The Corporate Transparency Act (the “CTA”) marks a significant shift in the U.S. corporate regulatory landscape. Aimed at curbing illicit financial activities, the CTA requires many companies to disclose certain information about the entity itself and each of the entity’s beneficial owners. Understanding these new compliance requirements is crucial for businesses to avoid hefty penalties and ensure operational transparency.

 

Who Must Report?

Under the CTA, “Reporting Companies” include both domestic entities and foreign entities doing business in the United States. The CTA primarily targets shell companies and similar entities that might be used for financial misconduct. However, not all companies are subject to the CTA’s reporting requirements. This firm has previously posted about the 23 types of entities that are exempt from the CTA reporting obligation, which can be found here . Many existing entities are likely Reporting Companies without an exemption, while all newly created entities as of January 1, 2024 are likely to be Reporting Companies for at least their first year in existence. The deadline for a new entity to file with FinCEN is 90 days after its formation date if formed in 2024, and 30 days after its formation date if formed on or after January 1, 2025; it is therefore highly unlikely that such entities would be able to qualify under any of the exemptions in those short time frames. Knowing whether your business is deemed a Reporting Company or if it falls under an exemption is paramount to ensuring compliance and avoiding costly penalties.

 

Information to be Reported

Each Reporting Company must report detailed company information, including the company’s full legal name, any trade names the entity uses, its business address,[1] and its IRS tax identification number. The CTA also necessitates the disclosure of Beneficial Owner Information (“BOI”), which includes Personally Identifiable Information (“PII”) about each of the Reporting Company’s “Beneficial Owners,” discussed in more detail in the next section.

 

More specifically, the CTA requires each Reporting Company to report each Beneficial Owner’s:

 

  • Name;
  • Date of birth;
  • Residential address; and
  • Unique identifying number and issuing jurisdiction from (and image of) such individual’s: (i) U.S. passport; (ii) state-issued driver’s license; (iii) identification document issued by a state, local government, or tribe; or (iv) if an individual does not have any such documents, his or her foreign passport.

 

FinCEN has made clear that each Reporting Company will have ongoing reporting requirements. When there is a change to previously reported information about the Reporting Company itself or its Beneficial Owners, the Reporting Company must file updated reports within 30 calendar days of such change.[2] For example, if a Beneficial Owner changes his or her residential address, the Reporting Company itself must file a report identifying its Beneficial Owner’s new address within 30 days of learning of such change.

 

Identifying a Beneficial Owner

“Beneficial Owner” is defined very broadly in the CTA, but it is important to know that the term can only refer to an individual – a living, breathing human being. While entities may own ownership interests in other entities, the determination of “Beneficial Owner” must go back to one or more human beings (the individuals). To be a “Beneficial Owner” subject to the CTA reporting requirements, a person must either: (i) be a person who exercises substantial control over the Reporting Company; or (i) own or control at least 25 percent of the ownership interests of the Reporting Company.[3]

 

The definition of “substantial control”[4] within the CTA includes individuals serving as a senior officer of the Reporting Company, individuals that have “authority over the appointment or removal of any senior officer or a majority of the board of directors,” or individuals who direct, determine, or have substantial influence over important decisions made by the Reporting Company.” While FinCEN continues to provide guidance as to these requirements, a good rule of thumb is that any manager or c-suite executive of a Reporting Company will be deemed a Beneficial Owner and subject to reporting requirements.[5]

 

What is less clear is whether a minority owner (under 25% equity) who does not exercise regular operational control over a Reporting Company, but who is otherwise entitled to vote with an outsized say on certain material decisions of the Reporting Company, will be deemed a Beneficial Owner. Take, for example, a 10% owner of the membership interests of a limited liability company. If the operating agreement for this Reporting Company provides that certain corporate activities, such as large expenditures or disposition of company assets, must be unanimously approved by the owners, the minority owner (even though he or she holds a percentage of equity well below the 25% threshold), may be deemed to hold “substantial control” over an important decision of the Reporting Company such that the Reporting Company may be required to disclose this minority member as a Beneficial Owner.

