The Corporate Transparency Act is Finally Effective: What You Should Know
I. Executive Summary:
The Corporate Transparency Act (“CTA”) is finally effective January 1, 2024. Enacted in 2021, the CTA requires certain U.S. and foreign entities to disclose beneficial information for purposes of combatting illicit activity, including money laundering, tax fraud, and terrorism financing.
Under the CTA, certain domestic and foreign companies are required to disclose information about their beneficial owners (“BOs”) and individuals who file paperwork on the company’s behalf (a “Company Applicant”) to the US Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
This alert will discuss what entities are subject to reporting and which ones are exempt, who must file, and what information must be reported. Further, it will address who has access to the report, when it is due, and penalties associated with civil and criminal non-compliance. Finally, it will include a brief analysis of New York’s recently enacted New York LLC Transparency Act.
II. What is a Reporting Company
An estimated 32 million entities are now mandated to report to FinCEN beneficial ownership information (“BOI”) concerning a broad range of U.S. and foreign entities. An entity that is required to report is a reporting company (“Reporting Company”). A Reporting Company includes the following:
Domestic Entities
a U.S. corporation,
a U.S. limited liability company, or
any other entity 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.
Foreign Entities
a corporation, limited liability company, or other entity formed under the law of a foreign country, and
registered to do business in any U.S. state or in any Tribal jurisdiction, by the filing of a document with a secretary of state or any similar office under the law of a U.S. state or Indian tribe.
It is important to stress that the mere formation of an entity in the U.S. will bring the entity under the scope of the CTA reporting requirements, subject to limited exemptions.
III. Who Must Report to FinCEN
Beneficial Owners
Individuals who either (1) directly or indirectly own or control 25% or more of a Reporting Company or (2) exercise substantial control over the Reporting Company are required to complete the BOI form.
An individual has control if such individual serves as a senior officer, has authority over the appointment or removal of any senior officer or a majority of the board of directors or similar body, has substantial influence over important business, financial or corporate decisions or has similar indirect or direct substantial control, including through board representation or control over intermediary entities that exercise substantial control.
An individual who owns or controls an ownership interest in an entity through a contract, arrangement, understanding, relationship or otherwise, including through ownership or control of intermediary entities that separately own or control the entity’s ownership interests is considered as controlling the Reporting Company.
Company Applicants
Company applicants are individuals who file the document to create or register the Reporting Company and the individual who is primarily responsible for directing and controlling the filing.
IV. What Entities are Exempt from Reporting
The CTA carved exemptions to report BOI to FinCEN for narrow categories of entities. The applicant will still need to file a written certification with FinCEN clearly identifying the exemption to disclosure. A few of the 23 non-reporting entities are as follows:
financial entities that report to governing authorities i.e. banking institutions, credit unions, investment advisors, venture capital funds, public accounting firms, and insurance companies;
any pooled investment vehicle that is operated or advised by an exempt financial entity described above;
Regulated Private Trust Companies (Regulated PTC);
501(c) organizations, which can include private foundations;
sole proprietorships and general partnerships;
large businesses with at least 20 full-time employees, over 5 million USD in gross receipts, and a substantial U.S. presence;
inactive companies created prior to January 1, 2020, excluding foreign owned entities, companies with annual receipts above $1,000 USD and those that had any recent changes in ownership; and
subsidiaries of the exempted entities (except for the pooled investment company).
The text of the CTA includes specific criteria for the exemptions, which should be analyzed on a case-by-case basis before concluding that an entity qualifies for an exemption. Many of these exempt entities are excluded from the CTA because they are already regulated by federal and/or state government reporting requirements (i.e. under SEC).
V. What BOI Must Be Reported
Beneficial Owner
A BO must report his/her name, current residential or business address, birth date, and an identification number of driver’s license number or non-expired U.S. or foreign passport number (with a photograph for those not holding a U.S. ID, driver’s license or passport). Alternatively, the BO can provide his FinCEN Identifier (see below).
The Reporting Company
The Reporting Company must report its name, its “doing business as” (if applicable), address, tax identification number (TIN) or foreign TIN, jurisdiction of formation/registration, and whether the filing is an initial filing, a correction, or an update. Alternatively, the Reporting Company can provide his FinCEN Identifier (see below).
Company Applicants
An individual who files the document that creates or forms the Reporting Company under local law is a Company Applicant. For a foreign Reporting Company, the Company Applicant is the individual who files the document that first registers such foreign entity to do business in the U.S. Anyone who directs or controls the filing of an entity creation or registration document by another is also Company Applicant.
VI. FinCEN Identifiers For Simplified Reporting
Individuals and Reporting Companies may want to consider requesting a FinCEN identifier to keep track of their reported information. For individuals, the number is called an “individual FinCEN identifier” and for Reporting Companies, the number is called an “entity FinCEN identifier” (collectively, “FinCEN Identifier”). A FinCEN Identifier would simplify reporting, because, in some circumstances, the FinCEN Identifier can be provided instead of BOI.
If an individual has obtained an individual FinCEN Identifier and provided such individual FinCEN Identifier to a Reporting Company, the Reporting Company may include the FinCEN Identifier in its report in lieu of the BOI. Additionally, an individual FinCEN Identifier would allow those individuals to submit personal information directly to FinCEN rather than providing it to every Reporting Company that must report on such individual.
