Corporate Transparency Act – What You Need to Know

By James McLaughlin, Partner

A new federal anti-money laundering law took effect earlier this year. It creates new reporting obligations for a wide range of entities, both large and small. It requires reporting companies to disclose information to the U. S. Department of Treasury about their owners and persons who exercise control. The tight reporting deadlines for both existing and newly formed businesses require action before the end of 2024.

Background

The Corporate Transparency Act (CTA), a new federal law, took effect on January 1, 2024, requiring most companies to submit beneficial ownership reports (BOI Reports) to the Financial Crime Enforcement Network (FinCEN) of the U.S. Department of Treasury.

The CTA was passed by Congress as part of the Anti-Money Laundering Act of 2020 with the goal to aid law enforcement in combating illicit money laundering, fraud and terrorist financing conducted through previously anonymous entities.

While the CTA is simple in concept, it is technical in its application. Before the end of 2024, it is important that all businesses closely analyze:

            Whether an entity is a reporting company that must report to FinCEN, or do any exemptions apply?

            Who are the beneficial owners whose information must be reported, and how do you calculate the percentages of “ownership interests” to determine which owners meet the threshold for reporting purposes?

            How to assess and determine each person who exercises “substantial control” over a reporting company?

            When are reports due to FinCEN?

            What new processes and procedures should you put in place to ensure future compliance with the CTA?

BGM Law Group attorneys is developments and providing support on CTA matters. Please contact your BGM Law Group attorney for assistance with CTA questions.

Who is required to report?

            The CTA obligates “Reporting Companies” to file BOI Reports. Reporting Companies include any entity formed under the laws of any U.S. state or tribal jurisdiction, and any foreign entity registered to do business in any U.S. state or tribal jurisdiction, unless an exemption applies (see below). This includes corporations, limited liability companies (LLCs), limited partnerships, and other legal entities created by the filing of a document with a secretary of state or any similar office under the law of a State or tribe.  The filing is the triggering event for an entity to become a Reporting Company.

What entities are exempt from CTA reporting?

Any company that meets the CTA’s definition of a “large operating company” is exempt from reporting, as are publicly traded companies, nonprofits, and other entities that fall under one of 23 exemptions specified in the CTA.  Most of the CTA exemptions do not apply to small businesses. For example, an exempt “large operating company” is any business entity that:

• Employs more than 20 full time employees in the U.S.;
• Regularly conducts business at a physical location in the U.S.; and
• Filed a federal income tax return in the previous tax year showing more than $5 million in gross receipts or sales (net of returns and allowances) from sources in the U.S.

Other exemptions are for entities already regulated by federal or state governments, such as banks, credit unions, security brokers or dealers, and regulated public utilities and, as such, already disclose beneficial ownership information.

What are the deadlines for filing BOI reports?

• Reporting Companies existing prior to January 1, 2024 have until January 1, 2025 to make an initial report.
• Any Reporting Company formed between January 1, 2024 and December 31, 2024 is required to make an initial report within 90 days of formation.
• Any Reporting Company formed on or after January 1, 2025 is required to make an initial report within 30 days of formation.
• Updates. A Reporting Company must file updates when there is a change in reported information (see below). The updated report must be filed no later than 30 days after the change.

What information must be reported?

Reporting requirements include providing information about the Reporting Company, its senior officers, its Beneficial Owners (see below) and information about the individuals involved in the formation of the Reporting Company (“Company Applicants”).

Individual Beneficial Owners, senior officers or Company Applicants must provide:

• their full legal name;
• their date of birth;
• their complete current address;
• a unique identifying number; and
• an image of the document with the unique identifying number, such as a state identification document, driver’s license or US passport.

Who is a beneficial owner?

A Beneficial Owner is an individual (natural person) who (1) exercises “substantial control” over the Reporting Company or (2) owns or controls not less than 25% of the ownership interests in a Reporting Company.

Substantial Control. “Substantial control” is broadly defined, and includes a Reporting Company’s senior officers (such as a company’s president, chief financial officer, chief executive officer, chief operating office, general counsel or any other officer who performs a similar function) and individuals who have authority to appoint or remove any senior officer or a majority of the board of directors, and individuals who have substantial influence over other important Reporting Company matters.

25% Ownership.

Beneficial ownership information is also required from any natural person who, directly or indirectly, owns or controls 25% or more of the ownership interests in the entity. “Ownership interests” are not limited to traditional shares of stock, membership interests, or partnership interests and may include profits interests, warrants, convertible notes, SAFEs, puts, options, calls and other instruments, contracts, arrangements, understandings, relationships and other mechanisms used to establish ownership. Ownership is calculated on a fully-diluted basis, as if all options, warrants, SAFEs and similar instruments are fully exercised, and calculations are performed on the ownership interests as they stand at the time of the calculation.

