In 2021, Congress enacted the Corporate Transparency Act (CTA). The Act aims to create a nationwide database of beneficial owners behind limited liability companies (LLCs), corporations, and similar entities operating in the United States. Greater financial transparency can help the government better track businesses engaged in serious crimes such as money laundering, tax fraud, and terrorism.
Government organizations acknowledge that most companies operate legitimately. However, the law applies to all non-exempt companies. That means that beneficial owners and others with significant control of the company may need to file the appropriate forms to comply with the new regulations.
Scope and Applicability
The Corporate Transparency Act requires all domestic and foreign reporting companies to report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). A business meets the CTA’s definition of “reporting company” if it is a corporation, LLC, or similar entity established through a formal filing with a secretary of state or similar office.
Foreign companies based overseas also fall under the regulation if they register to do business in the U.S. through the filing of a document with a secretary of state or similar office.
While the scope of CTA is fairly broad, it allows for exemptions. Companies with more than 20 full-time employees based in the U.S., more than $5,000,000 in annual U.S. gross receipts filed on a federal tax return, and a physical office in the U.S. may qualify for an exemption. Companies that operate in highly regulated industries like banking or insurance may also be exempt, as are certain tax-exempt entities and non-active businesses.
Since the rules concerning exemptions are complex, it’s best to speak with an attorney to determine whether your company qualifies for one.
Beneficial Ownership Reporting
The Corporate Transparency Act requires non-exempt companies to report the names and identify information of beneficial owners. A “beneficial owner” as it relates to the Act is anyone who owns or controls 25% or more of the entity’s interests, or who exercises substantial control over the entity’s operations and activities.
Beneficial Ownership Criteria: Basic Requirements
The ownership interest criteria include any financial interests in a company, such as shares of stock or other equity. It also includes voting rights, capital and profit interests, warrants or similar convertible interests, and options to buy or sell interests in a company. An option exception exists when the option is created and held by others without the knowledge or involvement of the reporting company.
Substantial Control Criteria
An individual is considered to meet the “substantial control” test if they are a senior officer, such as CEO, CFO, or general counsel for the entity. Others who may fall under the substantial control compliance requirements include:
· Individuals who can appoint or remove a senior officer or a majority of the company’s board of directors or similar body.
· People who influence significant financial, business, or structure-related activities within the company. Examples include the ability to enter into significant contracts, deciding whether to buy, sell, or lease assets, issue equity or debt, or enter into a merger.
The Corporate Transparency Act includes a catch-all category for individuals who don’t fit into those three categories, but substantially influence business activities in other ways. The catch-all category may apply to businesses with unique corporate structures or that use different standards of control than those provided for under the Act.
Beneficial Owner Exemptions
There are several allowed exceptions for individuals who may meet the general definition of “beneficial owner.” They include:
· Minors as defined under state law. In this case, the reporting entity may submit the minor’s guardian or parent information instead.
· Nominees or custodians who act as a beneficial owner’s advisor, such as tax professionals.
· Employees subject to the reporting entity’s control who receive monetary benefits from their employment and don’t meet the “senior officer” qualifications.
· Individuals whose interest in the company comes from a future inheritance. Once the individual realizes the inheritance, they may meet beneficial ownership requirements.
· Creditors of a reporting company, such as banks that provide loans for equipment or other capital assets.
Information Required Under the Corporate Transparency Act
Entities and beneficial owners must provide FinCEN with certain specific information.
Company-Specific Details
The entity must provide its full legal name and any trade or “doing business as” (DBA) names. It must also list its current U.S. address. Foreign companies may list the primary location it conducts business within the U.S.
The entity should indicate the jurisdiction of its primary establishment, whether that’s a state, tribal area, or a foreign location. Foreign companies must provide the state or tribal area of their initial registration within the U.S.
The company should provide its IRS-issued Taxpayer Identification Number (TIN) or Employer Identification Number (EIN). Foreign reporting companies without either number may substitute an identification number issued in their local jurisdiction.
Beneficial Owner Details
Individuals who meet the CTA’s definition of “beneficial owner” submit the following details:
· Full legal name and date of birth
· Current residential address within the U.S. or elsewhere
· An identification number and the issuing jurisdiction associated with the below document.
· Image of an unexpired identification document such as a U.S. passport, state driver’s license, or similar document issued by a state, local government, or tribe. Individuals who don’t possess a U.S. identity document may submit a copy of their foreign passport instead.
