On January 1, 2021, Congress passed the Corporate Transparenc...Continue reading
Posted: December 8, 2022
On January 1, 2021, Congress passed the Corporate Transparency Act ("CTA") as part of the National Defense Authorization Act. The purpose of the CTA is to guard against money laundering, terrorism financing, and other illicit activities. The CTA seeks to do this by requiring certain types of domestic and foreign entities (“Reporting Companies”) to report certain beneficial ownership information (“BOI”) to the Financial Crimes Enforcement Network (“FinCen”).
The requirements for reporting BOI were promulgated by final regulations issued by FinCen on September 30, 2022 and will take effect on January 1, 2024. The CTA and final regulations require Reporting Companies to file information on the Reporting Company, its “Beneficial Owners”, and the “Company Applicant” that filed the document forming or registering the Reporting Company.
A “reporting company” is an entity that is required to file a BOI report with FinCen. The regulations define “reporting company” as any entity created by filing a document with a secretary of state or similar office under the laws of a state or Indian tribe. This includes most corporations, limited liability companies, and limited partnerships. The definition of “reporting company” also includes any business formed under the laws of a foreign country that is registered to do business in any state or tribal jurisdiction by filing a document with the applicable office.
The final regulations provide exemptions for 23 enumerated entities. These exemptions include, but are not limited to: banks or bank holding companies; federal or state credit unions; government entities; entities with publicly traded securities that are registered with reporting requirements to FinCen, the Financial Industry Regulatory Authority, or the Securities and Exchange Commission; public accounting firms; public utilities; insurance companies; tax exempt political organizations; and 501(c) tax-exempt entities. There is also an exemption provided for large operating companies that employ 20 or more full-time employees in the U.S. and that filed a federal income tax return for the prior year reporting gross receipts of more than $5 million in the U.S.
A “beneficial owner” is defined as “any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25% of the ownership interests of a reporting company.” The CTA requires each “beneficial owner” to be identified when reporting BOI.
Beneficial ownership is established through “substantial control” if an individual: (1) serves as a senior officer; (2) has authority over the appointment or removal of any senior officer or a majority of the board of directors; (3) has the ability to direct, decide or substantially influence important matters; or (4) has any other form of substantial control over the “reporting company”.
“Ownership interest” includes: (1) stock, membership, and partnership interests; (2) capital or profits interest; (3) convertible instruments; and (4) put, call, or option rights. It does not matter if the interest is vested or unvested, and any ownership interest requiring exercise is treated as if it had been exercised. However, the following are not treated as “beneficial owners”: (1) minor children; (2) nominees, intermediaries, custodians or agents; (3) employees that are not senior officers and do not have 25% of ownership interest; (4) individuals whose only interest is through right of inheritance; and (5) creditors.
“Company Applicants” are primarily responsible for directing or controlling the filing of formation documents. This definition is limited to only one or two individuals and includes the individual who actually files the formation documents and any individual who directs or controls the filing.
The reporting company submits the following information to FinCen regarding itself: (1) full legal name; (2) trade names or “doing business as” names; (3) address of the principal place of business or primary business location (if no domestic principal place of business); (4) jurisdiction where formed or registered; (5) IRS Taxpayer ID Number.
The reporting company also submits the following information regarding the “beneficial owners” and “company applicant”: (1) full legal name; (2) date of birth; (3) current residential or business street address; (4) a unique identifying number from (and a photocopy of): a current passport; state, local, or Indian tribe issued identifying document; current state driver’s license; or the individual’s FinCen identifier. Companies formed prior to January 1, 2024, are not required to report information about the “company applicant” in their initial filing.
The due date for initial filings depends on when the “reporting company” was formed. Any entity formed or registered prior to January 1, 2024 is required to file their initial report on or before December 31, 2024, and any entity formed or registered after January 1, 2024 is required to file their initial report within 30 days after the notice of formation or registration. When information in previous reports changes, “reporting companies” will have 30 days to report the changes. When incorrect information is reported, the “reporting company” has 30 days from the date it became aware or should have become aware of the inaccuracies in previous reports.
Companies will need to develop procedures for determining their reporting obligations and keeping track of reportable information. McDaniel Wolff's corporate and business attorneys are available to assist companies comply with their reporting obligations under the CTA and its regulations. If you would like assistance complying with these new reporting obligations, contact us to see how we can help.