Opinion Editorial: Understanding the Corporate Transparency Act

Understanding the Corporate Transparency Act

The Corporate Transparency Act (CTA) is a federal law that went into effect on January 1, 2021. This new law imposes a federal reporting regime on companies in the United States. Although news about the CTA has been relatively widespread in professional and business journals and on social media, many business owners and legal practitioners remain largely unaware of the full scope of the CTA and its unprecedented reporting requirements.

Overview of the CTA

The CTA creates a new reporting system in which companies will now be required to report to the U.S. government information about the individuals who ultimately own and control those companies. These reports — called “Beneficial Owner Information Reports” or BOIRs — will need to be filed online with the U.S. Department of Treasury’s Financial Crimes Enforcement Network, or FinCEN, where they will be compiled into a new cloud-based database called the Beneficial Ownership Secured System, or BOSS.

While Congress passed the CTA to combat the use of anonymous shell companies by bad actors for illegal activities such as money laundering, terrorist financing, and other illicit activity, the impact of the CTA on legitimate small and privately held businesses is wide-reaching. It is anticipated that millions of domestic and foreign companies in the U.S. will need to comply with this new reporting requirement.

Which Companies are Required to File a BOIR?

Under the CTA, every “reporting company” must file a BOIR. A “reporting company” includes any corporation, limited liability company, or other entity such as a limited partnership, 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. The term also includes non-U.S. entities that are registered to do business in any state or tribal jurisdiction by the filing of a document with that jurisdiction.

23 exemptions from the definition of “reporting company” have been provided by the CTA. Those generally will only apply to businesses that are already highly regulated, such as publicly traded companies, regulated insurance companies, registered investment companies, banks, and tax-exempt entities. There is also an exemption for any “large operating company,” which is defined as an entity that (i) operates in a physical office in the United States, (ii) employs more than 20 employees on a full-time basis in the United States, and (iii) filed a federal income tax return for the previous year reflecting more than $5,000,000 in gross receipts or sales.

When Does the Initial BOIR Need to be Filed?

New companies created or registered on or after January 1, 2025, have only 30 days from the date of formation or registration to file their initial BOIR.

What Will Need to be Included in the BOIR?

A “beneficial owner” is any individual who:

Exercises substantial control over the company
Owns 25% or more of the company’s ownership interests
Receives substantial economic benefits from the assets of the company

The CTA defines these concepts very broadly. For example, “ownership interests” includes equity, stock, voting rights, capital or profit interests, convertible instruments, options, and any other instrument, contract, or mechanism used to establish ownership. “Substantial control” is defined even more broadly and includes:

Power to direct the management or policies of the company
Power to vote more than 20% of any class of voting securities of the company
Power to direct the disposition of at least 25% of the assets of the company

For new companies created or registered on or after January 1, 2024, the BOIR will also need to include the same information that is provided for beneficial owners of the reporting company (i.e., name, date of birth, address, photo ID, etc.) for up to, and no more than, two “company applicants.”

Do Changes to BOIR Information Need to be Reported?

Yes. Any change in the information provided in a BOIR, including any change with respect to who is a beneficial owner, or the information reported for any particular beneficial owner, must be reported within 30 days. For example, if a new individual acquires an ownership interest that makes that person a beneficial owner, or if an existing beneficial owner changes his or her residential address disclosed in the BOIR, the reporting company must update its BOIR with FinCEN within 30 days of such change. One exception, however, is that no updates are required with respect to information related to any company applicant.

Are There Penalties for Noncompliance?

The willful failure to file a complete or updated BOIR with FinCEN, or the willful provision of or attempt to provide false or fraudulent information in a BOIR, may result in civil or criminal penalties. This may include civil penalties of up to $500 for each day that the violation continues, up to $10,000, or criminal penalties, including imprisonment for up to two years. Senior officers of a reporting company that fails to file a required BOIR may also be held personally accountable for that failure. However, the CTA provides a “safe harbor” from penalties if a person has reason to believe that a BOIR filed with FinCEN contains inaccurate information and voluntarily submits a report correcting the information within 90 days of the deadline for the original BOIR.

What Steps Should a Company Take to Comply with the CTA?

Although existing companies will have until January 1, 2025, to submit an initial BOIR, all companies should begin taking steps to determine whether they constitute a “reporting company” under the CTA or whether they may qualify for one of the exemptions.If a company is not exempt, the company should also begin identifying those individuals who will be the “beneficial owners” of the company, whose personal information (i.e., name, DOB, address, photo ID) will need to be provided in the company’s BOIR.

How Does a Reporting Company File a BOIR?

A reporting company that is required to report its beneficial ownership information to FinCEN under the CTA may do so electronically by accessing the filing system available via FinCEN’s BOI E-filing website (https://boiefiling.fincen.gov/) and selecting the “File BOIR” icon. Various third-party corporate service companies also offer fee-based filing services to assist reporting companies in filing BOIRs.

Originally Post From https://sclawyersweekly.com/news/2024/07/03/corporate-transparency-act-institutes-new-reporting-requirements/

Corporate Transparency Act Institutes New Reporting Requirements