The Corporate Transparency Act
I. OVERVIEW
Starting from January 1, 2024, the US Corporate Transparency Act (“CTA”) will require companies that are formed or registered to do business in the United States to disclose beneficial ownership information (“BOI”) to the Financial Crimes Enforcement Network (FinCEN), a division of the US Department of the Treasury. The primary goal of the CTA is to improve financial transparency and bolster the fight against money laundering in cooperation with other US law enforcement agencies. Although the FinCEN database will not be available to the public, FinCEN will make the database accessible to US law enforcement agencies, US financial institutions, and certain non-US law enforcement agencies pursuant to proposed regulations that will govern access.
II. ENTITIES SUBJECT TO REPORTING
The CTA imposes reporting obligations on both domestic (US) and foreign (non-US) entities that fall within the scope of the definition of "reporting company" unless specifically exempted. 1 More specifically, the reporting companies under the CTA include US corporations, limited liability companies, or other legal entities that: (i) were created by the filing of the appropriate documentation with a secretary of state (or any similar office) in any US state or jurisdiction; or (ii) were formed under the laws of a foreign country and are registered to do business in the United States.
III. INFORMATION TO REPORT
The CTA requires reporting companies to disclose the following information to FinCEN
for each eligible beneficial owner:
The beneficial owner's full legal name;
Date of birth;
A unique identification number from a government-issued document (e.g., passport, driver's license);
An image of the document that contains the identifying number.
IV. EXEMPT ENTITIES
The CTA exempted 23 classes of entities that would otherwise have been subject to reporting. Entities that fall within this category, for example, are entities whose beneficial ownership is already a matter of public record and/or entities that are already subject to substantial governmental oversight. Indeed, most exemptions are directed toward larger operating companies and do not directly apply to small businesses. These 23 categories can be divided into 5 areas:
Regulated entities, such as US governmental authorities, banks, credit unions, depository institution holding companies, brokers or dealers in securities, and all the other entities indicated herein;
Large operating companies, any entity that: (i) employs more than 20 full-time employees in the US; (ii) has an operating presence at a physical office within the US; and (iii) has reported more than $5 million in gross receipts or sales on its filed prior year federal tax return, excluding gross receipts or sales from sources outside the US;
Subsidiaries of certain exempt entities exemption, if the entity’s ownership interests are controlled or wholly owned, directly or indirectly, by certain: (i) IRC Sec. 501(c) exempt entities; (ii) IRC Sec. 527(e)(1) political organizations; and (iii) IRC Sec. 4947(a) trusts;
Inactive entities, that: (i) were in existence on or before January 1, 2020; (ii) are not engaged in active business; (iii) are not owned by a “foreign person”2, whether directly or indirectly, wholly or partially; (iv) have not experienced any change in ownership in the preceding twelve- month period, i.e. January 1, 2019; (v) have not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding twelve-month period; and (vi) do not otherwisehold any assets, whether in the US or abroad which include any ownership interest in any corporation, limited liability company, or other similar entity.
Secretary of Treasury exemption, Congress gave the Secretary of Treasury, with the written concurrence of the Attorney General and the Secretary of Homeland Security, the ability to clarifies that “The term ‘foreign person’ means a person who is not a United States person, as defined in section 7701(a) of the Internal Revenue Code of 1986,” to determine if there are other entities or classes of entities that should be exempt because the reporting would not serve the public interest or be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes.
V. BENEFICIAL OWNERS
The CTA defines a beneficial owner as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise: (a) exercises substantial control over the reporting company, or (b) owns or controls not less than 25% of the ownership interest.
Substantial Control
An individual exercises substantial control over a reporting company if the individual: (1) is a senior officer; (2) has authority to appoint or remove certain officers or a majority of directors of the reporting company; (3) is an important decision-maker; or (4) has any other form of substantial control over the reporting company.
Ownership Interest
Reporting companies are required to identify all individuals who own or control at least 25% of the ownership interests of said company. Any of the following may be considered to constitute an ownership interest: equity, stock, or voting rights; a capital or profit interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership. Whether or not an individual owns or controls at least 25% of the ownership interests of a reporting company can be calculated, or determined, as follows:
Ownership Interest Calculation. The ownership interests of the individual will be determined and calculated on a fully diluted basis, with any options or convertible securities being treated as exercised;
Tax Partnerships. For reporting companies that issue capital or profit interests (including entities treated as partnerships for federal income tax purposes), the individual’s ownership interests are determined by the individual’s capital and profit interests in the entity, calculated as a percentage of the total outstanding capital and profit interests;
Corporate Ownership Rule. For corporations, and entities treated as corporations for federal income tax purposes, and other reporting companies that issue shares of stock, the applicable ownership interest calculation shall be the greater of: (i) the total combined voting power of all classes of ownership interests of the individual as a percentage of the total outstanding voting power of all classes of ownership interests entitled to vote; or (ii) the total combined value of the ownership interests of the individual as a percentage of the total outstanding value of all classes of ownership interests;
Failsafe rule. If the facts and circumstances do not permit the calculations described in
above to be performed with reasonable certainty, any individual who owns or controls 25% or more of any class or type of ownership interest of a reporting company, shall be deemed to own or control 25% or more of the ownership interests of the reporting company.
That being said, the definition of beneficial owner excludes: (i) minor children (if the information of their parent or guardian is reported); (ii) individuals acting as a nominee, intermediary, custodian or agent; (iii) an employee, acting solely as an employee, whose substantial control or economic benefits from such reporting company are derived solely from the employment status of the employee and who is not a senior officer; (iv) an individual whose interest in such reporting company is through a right of inheritance; or (v) a creditor of the reporting company, unless that person owns more than 25% of the ownership interest or exercises substantial control same.
VI. WHEN AND HOW TO FILE A BOI REPORT
If a reporting company already exists as of January 1, 2024, it must file its initial BOI report by January 1, 2025. If the reporting company is created or registered to do business in the US during the 2024 calendar year, then it must file its initial BOI report within 90 days after receiving actual or public notice, whichever is earlier, that its creation or registration is effective. For reporting companies formed or registered after December 31, 2024, the deadline for filing the initial BOI reports will be within 30 days of creation or registration. A reporting company required to file a BOI report must do so electronically through a secured FinCEN portal that will be available starting January 1, 2024.
VII. PENALTIES
The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure. Additionally, a person may be subject to civil and/or criminal penalties for willfully causing a reporting company not to file a required BOI report or to report incomplete or false beneficial ownership information to FinCEN.