“Ownership or control” may be direct or indirect, including control through any contract, arrangement or understanding, including joint ownership, ownership through another individual acting as a nominee, custodian or agent, ownership or control of one or more intermediaries that individually or collectively own or control ownership interests of the Reporting Company; and for trusts holding ownership in a Reporting Company: a trustee, beneficiary, or grantor.

We recommend that Reporting Companies with a complex capital structure (i.e., one utilizing SAFEs, convertible debt instruments, waterfall provisions, liquidation preferences attached to preferred stock, profits interests, ownership through multiple pass-through entities, etc.) work with their advisors to conduct a detailed analysis to identify Beneficial Owners to ensure compliance with the CTA.

What is required if information in a BOI Report changes?

Reporting Companies have 30 days to report changes or inaccuracies to information in BOI Reports. Examples of reportable changes include a change in the Reporting Company’s name, business address, or the name, address or other identifying information of a Beneficial Owner, including a new identifying document (new passport, driver’s license or other ID), or any change in Beneficial Owners of the Reporting Company.  

How do I file a BOI Report?

BOI Reports can only be filed electronically with FinCEN through the BOI filing website at https://boiefiling.fincen.gov.  Filers can obtain the reporting form on the website by selecting “File BOIR.” The BOI Report can be filed by any individual the Reporting Company authorizes to act on its behalf, such as an attorney or third-party service provider. The person filing the BOI Report will be asked to provide their own contact information to FinCEN at the time of filing.

What are the penalties for non-compliance with the CTA?

If your business is a Reporting Company, compliance with the BOI Rule is mandatory. Any willful violation may subject a person to civil penalties of up to $500 for each day the violation continues, as well as to criminal penalties including a fine of up to $10,000 and up to two years in prison per violation.

Who has access to BOI Reports?

FinCEN has a statutory duty to maintain the BOI Report database on a non-public, secure website. FinCEN may only disclose BOI information to designated recipients, including U.S. and foreign government agencies, financial institutions, federal regulators, and the U.S. Department of Treasury, under specific circumstances with prescribed restrictions on use and security.

What are recommended best practices in light of the CTA?

Updates to governance documents. Reporting Companies will need to rely on beneficial owners to provide timely updates on reportable changes to their information (for example, ownership changes, moves, marriages, divorces, etc.). As a result, a Reporting Company’s governance document, such as the operating agreement for an LLC or shareholders’ agreement for a corporation, should be reviewed and may need to be revised to include provisions related to the Corporate Transparency Act, such as representations, covenants, indemnifications and consent clauses from its owners that facilitate timely CTA compliance.

Beware of bad actors. The CTA has spurred development of a third-party vendor market to facilitate BOI Report filings. Whenever disclosure of non-public or personally identifiable information is involved, companies should thoroughly vet potential third-party service providers to avoid potential bad actors seeking to gain access to vital identification information for illicit purposes.

How does recent federal case law affect reporting requirements?

On March 1, 2024, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional in response to a lawsuit brought by the National Small Business Association (“NSBA”) and one of its individual members. The lawsuit challenged the constitutionality of the CTA on various grounds, including allegations that the CTA’s reporting requirements exceed Congressional authority under the U.S. Constitution In connection with the ruling, the court also enjoined the federal government from enforcing the CTA as to the plaintiffs in the case. However, this injunction does not extend beyond those plaintiffs. In response to the court’s ruling, FinCEN issued a statement declaring that while the litigation is ongoing, FinCEN will continue to implement the CTA with reporting companies other than members of the NSBA as of March 1, 2024.

BGM Law Group will continue to monitor further proceedings in this case, which the government has appealed to the United States Court of Appeals for the Eleventh Circuit, as well as any similar lawsuits filed in other courts regarding the constitutionality of the CTA.

Disclaimer: This summary was prepared as of September 9, 2024, and is subject to change as further guidance on the CTA develops. This is only a summary of a complex regulation and is not legal advice. Specific questions regarding the CTA should be directed toward your BGM Law Group attorney.

BGM Law Group is a law firm specializing in business, privacy, and cybersecurity law. With practitioners admitted in California, Connecticut, Massachusetts, and Texas, BGM Law Group can help you and your business with a variety of legal needs. For more information, please contact James McLaughlin at james@bgmlawgroup.com.