Corporate Transparency Act

THIS LAW HAS BEEN STRUCK DOWN AS UNCONSTITUTIONAL BY A FEDERAL COURT IN MARCH 2024. WE WILL REPORT BACK UPON HEARING MORE INFORMATION ABOUT ITS STATUS.

What is the Corporate Transparency Act?

The Corporate Transparency Act (the “CTA”) was enacted January 1, 2021 as part of the National Defense Authorization Act. Its intent is to create a national database to ensure transparency of information among domestic and foreign entities to fight money laundering and hiding assets. Information about the owners and controlling parties of entities doing business in the United States will be required to be disclosed to the U.S. Department of Treasury’s new Financial Crimes Enforcement Network, known as FinCEN (“FinCEN”). Essentially, with several exceptions, domestic and foreign entities doing business in the United States must file a report with FinCEN disclosing certain owners and controlling parties or face steep penalties for failing to do so. 

The pages on the CTA are far from complete. There are many nuances and areas unaddressed by the CTA. This is intended to give you an overview and some guidance to help you. Please contact us if you need additional support. 

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Who must file?

Domestic and foreign entities 

Unless an exception exists, all entities filed in a state or foreign country that are doing business in the United States must file a report with FinCEN. Entity refers to businesses that filed with a state to incorporate into some sort of business, like an INC, CORP, LLC, LP, LLP, LLLP, PC, PA, etc. It does not include a sole proprietorship or general partnership, which do not require any filing with a state (and also should generally not be used anyway for that matter). More on entity selection in the video above.

This reporting requirement is in accordance with the Beneficial Ownership Information Reporting Rule of 31 C.F.R. §1010.380, implementing section 6403 of the CTA. The entities that must file must file a “Beneficial Ownership Information” report (“BOI Report”) with FinCEN regarding two categories of individuals: (1) Beneficial Owners and (2) Company Applicants.

There is an estimated 33,000,000 entities that will have to file with FinCEN. It is estimated that this will cost $5,000,000,000 for all of these to be filed, probably through professional advice on who should file and the actual filing itself. 

Exceptions 

There are 23 exceptions available to avoid having to file with FinCEN. Most of these exceptions relate to entities that are already heavily regulated and the information is already readily available to the government. That information is already available to the Internal Revenue Service (IRS) too, but who are we to judge the wisdom of the federal government? That said, the exceptions include banks, credit unions, broker-dealers, venture capital funds, insurance companies, etc. Some non-profits are also exempt. 

Notably, large operating entities are exempt (see #21 in the list below). They require 6 elements to be satisfied including, among other elements, having greater than 20 full-time employees and over $5,000,000 in revenue. 

In short, most small businesses must file with FinCEN. Entities required to file a report shall be referred to herein as a “Reporting Company” or “Reporting Companies”. 

Here’s a comprehensive list of the exceptions to entities required to be filed with FinCEN. More indept analysis can be found here: CTA § 5336(a)(11)(B) and CFR § 1010.380(c)(2).

Notably, some subsidiaries owned by or controlled by an exempt company or companies are also exempt. Others are not exempt. 

Below you will find what information (i.e. the “who”) must be reported in the FinCEN BOI Report.

Beneficial owners

The BOI Report must disclose the “beneficial owners” of the Reporting Company. “Beneficial Owners” is defined as (1) an individual who, directly or indirectly, exercises “substantial control” of the Reporting Company, or (2) owns at least 25% of the ownership interest in the Reporting Company. CTA § 5336(a)(3). An individual can be a beneficial owner by exercising substantial control, owning at least 25% of the ownership interests in the Reporting Company, or both. 

FinCEN expects that each non-exempt Reporting Company to report at least one beneficial owner.  

Notably, there are 5 exceptions to individuals who would otherwise qualify as a “beneficial owner:” 

    1. Minor child or children; 
    2. Nominee, intermediary, custodian, or agent acting on behalf of the real beneficial owner;
    3. Employees who are not senior officers; 
    4. Inheritor. Future interests via inheritance are not beneficial owners; or 
    5. Creditor. Creditors may meet the definition here but not if they only are owed money.
Ownership Interest

FinCEN defines “Ownership Interest” as equity, stock, voting rights, a capital or profits interest, convertible instruments, options and other non-binding privileges to buy or sell any of the foregoing interests in a Reporting Company or any instrument used to establish ownership. See FAQ D.4 for more information. We presume this includes simple agreements for future equity, or SAFEs, which are common in early-stage ventures. Learn more about what these are here. 

