The Corporate Transparency Act (CTA) went into effect on January 1, 2024. The Financial Crimes Enforcement Network of the United States Treasury Department (FinCEN) enacted the CTA to enhance transparency into business transactions, promote accountability, and mitigate financial crimes. FinCEN is tasked with collecting information from small businesses about their beneficial owners. The information that is collected will only be used by governmental agencies for compliance purposes, but financial institutions may gain access with the consent of the filer. This blog will break down the key portions of the CTA into 3 parts. First, we will discuss if you need to file. Then we will explore what needs to be filed, and finally, we end by addressing the penalties for failing to register.
Do you need to file?
Under the CTA, every corporation, limited liability company, or other company registered with a Secretary of State will need to file the Beneficial Owners Information (BOI) with FinCEN within a specific period, unless you are specifically excluded.
There are three different deadlines for filing the BOI with FinCEN, depending on when the entity was created. If an entity was already in existence before January 1, 2024, then that entity has 1 year to submit their BOI to FinCEN. This means the deadline for all pre-existing entities to file their BOI is January 1, 2025. If an entity is created during 2024, that entity will have 90 days from the date of the date of creation to submit its BOI. Beginning January 1, 2025, all entities will need to submit their BOI within 30 days of creation.
Is your organization exempt from reporting its BOI to FinCEN?
FinCEN has created a list of 23 types of entities that are excluded from reporting under the CTA. These entities include, banks, companies that trade securities, larger corporations, insurance companies, and utilities. Generally, these exempt entities have reporting requirements to other institutions and are not required to further disclose the same information under the CTA. Most of these classifications, however, have specific requirements that should be reviewed to ensure they apply. If you think you may meet one of these requirements exempting you from reporting, you should check with your attorney to confirm.
What do you have to report?
The report submitted to FINCEN includes information about the company and its beneficial owners interest – this is called the Beneficial Ownership Information (BOI) Report . The company must report its name and any trade names it uses, its address and formation jurisdiction, and its Taxpayer Identification Number (TIN), including an Employer Identification Number (EIN).
What is a beneficial owner? FinCEN has defined a beneficial owner as “an individual who owns or controls at least 25 percent of a company or has substantial control over the company.” Beneficial owners will need to provide the following information:
- Full legal name;
- Date of birth;
- Complete current address;
- Unique identifying number and the issuing jurisdiction from one of the following nonexpired documents:
- (1) U.S. passport;
- (2) identification document issued by a State, local government, or Indian Tribe issued for the purpose of identifying the individual;
- (3) State-issued driver’s license; or
- (4) if none of the above are available, a foreign passport may be used; and
- A copy of a document containing the unique identifying number.
While it is obvious that an individual with a 50% ownership interest would have to provide this information, what if no one has above a 25% ownership interest in the company? Who then would be the beneficial owner? A beneficial owner is either a senior officer, an individual with the authority to appoint or remove officers, an individual who is an important decision maker, or has another way to exert substantial control over the company. It is important to note that if an individual does not own 25% of the entity, but has substantial control over the company, that individual will still need to be reported as a beneficial owner and provide their BOI. This means officers, directors, managers of LLCs, or executives need to be included in the BOI report.
Entities that are owned by other entities will also need to do calculations to determine whether those in control of the owning entity need to disclose their information. By way of example, let’s say 50% of Company A is owned by Company B. Company B is owned by two individuals, X and Y. X owns 30% of Company B and Y owns 70% of Company B. Both X and Y need to file the BOI report for Company B. To determine if X and Y need to file for Company A, math is required. X owns 30% of the 50% of Company A, which translates to 15% of Company A. So, X would not be a beneficial owner of Company A, even though X is a beneficial owner of Company B. Applying the same math to determine if Y is a beneficial owner of Company A. Y owns 70% of the 50% of Company A, which translates to 35% of Company A. Therefore, Y would be a beneficial owner of both Company A and Company B. This is discounting control of the company. If X was the CEO of Company B, then both X and Y would be beneficial owners of Company A, and, therefore, would be responsible for submitting a BOI Report. This can get complex, and it is advisable to have an attorney review your FinCEN BOI filings.
Further burdening reporting, if beneficial ownership information changes, then companies will need to update the filing with FinCEN no later than 30 days after the change occurred.
What happens if you fail to meet the filing requirements?
If an entity fails to report or provides false or fraudulent information about its beneficial owners, then there may be civil or criminal penalties. Civil penalties include fines in the amount of up to $500 per day the violation continues. Criminal penalties can include imprisonment for up to 2 years and a fine up to $10,000. As we are discussing corporations which are legal fictions with messy ownership structures that do not implicate a single identifiable person, it must be noted that real persons, not the entity, will be held accountable; FinCEN may hold senior officers of the entity responsible for these penalties.
This blog is for general information purposes only and should not be relied upon as specific legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact us, or visit our blog. You might also be interested in “The Corporate Transparency Act and Tax-Exempt Organizations” or “Nonprofit Considerations under the Corporate Transparency Act”