Beginning on January 1, 2024, the Corporate Transparency Act (CTA) and the regulations adopted pursuant to the CTA require certain corporations, limited liability companies, limited partnerships and other legal entities created in or registered to do business in the U.S. – “reporting companies” – to file “beneficial ownership” information with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The purpose of the CTA is to provide further protections against events of money launder, tax fraud, drug trafficking, and terrorism financing by establishing a federal database to track beneficial ownership of reporting companies
Who Must Report
Legal entities formed by registration with a government authority (such as a secretary of state or similar state or tribunal authority), including existing and future domestic and foreign corporations, limited liability companies, limited partnerships and business trusts, subject to certain limitations, will be subject to the CTA reporting requirements. [1] The CTA contains 23 reporting exemptions, including for legal entities registered with or regulated by agencies of the federal government, as well as businesses – “large reporting companies” – that (1) employ more than 20 full-time employees located in the U.S. (part-time employees and service providers do not meet this requirement), (2) have an operating presence at a physical office within the U.S. and (3) have filed a federal tax or information return in the U.S. for the previous year demonstrating more than US$5,000,000 in gross receipts or sales (excluding gross receipts or sales from any source located outside the U.S.).
When and How To Report
Existing regulatory requirements require companies created or registered between January 1, 2024 and January 1, 2025 to file an initial report with FinCEN within 90 calendar days of formation or registration. Reporting companies created or registered before January 1, 2024 have until January 1, 2025 to file an initial report with FinCEN. The initial report must be updated within 30 calendar days of any change in the information previously reported, any error in information reported or the loss of a reporting company’s exemption status.
All reports are to be filed electronically via FinCEN’s Beneficial Ownership Secure System, known as BOSS. BOSS is a cloud-based, non-public data base meeting the requirements of the Federal Information Security Modernization Act. Information contained in BOSS is confidential and may not be disclosed by FinCEN except upon receipt of a request, through specified protocols, from (1) a U.S. federal agency and State, local or Tribal governmental agencies (under specified circumstances), (2) from a U.S. federal agency on behalf of a foreign law enforcement agency, (3) from a financial institution subject to customer due diligence requirements with the consent of the reporting company, (4) U.S. federal regulatory agencies, or (5) the U.S. Department of Treasury.
What Must Be Reported
Any legal entity formed by filing a document with a state’s secretary of state, or a similar registration, that does not meet an exemption provided by the CTA, and is therefore a “reporting company,” must disclose the following information about itself and each “beneficial owner” of the reporting company and each “company applicant,” each of which must be a natural person.
- Company information to be reported includes (1) its full legal name, any trade name or any “doing business as” name, (2) its physical address, (3) the jurisdiction of its formation or registration, and (4) its taxpayer identification number. [2]
- For each “beneficial owner” (there has to be at least one but can be many) and “company applicant” of the reporting company, such individual’s legal name, date of birth, residential address (can be the business address of the company applicant if such applicant is in the business of forming legal entities), and an identifying number from an unexpired government issued driver’s license, passport or similar identification document, as well as an image of the document to which the identification number corresponds.
For purposes of reporting, a “beneficial owner” is any natural person who, directly or indirectly, either exercises “substantial control” over the reporting company or owns or controls at least 25% of the “ownership interests” of such reporting company (“ownership interests” include equity, stock or voting rights, capital or profit interests, convertible instruments, options, warrants, and any other instrument, contract or other mechanism used to establish ownership [3]). The regulations provide guidance for “substantial control” and “owns or controls.” For example, an individual has substantial control if such individual exercises a certain degree of power over a reporting company, like serving as a senior officer (e.g., president, chief executive officer, chief financial officer or general counsel) for the company. This definition is very broad and can also include anyone who has the authority to appoint or remove certain officers or a majority of directors or who has direction or substantial influence over matters at the reporting company, such as compensation schemes and incentive programs for senior officers. Under certain circumstances, a holder of rights to approve or veto certain “major decisions’ may be deemed to possess substantial control. Board representation may also be deemed to confer substantial control. A reporting company can have multiple beneficial owners and will always have at least one individual that is reportable as the beneficial owner.
Up to two “company applicants” must be identified for reporting companies formed on or after January 1, 2024. A company applicant is the individual who (1) directly files the documents to create or register a reporting company and (2) is primarily responsible for directing or controlling such filing. For example, individual A, who wants to create a company, prepares the necessary formation documents and directs individual B to file the documents with the relevant state regulatory office. In this case, individual A and individual B are both company applicants – individual B directly filed the documents and individual A was directly responsible for directly or controlling the filing.
Penalties
The CTA provides that it is unlawful for any person to provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN or to willfully fail to report complete or updated beneficial ownership information to FinCEN when due. Civil penalties include a fine of US$500 per day (up to US$10,000) per occurrence and criminal penalties of up to 2 years in prison, or both, per occurrence. Furthermore, it is unlawful for any person to knowingly disclose or use beneficial ownership information obtained by that person through a report submitted to FinCEN or a disclosure made by FinCEN.
Assistance
For additional information regarding the CTA, please see our more detailed overview of the CTA and compliance requirements here.
You may also obtain a copy of the “Small Entity Compliance Guide” manual published by FinCEN here.
Munsch Hardt is available to (1) answer any questions you may have regarding the CTA and the regulations adopted to date by FinCEN, (2) assist in determining which entities are “reporting entities” and who is deemed a “beneficial owner” and/or “control person,” and (3) recommend services to assist with filing any required report with FinCEN. Please reach out to your relationship attorney at Munsch Hardt or Phil Whitcomb by telephone at 214.855.7500 or by e-mail at pwhitcomb@munsch.com for any assistance you may need to comply with this regulatory requirement.
[1] Note that general partnerships, sole proprietorships or trusts are excluded from the definition as these entities can be created without filing with a governmental authority.
[2] Note that every reporting company must obtain a taxpayer identification number from the U.S. Internal Revenue Service and be included in the report for it to be complete.
[3] All options or other convertible instruments a holder possesses are deemed converted or exercised for purposes of calculating the 25% threshold.