Company Applicant Details
Companies created on or after January 1, 2024, must list a minimum of one, maximum of two, company applicant(s). These are the person(s) who.
(1) directed the filing of the creation or first registration document with a Secretary of State or similar office, and
(2) the person who directly filed the document that created or registered the company with a Secretary of State or similar office.
Individuals who meet the CTA’s definition of “company applicant” submit the following details:
· Full legal name and date of birth
· Current residential address within the U.S. or elsewhere (or, for company applicants who form or register a company in the course of their business, such as paralegals, report the business address)
· An identification number and the issuing jurisdiction associated with the below document.
· Image of an unexpired identification document such as a U.S. passport, state driver’s license, or similar document issued by a state, local government, or tribe. Individuals who don’t possess a U.S. identity document may submit a copy of their foreign passport instead.
Filing Deadlines and Timeline
FinCEN began accepting reports on January 1, 2024. Existing companies established prior to that date, and that meet the reporting obligations under the CTA, have until January 1, 2025, to submit their beneficial ownership information (BOI) reports to FinCEN.
Entities established between January 1, 2024, through December 31, 2024, have 90 days after receiving actual or public notice that the company’s creation or registration is effective to file. The timeline shortens to 30 calendar days for companies created on or after January 1, 2025.
As this is a one-time filing, once a company satisfies the initial registration reporting requirements, it does not need to file annually. However, it has 30 days to update its report for any changes to the entity or its beneficial owners’ information. Information requiring updates includes a change of address, legal name, new DBAs, and adding or removing beneficial owners. If a beneficial owner’s information changes, such as the address or identification number, the entity must submit an updated report.
Technical Filing Process
Companies may submit their BOI reports directly through the FinCEN website. There are two primary ways to do so — by downloading the forms in Adobe PDF format and completing information offline, then submitting them through the FinCEN website, or via a direct online submission.
Information provided via BOI reports is accessible only to approved government authorities involved in law enforcement, intelligence, and national security. It isn’t available to the general public. The CTA requires government agencies to comply with the Beneficial Ownership Information Access and Safeguards Rule to protect BOI reporting information. The Rule requires agencies to establish a secure system for BOI data and undergo annual internal auditing that examines the agency’s access and handling of BOI details.
Penalties and Enforcement
Failing to comply with the CTA filing requirement can lead to serious civil and criminal consequences for willful reporting violations.
Civil penalties include a $500 daily penalty for non-compliance. The government adjusts the penalty amount to account for inflation on an annual basis. It is currently $591 per day.
Criminal repercussions for non-compliance include a fine of up to $10,000- and two years’ imprisonment. The CTA defines willful violations to include:
· Willful failure to file a report.
· Willfully filing false information on behalf of a reporting entity or beneficial owner
· Willfully failing to update or correct erroneous information on a BOI report.
As an example, a beneficial owner who provides a false address or identity verification document on their BOI report could face fines and penalties for a willful violation. Similarly, willfully failing to file a BOI report at all, despite not qualifying for an exemption, could lead to civil and criminal repercussions.
Those who may be held liable for BOI reporting violations include individuals who willfully file false information, and those who willfully provide incorrect information.
Key Takeaways and Action Items
The Corporate Transparency Act’s reporting requirements took effect in January 2024. Going forward, all non-exempt entities must file the appropriate information with FinCEN on a timely basis. To facilitate immediate compliance, follow these steps:
· Determine whether the entity is exempt or non-exempt under the CTA.
· Identify all individuals with a qualifying business ownership interest or substantial control of the entity.
· Submit the information and documentation required for the entity and beneficial owners to FinCEN.
· Understand that non-exempt organizations established prior to January 1, 2024, have until January 1, 2025, to meet the reporting requirements.
· Companies established during 2024 must complete the reporting process within 90 days of forming or registering the business with a secretary of state.
· Companies established during 2025 must complete the reporting process within 30 days of forming or registering the business with a secretary of state.
· Willfully failing to adhere to the CTA requirements may lead to significant civil and criminal penalties.
Prager Metis advises you to consult with an attorney regarding your filing requirements or if any exemptions apply to you.
If you do not have an attorney, Prager Metis recommends Davidoff Tax Law who will do a consultation with you for a fee. You can schedule the consultation by contacting them at taxcontroversyinfo@taxdavidoff.com.