In addition, in computing “ownership interest,” FinCEN requires that you assume you’ve converted (or exercised) all of the instruments identified above. 

The CTA Final Regulations provide a descriptive list of individuals who would be considered a Beneficial Owner under the ownership test when a trust owns or controls at least 25% of the ownership interests in a Reporting Company: 

  1. an individual trustee of the trust; 
  2. an individual with authority to dispose of trust assets; 
  3. a beneficiary who is the sole permissible recipient of income and principal from the trust; 
  4. a beneficiary who has the right to demand a distribution of or withdraw substantially all of the assets in the trust; 
  5. a grantor of the trust who has the right to revoke the trust; and 
  6. a grantor of the trust who has the right to withdraw the assets of the trust. 

The foregoing provisions are not intended to be an exhaustive list of situations related to the ownership test with respect to a trust. 31 CFR § 1010.380(d)(2)(ii)(D).

Substantial control

An individual exercises substantial control over a Reporting Company if the individual meets any of the 4 elements: 

  1. the individual is a senior officer; 
  2. the individual has authority to appoint or remove certain officers or a majority of directors or similar body of the Reporting Company; 
  3. the individual is an important decision-maker; or
  4. the individual has any other form of substantial control over the reporting company.

The BOI Reporting Rule defines senior officers to include any individual holding the position or exercising the authority of a president, CFO, general counsel, CEO, COO, or any other officer, regardless of official title, who performs a similar function as these officers.

An important decision-maker is defined to be any individual who directs, determines, or has a substantial influence over important decisions made by the reporting company. This includes decisions about the company’s business, finances, and structure. Each are broken down more below.

Business is further defined as:

  • Nature, scope, and attributes of the business,
  • The selection or termination of business lines or ventures, or geographic focus, and
  • The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts.

Finances are further defined as:

  • Sale, lease mortgage, or other transfer of any principal assets,
  • Major expenditures or investments, issuances of any equity, the incurrence of any significant debt, or approval of the operating budget, and
  • Compensation schemes and incentive programs for senior officers.

Structure is further defined as:

  • Reorganization, dissolution, or merger, and
  • Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures.

An individual serving on a Reporting Company’s board of directors may be included here, but the FAQs indicate that this is a case-by-case analysis.

Notably, trusts as owners of a Reporting Company are, by virtue of their trustees, considered “Beneficial Owners” but because of their exercise of substantial control over the Reporting Company and not ownership interest. All trustees are, therefore, nevertheless required to be disclosed in the BOI Report. 87 Fed. Reg. at 59532.

Beneficial Ownership and Substantial Control in Modern Trusts

For modern trusts owning at least 25% of Reporting Companies, grantors with rights of revocation, beneficiaries with rights to income and/or principal or rights of withdrawal, as well as a trustee, direction advisor (in a directed trust), trust protector, designated representative or other individual acting on behalf of the trust (whether a fiduciary under state law or not), likely may have to be disclosed on the BOI Report. 

Much of this determination of whether these other non-grantor positions must be disclosed depends on if the individual has control over “Important decisions” regarding the scope of the business, reorganization of the business, major expenditures or major borrowing or lending, compensation of senior officers, entry into or termination of significant contracts, amendments of governance documents. 31 CFR § 1010.380(d)(1)(i)(C).

In addition, trusts are always evolving as successor trustees and protectors take over, beneficiaries age-in to control, and new beneficiaries replace deceased beneficiaries. These instances may warrant BOI Reports or updates to the existing BOI Reports. For example, 

When a Reporting Company is held in trust, the following events may trigger a reporting requirement: (a) a change of situs as that may result in a change of address for the trustee; (b) the resignation, removal or appointment of a trustee, advisor or protector; (c) a beneficiary reaching an age at which such beneficiary holds the power to control or dispose of trust assets; (d) a minor coming of age; (e) death of a beneficiary or grantor who was a beneficial owner; and (f) any other event that would trigger a change in the reporting information, including the change of address for a beneficiary, advisor or grantor who is a Beneficial Owner.

Applicants 

The BOI Report must include the individuals who formed the entity as well as the beneficial owners of the Reporting Company.  Luckily, to avoid the colossal mess that would be created otherwise, only applicants of Reporting Companies that were filed on or after January 1, 2024 must be disclosed on the BOI Report.  

Applicants are either “direct filers” who form the Reporting Company or individuals who are directing others to form the Reporting Company referred to as “directing and controlling the filing action”.  

What Information Must be Disclosed on the BOI Report? 

