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What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) became effective on January 1 of this year. It was passed by Congress in early 2021 as a part of the National Defense Authorization Act, and its purpose is to bring into the open the use of corporations, limited liability companies, and other registered entities as fronts for illicit activities such as money laundering, financing of terrorism, promoting serious tax frauds, drug trafficking, financial frauds, and acts of foreign corruption. The CTA imposes upon most companies the obligation to report to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of Treasury, the names and other personal information of the individuals who exercise “substantial control” over registered companies, including certain owners.

Do I really have to report this, I heard this was deemed unconstitutional?

On March 1, 2024, the Federal District Court for the Northern District of Alabama ruled that the CTA is unconstitutional. The court did not, however, enter a universal injunction against its enforcement. As such, it is advisable that reporting companies comply with the CTA before the end of 2024 to avoid penalties. We will post updates to the Morris Laing website (below) if the status changes.

Who is Exempt from these new requirements?

A. Unregistered Entities – If the entity was not formed through the filing of documents with a governmental registry (in Kansas, the Secretary of State), then the reporting requirement of the CTA does not apply. Examples of entities NOT generally subject to the reporting requirements of the CTA would be trusts, general partnerships, and joint ventures (unless their state of formation required filing with a registry such as the Secretary of State).

B. Large Operating Companies – The second significant category of entities that are exempt from filing requirements are what is defined as a “large operating company.” In order to qualify for this exemption, all of the following criteria must be met for the company:

  • it employs 21 or more full time employees, 20 of whom must be in the US;
  • it has a physical office within the US;
  • it regularly conducts business at the physical office in the US;
  • it reported more than $5,000,000 in gross receipts or sales (excluding gross receipts or sales from sources outside the US) on its income tax return or information return for the prior year, including the receipts  and sales of other entities owned by the company or through which the company operates.

C. Tax-Exempt Entities – A nonprofit organization that falls under Section 501(c) of the Internal Revenue Code and entities that operate exclusively to provide financial assistance to or hold governance rights over any tax-exempt entity.

D. Certain Regulated Entities – Certain types of entities that fall under the jurisdiction of state or federal regulators are exempt from filing BOI reports, including the following categories of companies: banks, credit unions, and their holding companies, securities brokers and dealers, investment companies, insurance companies, public utilities and many others. If you believe your company may qualify as exempt under any of the foregoing criteria, please contact us for the full criteria necessary to qualify for these exemptions.

E. Inactive Entities – An entity qualifies for an exemption from the BOI reporting requirement if it meets all of the following criteria:

  • the entity was in existence on or before January 1, 2020
  • the entity is not engaged in active business
  • the entity is not owned by a foreign person, whether indirectly or partially
  • the entity has not experienced any change in ownership in the preceding twelve-month period
  • the entity has not sent or received any funds in an amount greater than $1,000 in the preceding 12 months
  • the entity does not have any assets.

Is my business considered a reporting company?

Any company that is not exempted under the categories described in the previous section is required to file a BOI report with FinCEN, and is referred to in this article as a “reporting company.” The purpose and intent of the CTA is to reveal the natural persons who are the ultimate owners and who directly or indirectly control the reporting company. Congress has determined that money launderers and others involved in commercial activities often use multi-layered corporate structures across numerous jurisdictions, such that each time an investigator obtains ownership records for an entity, the newly identified entity turns out to be owned by yet another entity, necessitating a repeat of the investigative process. The CTA is intended to indicate the persons who are ultimately in control of and have beneficial interests in reporting companies.

I need to file a report – when will the first report be due?

Every reporting company must identify its beneficial owners (i.e., natural persons) in a beneficial ownership identification (BOI) report with FinCEN. If the entity was already in existence on January 1, 2024, then the reporting company has until December 31, 2024 to file the BOI report. If, however, the reporting company was first formed on or after January 1, 2024, then the reporting company has only 30 days after its formation to file its BOI report. On November 29, 2023, FinCEN announced that it was amending the beneficial ownership information (BOI) reporting rule to extend that reporting deadline to 90 calendar days for companies subject to the BOI reporting rule, but only for companies created on or after January 1, 2024, and before January 1, 2025.

How do I determine who is considered a Beneficial Owner?

Beneficial Owners – There are generally three categories of persons (referred to as “beneficial owners”) whose information a reporting company must report to FinCEN:

  • any individual who owns or controls, directly or indirectly, at least 25 percent of the ownership interests of the company, including stock, equity, voting rights or capital or profit interests, regardless of form or structure;
  • any individual who exercises “substantial control” over the company (whether the individual has an ownership interest or not); and
  • in the case of an entity formed on or after January 1, 2024, the company “applicants;” that is, the individual or individuals who created the company, including the company’s lawyer or accountant.

The reporting company must include the information in its BOI report with respect to every individual who meets the criteria of a beneficial owner, and in many cases there will be numerous beneficial owners.

