Legal Bulletins

This article is an updated version of the Corporate Transparency Act Requires Reporting Companies to File with FinCEN.

Updated 10/8/2024: On January 7, 2021, Congress passed the National Defense Authorization Act, which includes the Corporate Transparency Act (“Act”).  The Act, which takes effect on January 1, 2024, requires “reporting companies” to file information on beneficial owners, key decisionmakers, and company applicants with the Financial Crimes Enforcement Network (“FinCEN”).  Since the Act’s passage, FinCEN has issued several implementing regulations (“Reporting Rules”), which describe who must file a report, what information must be provided, and when a report is due.

FinCEN will collect, store, and maintain this information on its Beneficial Ownership Secure System (“BOSS”), a secure registry that may only be accessed upon request by federal, state, local, and foreign law enforcement agencies.  Federal functional regulators, including the Internal Revenue Service, may also request access to BOSS for tax purposes.  Further, a reporting company may consent to a request by a financial institution to access the company’s beneficial ownership information (“BOI”) to facilitate compliance with mandatory customer due diligence requirements.

The goal of the Act is to crack down on anonymous shell companies, which are often used as vehicles for money laundering and other illicit activities, by providing federal law enforcement agencies greater access to BOI reported to FinCEN.  Reporting companies and their senior officers are subject to civil and criminal penalties if they do not report BOI in the required timeframe. 

What Companies Are Subject to Reporting?

The Act requires reporting companies to file beneficial ownership information with FinCEN.  A reporting company is a corporation, LLC or “other similar entity” that is created when a document is filed with a state’s secretary of state or similar office, or that is formed in a foreign country and is registered to do business in the United States by filing a document with a secretary of state or a similar office.

Other business arrangements, such as sole proprietorships and general partnerships, are not “reporting companies”—and are therefore not subject to the Reporting Rules—because they operate according to common law principles and are not created or registered to do business by filing a document with a state agency.

The Act expressly excludes 23 categories of relatively large or highly regulated businesses from the Reporting Rules.  A company does not have to report its BOI to FinCEN if it meets the statutory definition of any of the following types of entities: 

• Securities reporting issuer
• Governmental authority
• Bank
• Credit union
• Depository institution holding company
• Money services business
• Broker or dealer in securities
• Securities exchange or clearing agency
• Other Exchange Act registered entity
• Investment company or investment adviser
• Venture capital fund adviser
• Insurance company
• State-licensed insurance producer
• Commodity Exchange Act registered entity
• Accounting firm
• Public utility
• Financial market utility
• Pooled investment vehicle
• Tax-exempt entity
• Entity assisting a tax-exempt entity
• Large operating company
• Subsidiary of certain exempt entities
• Inactive entity          

The exemption most applicable to non-regulated businesses is “large operating company,” defined in the Reporting Rules as a reporting company which satisfies all of the following criteria:

1. The entity employs more than 20 employees on a full-time basis in the United States;
2. The entity filed in the previous year federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales, excluding from sources outside of the United States; and
3. The entity has an operating presence at a physical office within the United States.

Note that a single member limited liability company that is taxed as a disregarded entity cannot qualify for this exemption because it does not file tax returns in the United States. 

What Information Must Be Reported?

The Act requires reporting companies to submit a BOI report with information about (a) the reporting company and (b) the reporting company’s beneficial owners and company applicants (as defined in the section below).

Note that the Act places the responsibility of filing the BOI report on the reporting company, not on the reporting company’s beneficial owners.  Therefore, the reporting company, acting through its senior officers, must ensure it identifies the appropriate individuals and should obtain undertakings from such individuals that they will timely provide such information.

With respect to the reporting company, the BOI report must include: (1) the full legal name of the reporting company; (2) any trade names or “doing business as” names; (3) the company’s complete current physical address; (4) the state, tribal or foreign jurisdiction of formation; and (5) the company’s taxpayer and employer identification numbers.

The BOI report must include the following information for each beneficial owner and company applicant:

• Full legal name;
• Date of birth;
• Complete current street address;
• Unique identifying number from an acceptable identification document, such as a U.S. passport, state driver's license, other U.S. and state-issued identification or a foreign passport; and
• Scanned image of the individual’s driver’s license, passport or whichever document contains the unique identifying number used in the BOI report

If an exempt entity has or will have a direct or indirect ownership interest in a reporting company, the reporting company or company applicant need only provide the name of the exempt entity.

Alternatively, a reporting company may include an individual’s FinCEN identifier on its BOI report in place of the five pieces of information specified above.  A “FinCEN identifier” is a unique identifying number that FinCEN will issue to an individual upon request after the individual provides FinCEN with the required information.  A reporting company may also request a FinCEN identifier when it submits its initial BOI report to FinCEN. 

Who Are Beneficial Owners and Applicants?

BENEFICIAL OWNERS

With respect to an entity, an individual is a beneficial owner if the individual, directly or indirectly, (i) exercises substantial control over the entity; or (ii) owns or controls at least 25% of the equity interests of such entity.  In a Final Rule issued September 30, 2022, FinCEN opined “that a reporting company will always identify at least one beneficial owner under the ‘substantial control’ component, even if all other individuals are subject to an exclusion or fail to satisfy the ‘ownership interest’ component” of the “beneficial owner” definition.

