The Corporate Transparency Act (CTA) took effect January 1, 2024 requiring certain companies to submit beneficial ownership information reports (BOI Reports) to the Financial Crimes Enforcement Network (FinCEN). The CTA was passed by Congress as part of the Anti-Money Laundering Act of 2020 and its goal is to strengthen the anti-money laundering regime by increasing transparency of entity structures and ownership.
The CTA has important implications for both small and large businesses. It is important that all companies undertake an analysis of their compliance and reporting requirements under the CTA regarding all entities within their structure.
Who must report?
The CTA obligates “reporting companies” to file BOI Reports. The CTA defines “reporting company” as a corporation, limited liability company or other similar entity that is 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. In the case of a non-US company, a company that is admitted and qualified to do business in the US by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe, is also reporting company.
It is the filing of the document that is the triggering event for an entity to become a reporting company. Importantly, most trusts can be formed without the filing of a document so most trusts may be outside the scope of the CTA.
For every non-exempt reporting company, BOI Reports must be filed that include information on the (i) company applicant(s) and (ii) beneficial owner(s).
Who is a company applicant?
The company applicant is the person who directly filed the document – this could be a lawyer, a paralegal, an accountant – anyone who did the actual formation of the entity. If more than one individual was involved in the filing of the reporting company’s creation or first registration document, then the individual primarily responsible for directing or controlling such filing must also be reported as a company applicant. FinCEN has noted that it is not relevant to the analysis who signs the creation or registration document (i.e. as an incorporator).
Note that FinCEN does not require reporting companies formed before January 1, 2024 to report company applicant information. There may be more than one company applicant, but FinCEN does not permit more than two to be reported.
Who is a beneficial owner?
A ”beneficial owner” is any individual who, directly or indirectly, (i) exercises substantial control over a reporting company or (ii) owns or controls at least 25 percent of the ownership interests of a reporting company. The 25 percent test is relatively straightforward, but substantial control requires looking at the specific facts and circumstances, such as the extent to which the individual can control or influence important decisions or functions of the reporting company.
FinCEN gave numerous examples and responses to the comments it received in the Final Rules and related additional guidance that should help companies better understand what substantial control means. See FinCEN’s current FAQs and the small entity compliance guide.
In the meantime, “substantial control” is broadly defined. An individual exercises substantial control over a reporting company if the individual:
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Serves as a senior officer;
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Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);
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Directs, determines or has substantial influence over important decisions; or
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Has any other form of substantial control.
FinCEN gives further guidance such that an individual may directly or indirectly exercise substantial control through:
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Board representation;
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Ownership or control of a majority of the voting power or voting rights;
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Rights associated with any financing arrangement or interest in a company;
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Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;
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Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or
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Any other contract, arrangement, understanding, relationship or otherwise.
There is no maximum number of beneficial owners a reporting company must disclose.
There are also a few exceptions depending on the type of beneficial owners. For example, if the beneficial owner is a minor child, that fact will get noted on the report, but the identifying data for that minor child does not need to be included. However, once that child reaches the age of majority, an updated beneficial ownership report must be submitted with the child's information.
If an individual only has a future interest in a reporting company through a right of inheritance, they will not need to be included. There are also certain rules for intermediaries or others who are acting on another's behalf (i.e. a nominee or custodian).
What information must be reported?
If an entity is a reporting company and does not fall within one of the exemptions, it must file a BOI Report. The BOI Report must include the following information:
For the Reporting Company:
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Full legal name and any trade name or “doing business as” (DBA) name;
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Current US address of its principal place of business or current address where it conducts business in the US, if its principal place of business is outside the US;
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Jurisdiction of formation or registration; and
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IRS Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) or a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction if the foreign reporting company has not been issued a TIN.
For each Company Applicant and each Beneficial Owner:
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Full legal name;
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Date of birth;
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Current residential address, no P.O. boxes (Company applicants who form or register companies in the course of their business should report the business street address.); and
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Unique identifying number and issuing jurisdiction from an acceptable identification document (i.e. US passport, driver’s license) (this could be a FinCEN identifier number or something like a passport number or driver's license number)
Reporting companies must also submit an image of the document that contains the unique identifying number. If an individual has obtained a FinCEN identifier, this may be included instead of the information required. If anything changes, updated reports must be filed within 30 calendar days after the date of a change concerning the reporting company or its beneficial owners. A change in name, address or the identifying number on a document would trigger an updated report and a new updated image of the document would also need to be submitted.
Who is exempt?
The CTA lists 23 different categories of exempt entities. Companies that typically are already under substantial oversight by a regulator and that already have to disclose their beneficial ownership information are likely exempt. Public companies with a class of securities registered under the Securities Exchange Act of 1934 are exempt. Banks are exempt, along with savings associations, trust companies, credit unions and bank holding companies.
Many large businesses may be able to take advantage of the “large operating company” exemption. Under the CTA, an entity is a large operating company if it meets three prongs:
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employs more than 20 employees on a full-time basis in the US;
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reported more than US$5m of gross receipts or sales in the previous year on a federal income tax return; and
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has an operating presence at a physical office in the US.
Note that employees cannot be aggregated across affiliated entities in order to meet the large operating company exemption. Each entity itself must employ at least 20 full time employees.
There is an exemption for registered investment advisers and “venture capital fund advisers” under the Advisers Act. See our further analysis, "What the CTA means for private investment funds and family offices," with respect to private investment funds and family offices.
There is also an exemption for wholly-owned subsidiaries of certain exempt entities. Subsidiaries of money services businesses, pooled investment vehicles and entities that assist a tax-exempt entity, among others, are not eligible for the subsidiary exemption. FinCEN limits this exemption to prevent entities that are only partially owned by exempt entities from shielding all of their beneficial owners.
When do I need to report?
The timelines for CTA compliance vary based on the date of formation or registration of the entity.
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Reporting companies existing prior to January 1, 2024 will have until January 1, 2025 to make an initial report.
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Any reporting company formed between January 1, 2024 and December 31, 2024 is required to make an initial report to FinCEN within 90 days of notice of formation or registration. FinCEN recently extended this timeline from 30 to 90 days to allow companies in 2024 to understand and get familiar with the new requirements. See our update, "FinCEN issues rule governing access to beneficial ownership information."
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Any reporting company formed or registered on or after January 1, 2025 is required to make an initial report to FinCEN within 30 days of notice of formation or registration.
All companies should evaluate their corporate governance structures and determine if any changes may want to be made. Any reporting company will need to put in place compliance procedures for filing these reports and also updating them as necessary.
Compliance is also particularly important given the severity of the penalties. The knowing failure to provide complete or updated information or willfully providing false or fraudulent information is punishable by civil penalties of US$500/day and possible criminal penalties of up to two years in prison.
