currently to register, will need to regularly review whether changes in circumstances require an update to their registration as described above.

What You Should Do Next

With the CTA, the government is casting a wide net to combat corporate fraud.

Management and owners will need to spend time in 2024 considering whether companies they own or control will need to register. Management and owners of new businesses will need to be aware of the 30-day registration requirement, consider whether they are required to comply and be diligent about updating registrations if company circumstances change. It will be beneficial to have a list of reportable changes available for management and review that list on a regular, periodic basis to ensure the company has complied with the CTA. Companies may also want to obtain representations from their owners that indicate the owners will timely notify the company about changes in circumstances, such as a change in ownership or death of an owner, which will require updates to the CTA registration.

Need Help?

Contact your attorney. Here is a link to keep up-to-date with changes in BOI from FinCEN.

Published September 1, 2023

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