 

In cases where ownership structures are layered or involve multiple intermediary entities, determining the Beneficial Owners can be complex. Companies must exercise due diligence to trace the ownership chain to its ultimate owners. This may involve reviewing operating agreements, shareholder agreements, trust documents, and other legal arrangements that establish control or ownership of an entity.

 

Company Applicants

In addition to Beneficial Owners, the CTA introduces the concept of a “Company Applicant,” the individual(s) who file the paperwork to create or register the Reporting Company. This includes both the person who files the document with the applicable Secretary of State or other state or Tribal Authority, and the individual who directs or controls the filing of the formation document(s). Similar to Beneficial Owners, Company Applicants must also provide their PII to the Reporting Company, who must include the Company Applicant’s PII in its initial report. The information required includes the Company Applicant’s full legal name, date of birth, current residential street address,[6] and a unique identification number from an acceptable document. This requirement ensures transparency not just in the ongoing ownership and control of companies, but also at the foundational stage of their creation or registration.

 

Secure Handling of PII

The CTA places a significant emphasis on the secure handling of PII. Reporting Companies must ensure the confidentiality and security of sensitive data, adhering to stringent data protection standards. This includes secure storage, restricted access, and measures to prevent unauthorized disclosure. The CTA underscores the importance of safeguarding this information, recognizing its sensitivity and potential misuse.

 

Use of a FinCEN Number

The CTA allows for the use of a unique FinCEN Identifier in lieu of providing full PII for Beneficial Owners and Company Applicants. Of note, this option does not eliminate the requirement to provide PII to FinCEN. Instead, it is useful for individuals who have already provided their PII to FinCEN in previous filings. By using a FinCEN Identifier, individuals can streamline the reporting process while maintaining compliance. This approach not only simplifies the filing procedure for entities with complex ownership structures but also enhances data security by minimizing the repetitive submission of sensitive personal information. Individuals will be able to request a FinCEN identifier on or after January 1, 2024, by completing an electronic web form.

 

What Will the Impact of the CTA be?

The rigor of the CTA’s reporting requirements aims to strike a balance between thoroughness and feasibility, though the reporting requirements present varying implications and costs for small versus large businesses. In FinCEN’s estimation, the detailed reporting will be crucial in achieving the CTA’s purpose of enhancing transparency and combating illicit financial activities. However, for many businesses, particularly smaller ones with limited resources, these requirements will be seen as burdensome.

 

For most small businesses, especially those with simple ownership structures, the expectation is that the compliance burden will be manageable, necessitating little more than basic record-keeping and reporting, likely with minimal financial impact. Nevertheless, for small businesses with turnover and recapitalization amongst Beneficial Owners, and for larger businesses, particularly those with complex, multi-layered ownership structures, compliance will be much more onerous and costly.

 

While the CTA certainly advances transparency, the real test will be in its enforcement and the capacity of regulatory bodies to effectively utilize the reported data. The CTA could be a significant step towards deterring financial crimes, but its success will largely depend on consistent enforcement and the business community’s compliance.

 

Creating an Action Plan

The CTA introduces new regulatory requirements, and costs, for businesses. While companies in existence as of December 31, 2023 do not have any affirmative obligation to submit BOI reports until January 1, 2025 they should take proactive steps to identify Beneficial Owners, gather the information that will be required for their filings, and implement necessary data security measures to protect PII. Consulting with legal advisors can provide clarity on the CTA’s requirements and help develop an effective complia

[1] The reporting company address must be a U.S. street address and cannot be a P.O. box.

[2] https://www.fincen.gov/sites/default/files/shared/BOI_Reporting_Filing_DatesPublished03.24.23_508C.pdf, published March 24, 2023.

[3]  31 CFR § 1010.380(d). See also discussion at Section 2.1 of the “Small Entity Compliance Guide” available at https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf.

[4] 31 CFR § 1010.380(d)(1)(i).

[5] “The term “senior officer” means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function.” 31 CFR § 1010.380(f)(8).

[6] For Company Applicants in the business of forming entities, such as attorneys, the Company Applicant may provide its business address instead of its residential address.

 

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