by Benjamin Goldberg
On January 1, 2024, a new federal law, the Corporate Transparency Act (“CTA”), will go into effect. The main purpose of the CTA is to crack down on the proliferation of shell companies used as shields in money laundering, tax avoidance, and similar activities. However, the new reporting requirements will also compel most businesses created by filing documents with the Secretary of State to provide the information outlined in the CTA. Any business entity that must report to FinCEN is called a “reporting company” in the language of the CTA. The information will have to be reported to the Financial Crime Enforcement Network (“FinCEN”), which is part of the Department of Treasury.
There are three main parts to the new reporting requirements: beneficial ownership information (“BOI”), company applicants, and information about the reporting company itself.
Reporting companies must submit the information of everyone possessing beneficial ownership. A beneficial owner is defined in the CTA as an “individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, exercises substantial control over the entity, or owns or controls 25 percent or more of the ownership interests of the entity or receives substantial economic benefits from the assets of the entity.” While owning or controlling over 25 percent of the business entity is fairly straightforward, the definition of “substantial control” is less obvious. Within the CTA, the definition of substantial control is expansive. It includes, but is not limited to, any senior officers of the company, persons having authority over the appointment or removal of any senior officer or a majority of board members, persons who direct or have substantial influence over important decisions made by the entity or have control over an intermediary entity that exercises substantial control over a reporting company. Since the definition of a beneficial owner is expansive, careful consideration will have to be given to make sure everyone who meets the definition of a beneficial owner has their BOI entered into the FinCEN site.
A “company applicant” is the individual who files the application with the Secretary of State and, in addition, the person who directs or controls the filing if more than one individual is involved. However, at least at this point in time, there can only be two company applicants. The company applicants might not be anyone who works for or controls the reporting company in question. The company applicant could, for instance, be the lawyer and paralegal hired to help bring the entity into existence. The company applicant information will only have to be submitted once.
The reporting company will need to disclose its 1) legal name, 2) DBA names, 3) business address, 4) state of formation, and 5) Taxpayer Identification Number.
The beneficial owners of the reporting company will have to disclose their 1) legal name, 2) date of birth, 3) residential address, 4) unique number from an acceptable document such as a U.S. passport, state ID, or driver’s license, and 5) an image of that document.
The company applicants will need to disclose the same information as the beneficial owners with one potential difference: if the company applicant is registering the company in the course of the applicant’s business, such as lawyers, paralegals, or others, then the business address of the law firm will be substituted for the residential address. Also, the company applicant information will be required only for business entities that are formed on or after Jan. 1, 2024. The BOI will be required of all entities that are reporting companies regardless of their date of formation.
Businesses already in existence on Jan. 1, 2024, will have one year to file an initial report. For Businesses formed on or after Jan. 1, 2024, and before Jan. 1, 2025, an initial report must be provided to FinCEN within ninety days of formation. On and after Jan. 1, 2025, businesses will have to submit the required information within thirty days of formation. Another thing to note is that changes in beneficial ownership will need to be filed. Any changes in ownership or changes in organizational structure will require subsequent filings to keep the BOI up-to-date.
Certain businesses are exempt from the reporting requirement, but most of these businesses are those in heavily regulated areas of finance. Otherwise, the important exemption to note is the “large operating company.” To qualify as such, a company needs 1) more than 20 full-time employees, 2) more than 5 million dollars in gross receipts/sales in the US, and 3) a commercial, physical street address in the US. All three of these elements must be met. For example, a business that operates online with no commercial, physical street address will not qualify for the exemption even if it has more than 20 employees and over 5 million dollars in gross receipts or sales. The other exemptions will be listed at the end of this post.
While this legislation has mostly flown under the radar and might come as a surprise to many business owners, there is still time to prepare the necessary information. CCBLaw is here to help answer any questions and assist your business to ensure compliance with the CTA.
In the meantime, to avoid potential civil and criminal penalties, entities that will qualify as reporting companies should make determinations as to who will be considered a beneficial owner under the CTA and gather the necessary information to submit to the FinCEN portal once it is active. Importantly, reporting companies will also want to consider who will have the responsibility of updating any changes in BOI to FinCEN because, as addressed above, as beneficial ownership changes, BOI is required to be updated within 30 days of any such change.
Benjamin Goldberg is an associate at CCB Law. He can be reached at 315-477-6214 or firstname.lastname@example.org.
31 C.F.R. § 1010.380(d)