Substantial Control – Reporting companies are required to identify all individuals who exercise substantial control over the company. There is no limit to the number of individuals who can be reported for exercising substantial control. An individual exercises substantial control over a reporting company if the individual meets any one or more of these general criteria:

  • the individual is a senior officer (e.g., president, chief executive officer, chief operating officer, general counsel) or other officer, regardless of title, who performs a similar function as these officers.
  • 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, having substantial influence over important decisions as to the nature, scope and attributes of the business, finances, or structure of the company; or
  • the individual has any other form of substantial control over the reporting company, a catch-all category in which control may be exercised in unique ways or under flexible corporate structures having different indicators of control than the typical indicators shown above.

Under the CTA, individuals may exercise substantial control through contracts, arrangements, understandings, and relationships other than through the typical and traditional corporate structures we are familiar with. Examples of ways to exercise substantial control over a reporting company include board representation, ownership or control of a majority of voting power, rights associated with financing, and through trustees of trusts and similar arrangements.

Importantly, FinCEN expects that every reporting company will be substantially controlled by one or more individuals, and therefore, every reporting company will have to identify and report at least one beneficial owner on the BOI report. While the determination of the beneficial owners of a reporting company will be fairly straight-forward in most cases, to the extent your corporate structure is more complex, our firm can advise you in more detail.

What information should be included in the BOI report?

A. Company Information – The following is the information required to be reported about the reporting company itself:

  • Full legal name
  • All trade names or “d/b/a’s” that the company uses
  • Complete address of the company’s principal place of business in the US
  • State or other jurisdiction of its formation
  • IRS taxpayer identification number (including an employer identification number)

B. Beneficial Owner Information – The following information is required to be reported for each beneficial owner:

  • Full legal name
  • Date of birth
  • Complete current residential address (except for “applicants,” for whom their business address must be given)
  • Unique identifying number and issuing jurisdiction on an official non-expired driver’s license, state-issued identification card, or passport, and an image of that document.

How do I file a BOI report?

If your company is not exempt from filing a BOI report, you must file an initial BOI report online through FinCEN’s secure filing system. The reporting portal is available at www.fincen.gov/boi. You will also find reference materials, small business resources, FAQs, videos, and updates at this web site to assist in your filing of accurate BOI reports.

Is my personal information secure?

Beneficial ownership information reported to FinCEN will be stored in a secure, non-public database using security methods and controls typically used in the federal government to protect non-classified yet sensitive information systems at the highest security level.

What are the consequences if I don’t file a BOI report?

A reporting company’s willful failure to report complete or updated beneficial ownership information to FinCEN, or willfully providing of false or fraudulent information, may result in civil or criminal penalties of up to $500 for each day that the violation continues, up to $10,000 per violation.  Senior officers of an entity that fail to file a required BOI report may be held accountable for that failure by way of monetary penalties and/or imprisonment.  Additionally, a beneficial owner who willfully refuses to provide information, or provides false information, causing a reporting company’s noncompliance with the reporting rules may similarly face civil or criminal penalties.

What if something changes after I file the BOI report?

After the filing of an initial BOI report, if there is any change to the required information about the reporting company or its beneficial owners in a BOI report, the reporting company must file an updated BOI report no later than 30 days after the date on which the change occurred. The following are some examples of changes that would require a reporting company to file an updated BOI report:

  • the company changes the address of its principal place of business
  • a beneficial owner (including a senior officer) of the company changes his/her residential address
  • the reporting company hires a new senior officer
  • a change occurs in the beneficial ownership of the company
  • a beneficial owner obtained a new driver’s license that includes a changed name, address, or identifying number
  • a reporting company becomes an exempt entity (such as becoming a “large operating company” by virtue of increased sales or employee workforce).

Note that a change in the information of an “applicant” (i.e., the person who formed the company) is not required to be reported.

Changes in circumstances may cause a previously-exempt company to become a reporting company, necessitating the filing of an initial BOI report for a company that was previously exempt. Following are examples of changes in circumstances that would require the filing of a BOI report for the company:

  • a large operating company loses its exemption because its gross revenues or sales fall below $5 million in any year; or
  • the subsidiary of an exempt entity (e.g., a wholly-owned subsidiary of an insurance company, or bank, or large operating company) is sold to a third party who is not exempt from the reporting requirements.

If a reporting company discovers an inaccuracy in the information in a previously-filed BOI report, the company must correct it no later than 30 days after the date the company becomes aware of the inaccuracy or had reason to know of it.

This is a BIG change – is there someone who can walk me through it?

The CTA represents a substantial departure from the previously anonymous and decentralized system of entity formation and maintenance in the US. We are aware of the concerns the new reporting system will give to many people. The attorneys at Morris Laing understand these concerns, and we stand ready to guide and advise you about the requirements for compliance with your company’s filing requirements. Feel free to contact any of the following lawyers at Morris Laing if you would like advice on specific issues:

Robert K. Anderson, Karl R. Swartz, Roger L. Theis, Janet H. Ward, James D. Young, Shannon M. Braun, or Jon A. Schlatter