The Reporting Company must disclose the following information on the BOI Report. See 31 CFR § 1010.380(b)(1)(ii):

• Full legal name,
• Any trade names or DBAs,
• Complete current U.S. address,
• State, Tribal, or foreign jurisdiction of formation,
• For foreign reporting companies, state or Tribal jurisdiction of first registration, and
• IRS Tax ID Number (including EIN).

Each beneficial owner and company applicant must disclose the following information on the BOI Report. See 31 CFR § 1010.380(b):

• Full legal name,
• Date of birth,
• Complete current address (residential street address, except for company applicants who form or register a company in the course of their business, in which case a business street address can be used), and
• Unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents:
• U.S. passport,
• State driver’s license,
• ID document issued by a state, local government, or Tribal jurisdiction, or
• If none of the previous documents, foreign passport.

Notably, individuals can obtain a FinCEN number in advance and disclose that number instead of the above information. That makes sense for individuals who must be included on numerous Reporting Company BOI Reports. 

 

Changes to non-exempt Reporting Companies 

Importantly, changes to the information disclosed on the BOI Report above must be disclosed on an updated BOI Report within 30 days of the change. Examples of changes include the following: 

    • A change in address.
    • A change in controlling parties making up the substantial control test. I.e. a change in CEO, CFO or general counsel. 
    • An exception that is no longer valid, such as a minor becoming an adult. 

Notably, inaccuracies must be reported on an updated BOI Report within 30 days of the discovery of the accuracy. Also, termination or dissolution of a Reporting Company need not file any updates.

How to file?

If you want to file it yourself, it’s available here. It took me 13 minutes to obtain a FinCEN ID, but it would have taken less time if for some reason all the screens and emails were not in Spanish. It took me about 5 minutes to file a BOI Report. 

The site also contains helpful resources, such as how to obtain your own FinCEN identification number along with helpful videos. 

When to file (i.e. deadlines to file)?

    • Reporting Companies created or registered before 2024 will have until January 1, 2025, to file their initial BOI Reports with FinCEN.
    • Reporting Companies created or registered in 2024 will have 90 days to file their initial BOI Report, instead of 90 days. This was extended from 30 days relatively recently. 
    • Reporting Companies created or registered on or after January 1, 2025, will have 30 days to file their initial BOI Report.

See 31 CFR § 1010.380(a)(1).

Penalties for failure to file 

The willful failure to report complete or updated information to FinCEN, or the willful provision of or attempt to provide false or fraudulent BOI Report, may result in civil or criminal penalties, including civil penalties of up to $500/day that the violation continues, or criminal penalties including imprisonment for up to 2 years and/or a fine of up to $10,000. Senior officers of a Reporting Company that fails to file a required BOI Report may be held accountable for that failure.

Is the information filed with FinCEN secure?

The CTA imposes strict confidentiality, security, and access restrictions on the information disclosed to FinCEN. See 87 Fed. Reg. at 59507. FinCEN is charged under the CTA with maintaining Beneficial Ownership Information in a secure, nonpublic database, using security methods and techniques that are appropriate to protect non-classified information security systems at the highest level. See § 5336(c)(8). 

There are a few ways in which access can be granted to the database, which include, among other ways, by a federal government agency for national security or law enforcement purposes upon request. § 5336(c)(8).

There are strict penalties for disclosure of the information in the database including $500/day for each violation in addition to criminal penalties of up to $250,000 and/or 10 years in prison. Penalties can be higher if conjunction with other federal crimes. Does that mean it’s safe though? I have no idea, but it seems like the government is requiring information that serves as a very lucrative target.

kly through the website shared above. You should obtain a FinCEN number and disclose that on your BOI Reports if you file more than one of them. Please contact us if you want us to help give advice on disclosure and/or file the BOI Report. 

Bottom Line 

Most small businesses are Reporting Companies and must file a BOI Report with FinCEN. The reports must disclose the owners of 25% or more of the businesses as well as those individuals who exercise substantial control over the business. The latter is intended to cast a wide net. The applicant after January 1, 2024 must also be disclosed. Trustees of trusts as well as directed trustees, beneficiaries and protectors may also need to be disclosed. That said, there are a lot of inconsistencies, areas unaddressed and confusing provisions of the CTA so not every situation is clear.

In general, we recommend you err on the side of disclosure to avoid inadvertent civil and potentially criminal penalties.  You may file yourself quickly through the website shared above. You should obtain a FinCEN number and disclose that on your BOI Reports if you file more than one of them. Please contact us if you want us to help give advice on disclosure and/or file the BOI Report.

 

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