Enacted in 2021, the Corporate Transparency Act (CTA) is designed to provide transparency of entity structures and ownership to fight against money laundering, tax fraud, and other illicit acts by requiring ownership self-reporting of specific entities operating in or accessing the U.S. market. However, because the CTA requires new affirmative reporting by certain entities and beneficial owners to the Financial Crimes Enforcement Network (FinCEN), understanding who and what needs to be reported may be confusing to some. With the effective date, January 1, 2024, quickly approaching, this article will provide some general information to help readers understand the CTA a little better.
Who and What is Affected?
Companies that need to self-report are either domestic or foreign entities. For brevity, this post only focuses on domestic reporting companies. A domestic reporting company are business entities that are created by filing a document with a secretary of state or any similar office under the law of a state or Indian tribe. These can include the following entities:
- Limited Liability Company;
- Limited Liability Partnerships;
- Limited Liability Limited Partnerships;
- Business trusts; and
There are exemptions to reporting under the Corporate Transparency Act, that include publicly traded companies, nonprofits, and certain other large operating companies. These exemption types usually have other stringent reporting requirements.
If a company is a domestic reporting company, then the beneficial owners need to be identified and reported to FinCEN through its electronic reporting system. A beneficial owner is any individual who directly or indirectly; exercises substantial control over a reporting company; or owns or controls at least 25 percent of the ownership interest of a reporting company.
What is “Substantial Control?”
An individual exercise substantial control over a reporting company if they meet any of the four general criteria:
- The individual is a senior officer;
- The individual has authority to appoint or remove certain officers or a majority of directors of the reporting company;
- The individual is an important decision-maker; or
- The individual has any other form of substantial control over the reporting company.
Additionally, an individual may directly or indirectly exercise substantial control through contracts, arrangements, understandings, relationships, or otherwise. For example, direct control may be through Board representation, ownership or control of a majority of voting power or rights, or rights associated with financing or interest; whereas examples of indirect control may be through controlling one or more intermediary entities that separately or collectively exercise substantial control over a reporting company (i.e., holding companies or trusts), or through arrangements or financial or business relationships with other individuals or entities acting as nominees.
What is an “Ownership Interest?”
While generally straightforward, some of the classes of ownership interests may not be immediately apparent. For example, an individual may have an ownership interest by owning or controlling:
- Equity, stock, or voting rights;
- Capital or profit interest;
- Convertible interest;
- Options or other non-binding privileges to buy or sell the previous listed interests; and
- Any other instrument, contract, or other mechanism used to establish ownership.
What is Reported?
If required to report, a domestic reporting company generally must report its full legal name, any trade name or doing business as (DBA) name, current U.S. address, State or Tribal formation jurisdiction, and IRS taxpayer identification number. Similarly, beneficial owners generally must report their name, date of birth, address, and unique identification number from an issuing jurisdiction’s document, together with an image of the document (i.e., U.S. passport, State driver’s license, etc.). Of note, a reporting company must file an updated Beneficial Ownership Information (BOI) report within 30 calendar days after a change occurs to the company or its beneficial owners; or 30 days upon becoming aware of or having a reason to know of inaccurate information previously filed. Thus, if a reporting company’s beneficial owner lists their home address and later moves to a new home, they must report the change of address within 30 days by submitting a new BOI report.
For reporting companies in existence prior to January 1, 2024, they must file their initial BOI report within one year after the Corporate Transparency Act becomes effective. Reporting companies created between January 1, 2024 and December 31, 2024 have 90 days to file their initial BOI after receiving notice of their creation or registration from their respective jurisdiction. Reporting companies created on or after January 1, 2025 will have 30 days to file their initial BOI after receiving notice of their creation or registration from their respective jurisdiction
Failure to comply with the CTA can lead to significant civil and/or criminal penalties. This includes a maximum civil penalty of $500 per day (up to $10,000) and imprisonment for up to two years.
The CTA can be complex and daunting as a new reporting requirement for many reporting companies or beneficial owners. However, FinCEN has created a number of helpful resources and reference materials on their website (link below) for companies and individuals to understand the CTA in more detail: https://www.fincen.gov/boi
We hope this article has been informative and helpful in providing basic information about the CTA. If you would like to speak with one of our knowledgeable and experienced business attorneys regarding a reporting company or beneficial interest, please contact us at 206-624-6271 or via email at firstname.lastname@example.org.
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