The Reporting Rules provide that an individual exercises “substantial control” over a reporting company if the individual:

• Serves as a senior officer of the reporting company;
• Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);
• Directs, determines, or has substantial influence over important decisions made by the reporting company; or
• Has any other form of substantial control over the reporting company.

The following individuals are not beneficial owners:

• Minors (provided the information of the parent/guardian is reported);
• Nominees, intermediaries, custodians and agents;
• Individuals who are employees and whose control over or economic benefits from the entity are derived from their employment;
• Individuals whose only interest in the entity is through a right of inheritance, and
• Creditors that are not also beneficial owners of the reporting company.

COMPANY APPLICANTS

A “company applicant” is any individual who files an application, or is primarily responsible for directing or controlling such filing if more than one individual is involved, to form a reporting company in the United States or registers or files an application to register a foreign reporting company to do business in the United States.  A reporting company would report information for two company applicants if, for example, an attorney responsible for preparing a company’s corporate charter directed the law firm paralegal to file the charter with a secretary of state office.

Only reporting companies that are formed after January 1, 2024, must include information about the company applicant.

When Does Reporting Begin?

INITIAL REPORTS

Existing reporting companies may begin reporting BOI to FinCEN on January 1, 2024.  The deadline for an existing reporting company to file its initial BOI report is January 1, 2025.

New reporting companies formed or registered after January 1, 2024, were initially required to report beneficial ownership information within 30 days of the date the applicable state agency accepts the entity formation filing.

However, on September 28, 2023, FinCEN issued a Notice of Proposed Rulemaking that proposed to extend the filing deadline for reporting companies created or registered on or after January 1, 2024, and before January 1, 2025.  The Proposed Rule became final on November 29, 2023, and therefore reporting companies created or registered in 2024 will have 90 days to file their initial BOI reports, but the deadline will go back to 30 days for reporting companies created or registered after December 31, 2024. 

UPDATED/CORRECTED REPORTS

If a reporting company’s beneficial ownership information changes, it has 30 days from the date the ownership change occurred to file an updated BOI report.  An updated BOI report is only required if there is a change to information reported about a reporting company or its beneficial owners; a reporting company is not required to file an updated BOI report for any changes to previously reported information about a company applicant.

Also, corrected BOI Reports must be filed within 30 days of the reporting company becoming aware of or having reason to know that a correction is needed.  However, to avoid penalties, reporting companies must file corrected BOI Reports within 90 days of the date the inaccurate report was filed.

Further, if a previously exempt legal entity is no longer exempt, or if a reporting company becomes exempt from the Reporting Rules after filing a BOI Report, for example, if the number of full-time employees drops below the specified threshold, then the company will need to file a BOI report within 30 days after the date that it no longer meets the criteria for any exemption.

What Are the Penalties for Failing to Timely File a BOI Report?

The CTA provides civil and criminal penalties, including a fine of $591 per day, up to $10,000, imprisonment or both.

While it is the reporting company that is ultimately responsible for filing its initial BOI report and any subsequent updated or corrected report, an individual (such as a senior officer of a reporting company, a beneficial owner, or a company applicant) may be subject to civil and/or criminal penalties for willfully causing a company not to file a required BOI report within the prescribed timeframe.

What Actions Should Existing Companies be Taking?

• Determine if the entity is a reporting company;
• If it is a reporting company, begin gathering the information necessary to determine beneficial owners and file a BOI report by January 1, 2025;
• Designate an individual who will be responsible for compliance with the CTA and making the necessary filings;
• Amend existing agreements, such as operating agreement, stockholders agreements, investors rights agreements, employment agreements and equity grant agreements, to name a few, to require the parties to such agreements to agree to provide all information necessary to enable the reporting company to file its BOI report.;
• Establish internal systems and controls to collect and report BOI and ensure future changes to beneficial ownership information reported on the initial BOI report are flagged and reported on an updated BOI report.

UPDATE: What Effect Do Challenges to the CTA Have on the Reporting Requirements?

On March 1, 2024, in the case of National Small Business United (NSBU)  v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), a federal district court in the Northern District of Alabama, Northeastern Division, entered a final declaratory judgment, concluding that the CTA exceeds the Constitution’s limits on Congress’s power and enjoining the Department of the Treasury and FinCEN from enforcing the CTA against the specific plaintiffs in that case. The Justice Department, on behalf of the Department of the Treasury, filed a Notice of Appeal on March 11, 2024. While this litigation is ongoing, FinCEN has stated that it will continue to implement the CTA as required by Congress, while complying with the court’s order.  FinCEN has stated that, other than the particular individuals and entities subject to the court’s injunction, reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.

While there are other pending federal cases that challenge the constitutionality of the CTA, it will likely take time for the courts to resolve the issue nationwide, and because FinCEN has indicated its intent to continue to enforce the CTA other than with respect to the plaintiffs in the NSBU case, reporting companies should comply with the CTA’s filing requirements until there has been a final resolution to the constitutionality issues.

If you have any questions, please contact, Michele Bresnick Walsh, Abba D. Poliakoff, Kelcie L. Longaker, or James J. McKittrick Jr.

Michele Bresnick Walsh
410-576-4216 • mwalsh@gfrlaw.com

Abba David Poliakoff
410-576-4067 • apoliakoff@gfrlaw.com

Kelcie L. Longaker
410-576-4264 • klongaker@gfrlaw.com

James J. McKittrick, Jr.
410-576-4134 • jmckittrick@gfrlaw.com