As to the entity FinCEN Identifier, a Reporting Company may report another entity's FinCEN Identifier and full legal name instead of the information required with respect to the BOs of the Reporting Company if: (1) such entity has obtained a FinCEN Identifier and provided that FinCEN Identifier to the Reporting Company; (2) an individual is or may be a BO of the Reporting Company by virtue of an interest in the Reporting Company that the individual holds through the entity; and (3) the BO of the entity and of the Reporting Company is the same individuals.
VII. Who Has Access to BOI
BOI can be disclosed to five (5) types of recipients:
U.S. Federal, state, local, and Tribal government agencies requesting BOI for specified purposes;
foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities;
financial institutions (“FIs”) using BOI to facilitate compliance with customer due diligence (“CDD”) requirements under applicable law;
Federal functional regulators and other appropriate regulatory agencies acting in a supervisory capacity assessing FIs for compliance with CDD requirements; and
the U.S. Department of the Treasury, which of course includes the Internal Revenue Service (“IRS”) and Office of Foreign Assets Control (“OFAC”).
The BOI will be stored in a federal, searchable database, with limited access for use by law enforcement or for national security or intelligence purposes. This system is called the Beneficial Ownership Secure System (“BOSS”).
VIII. Penalties for Failure to File
Civil Penalties
Entities that fail to report the required information about their BOs, or report incorrect or incomplete information, face fines up to $500 per day until the violation is corrected.
Criminal Penalties
In cases where non-compliance is found to be willful or accompanied by fraudulent intent, criminal penalties may be imposed. This includes cases in which false or misleading information is knowingly submitted. Violators can face fines of up to $10,000 USD and imprisonment for up to two years.
The severity of these penalties is a clear indication of the seriousness with which the government views compliance with the CTA.
IX. When Is a BOI Report Due
For entities created before January 1, 2024:
A Reporting Company created or registered to do business before January 1, 2024, will have until the deadline of January 1, 2025 to file its initial beneficial ownership information report.
For entities created January 1, 2024 – December 31, 2024:
New companies created or registered on or after January 1, 2024, have 90 days to file initial BOI reports from the time the company receives notice that its creation or registration is effective, or after a secretary of state or similar office provides public notice of its creation or registration, whichever is earlier.
For entities created on or after January 1, 2025:
Only Within 30 days of notice of creation or registration.
Ongoing Reporting:
The reporting obligation entails the submission to FinCEN of an annual filing containing a list of:
the current beneficial owners of the corporation or limited liability company and the information for each beneficial owner; and
any changes in the beneficial owners of the corporation or limited liability company during the previous year (but not changes to the applicants); and
update the list of the beneficial owners of the corporation or limited liability company within 30 days
Reporting companies have 30 days to report changes to the information in their previously filed reports. Inaccurate information in previously filed reports must be corrected within 30 days of when the Reporting Company becomes aware or has reason to know of the inaccuracy of information in earlier reports.
In conclusion, the CTA will require annual and continuing reporting, and a prior analysis to identify the ultimate beneficial owners under the stringent “substantial control” or “benefits” criteria based on the evolving guidance of FinCEN. Lack of compliance in not reporting or incomplete/incorrect reporting can expose individuals to civil and criminal penalties, with a short 30-day timeframe for correction, making the CTA a top priority for both small and larger entities that will have to examine their exemption status and file a certification with FinCEN to avoid non-compliance.
X. New York’s Version of the CTA: The NY LLC Transparency Act
New York enacted its own version of the CTA, called the New York LLC Transparency Act (the “NY Act”), which was signed into law on December 23, 2023. The NY Act applies to limited liability companies that are organized under the laws of New York and foreign entities that are registered to do business in New York. The NY Act is significantly narrower than CTA because CTA covers more entities, including corporations, LLCs, limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships.
The NY Act states that reporting companies must provide BOI to the New York State Department of State (“DOS”) each beneficial owner's full legal name, date of birth, and current business street address. Reporting companies can satisfy New York's requirements by submitting a copy of the BOI form filed with FinCEN.
NY’s reporting companies must file the required BOI with the DOS and exempt companies must file an exemption statement with the DOS:
By January 1, 2025, if formed or qualified to do business in New York on or before the Act's effective date.
With the articles of organization, if a domestic LLC formed after the Act's effective date.
With the application for authority to do business in New York, if a foreign LLC qualified in New York after the Act's effective date.
Any changes to a New York LLC’s BOI must be reported to the DOS within 90 days. Foreign entities registered to do business in NY must amend their application to do business in the state whenever there is a change in BOI.
One alarming difference between CTA and the NY Act is database of BOI that the NY Act creates. While CTA’s database of BOI is maintained in a nonpublic database accessible only in certain circumstances by authorized entities, some of the BOI under the NY Act will be made public. The beneficial owners' full legal names and current business street addresses will be included in a public database maintained by the DOS. However, BOs of reporting companies can cite significant privacy interests and apply for a waiver to withhold their name, business address, or both, from the database under procedures to be established by the DOS.
This news alert does not constitute legal advice and only contains informative content.
For assistance to determine your reporting requirements with federal or state regulation and additional requirements under the CTA please contact: