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What is the Corporate Transparency Act?

Enacted in 2021, the Corporate Transparency Act (“CTA”) aims to combat illicit activity including tax fraud, money laundering, and financing for terrorism by capturing more ownership information for specific U.S. businesses operating in or accessing the country’s market. Under the new legislation, businesses that meet certain criteria must submit a Beneficial Ownership Information (BOI) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), providing details identifying individuals who are associated with the reporting company.

According to the CTA, an individual qualifies as a beneficial owner if they directly or indirectly have a significant ownership stake in a company. This person either has a major influence on the reporting company’s decisions or operations, owns at least 25% of the company’s shares, or has a similar level of control over the company’s equity.

What happens if I do not file the report required by the Corporate Transparency Act?

It is sort of tempting to think “What’s the worst that can happen if I don’t report?” Given the number of small LLCs and Corporations in the United States (over 21,000,000) how on earth the Treasury Department is going to find out is an interesting question.

Like the tax system, the CTA reporting framework relies on individuals simply going along. However, like the penalty and interest system in the tax system the CTA contains its own mechanism to strike fear in the hearts of those disinclined to report. The penalty for failing to report is steep, $500 per day and/or up to two years in jail and a $10,000 fine. 

Fortunately, reporting under the CTA is not as hard as doing your taxes, but it does take a little work.

Who has to report under the Corporate Transparency Act?

The Reporting Rule requires certain entities to file beneficial ownership information (BOI) reports (referenced in this Guide as BOI reports or reports) to FinCEN. Reports contain information about the entity itself and two categories of individuals: 

  1. Beneficial owners
  2. Company applicants

What or Who is a Beneficial Owner under the Corporate Transparency Act?

In general, a beneficial owner is an individual who owns or controls at least 25% of a company or has substantial control over the company, and a company applicant is an individual who directly files or is primarily responsible for the filing of the document that creates or registers the company.

There is no “maximum” number of beneficial owners that can be reported. For example, based on the math there should be no more than 4 beneficial owners, but recall that “beneficial owner” can be an individual who owns at least 25% or an individual who has substantial control over the company.

What is Substantial Control according to the Corporate Transparency Act?

An individual exercises substantial control over a reporting company if the individual meets any of four general criteria: 

  1. the individual is a senior officer; 
  2. the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company; 
  3. the individual is an important decision-maker; or 
  4. the individual has any other form of substantial control over the reporting company (aka, “the catchall”).

What is “ownership interest” according to the Corporate Transparency Act?

The notion of an “ownership interest” is broader than most people would commonly think and requires a little bit of analysis. Any of the following may be an ownership interest: 

    1. equity, 
    2. stock, or voting rights; 
    3. a capital or profit interest; 
    4. convertible instruments; 
  • options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership. A reporting company may have multiple types of ownership interests. 

What types of entities must file the report required by the Corporate Transparency Act?

There are two types of companies that are required to report beneficial owners:

  1. Domestic Reporting Companies – Corporations and LLCs (critical question is whether the company was formed by filing a document with the Secretary of State 
  2. Foreign Reporting Companies (has the company registered to do business in the U.S.)

What is the time frame for reporting under the Corporate Transparency Act?

As of January 1, 2024, all the LLCs or Corporations formed must be reported. There are three categories of entities with different timelines for reporting.

  1. Entities formed after January 1, 2024, but before January 1, 2025, have 90 days to report.
  2. Entities formed on or after January 1, 2025, have 30 days to report.
  3. Entities formed before January 1, 2024, have until January 1, 2025, to report.

You may be thinking to yourself. “So what, I formed my LLC in 1995, do I have to report?”  The answer is a resounding YES. Scenario 3 contemplates this scenario.

Are there any exceptions to the CTA reporting requirements?

Yes, there are some exceptions.  They are as follows:

  1. Minor children – if one of the beneficial owners is a minor then the parent or guardian reports in the child’s place.
  2. A Nominee, intermediary, custodian, or agent – The individual merely acts on behalf of an actual beneficial owner as the beneficial owner’s nominee, intermediary, custodian, OR agent (a good example of this would be your accountant).
  3. Employees of the company so long as the following three criteria are met:
    1. Employee is subject to the will and control of the owner;
    2. The individual’s substantial control is derived solely from the employment status of the individual as an employee;
  • The individual is not a senior officer of the reporting company (e.g., president, chief financial officer, general counsel, chief executive officer, or chief operating officer, or any other officer, regardless of official title, who performs a similar function.)
  • An Inheritor – this is when the individual’s only interest is a future interest;
  • Creditors – an individual qualifies for the creditor exception if the individual is entitled to payment from the reporting company to satisfy a loan or debt, so long as this entitlement is the only ownership interest the individual has in the reporting company.

What are Company Applicants according to the Corporate Transparency Act?

Each reporting company that is required to report company applicants will have to identify and report to FinCEN at least one company applicant, and at most two. All company applicants must be individuals. Companies or legal entities cannot be company applicants

  1. Direct Filers – this is the individual who directly filed the documents with the Secretary of State (this could be a lawyer, yourself, an accountant, friend, or family member).
  2. Directs or Controls the Filing – this is the individual who was primarily responsible for directing or controlling the filing of the creation or first registration document. 

What exactly do I have to report in the filing under the Corporate Transparency Act?

The following is a list of things that must be reported regarding the company and the beneficial owners.

  1. Full legal name of the Company
  2. Any trade name or “doing business as” (DBA) name of the Company
  3. Complete current U.S. address – Report the address of the principal place of business in United States, or, if the reporting company’s principal place of business is not in the United States, the primary location in the United States where the company conducts business. 
  4. State, Tribal, or foreign jurisdiction of formation of the Company
  5. Each Beneficial Owner and Company Applicant 
  1. Full legal name 
  2. Date of birth 
  3. Complete current address – Report the individual’s residential street address, except for company applicants who form or register a company in the course of their business, such as paralegals. For such individuals, report the business street address. The address is not required to be in the United States. 
  4. Unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents: U.S. passport, State driver’s license, Identification document issued by a state, local government, or tribe.
  5.  If an individual does not have any of the previous documents, foreign passport

Yes, you read that correctly. You have to supply a copy of a government issued ID card.

Are there any exceptions for entities that do not have to file according to the Corporate Transparency Act?

Yes, certain entities are exempt from reporting. They are as follows:

  1. Securities reporting issuer 
  2. Governmental authority 
  3. Bank 
  4. Credit union 
  5. Depository institution holding company 
  6. Money services business 
  7. Broker or dealer in securities 
  8. Securities exchange or clearing agency 
  9. Other Exchange Act registered entity 
  10. Investment company or investment adviser 
  11. Venture capital fund adviser 
  12. Insurance company 
  13. State-licensed insurance producer 
  14. Commodity Exchange Act registered entity 
  15. Accounting firm (NOTE: there is no exception for law firms)
  16. Public utility 
  17. Financial market utility 
  18. Pooled investment vehicle 
  19. Tax-exempt entity 
  20. Entity assisting a tax-exempt entity 
  21. Large operating company 
  22. Subsidiary of certain exempt entities 
  23. Inactive entity

After I make a report according to the Corporate Transparency Act, do I have to update the information I report later on?

Yes, if there is any change to the required information about your company or its beneficial owners in a BOI report that your company filed, your company must file an updated BOI report no later than 30 days after the date on which the change occurred. The same 30-day timeline applies to changes in information submitted by an individual in order to obtain a FinCEN identifier. A reporting company is not required to file an updated report for any changes to previously reported personal information about a company applicant.

Some common examples are as follows:

  1. You move and have a different address
  2. Change in beneficial ownership
  3. A minor child reaches the legal age 
  4. You notice a mistake (you have 30 days from the date you notice the mistake)

The take-away

If you have an interest in an LLC, S-Corporation, or C-Corporation then you likely have a reporting requirement. This is a new rule so there are still some uncertainties. The penalty for non-compliance is very heavy, but fortunately the reporting requirements are not super burdensome. You can file the report yourself or your attorney can do it for you.

If you would like some help getting your business into compliance with the Corporate Transparency Act, please call us at (251) 215-9275 or write us on the contact page to schedule an appointment to discuss how we can help.