New Regulatory Reporting is Coming to Small Businesses:
The Corporate Transparency Act (CTA), enacted in 2021, was passed as part of the National Defense Authorization Act. According to the Financial Crimes Enforcement Network (FinCEN), the purpose of the CTA is to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity” by creating a federal framework for reporting, storing, and disclosing beneficial ownership information of “reporting companies.” The law itself starts out by saying:
It is the sense of Congress that— (1) more than 2,000,000 corporations and limited liability companies are being formed under the laws of the States each year; (2) most or all States do not require information about the beneficial owners of the corporations, limited liability companies, or other similar entities formed under the laws of the State; (3) malign actors seek to conceal their ownership of corporations, limited liability companies, or other similar entities in the United States to facilitate illicit activity…
The intention is clear, the law is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market.
With the law going into effect on January 1, 2024, it’s important to understand how the requirements will impact your business.
Who does the Corporate Transparency Act affect?
While the CTA was supposedly targeted to foreign-owned companies, domestic companies – particularly small businesses – who meet the broad definition of reporting company will be affected by the CTA’s disclosure provision.
Who needs to file?
Reporting companies typically include limited liability partnerships, limited liability limited partnerships, business trusts and most limited partnerships, where entities are generally created by a filing with a secretary of state or similar office. Sole-proprietorships (not including single-member LLCs) are not included in the definition of “Reporting Company”.
Domestic reporting companies are corporations, LLPs, or any other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.
Foreign reporting companies are a corporation, LLCs, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.
Who DOES NOT need to file?
The Reporting Rule exempts twenty-three (23) specific types of entities from the reporting
requirements listed in Chart 2 below. An entity that qualifies for any of these exemptions is not
required to submit BOI reports to FinCEN.
Exemption No. Exemption Short Title
1 Securities reporting issuer
2 Governmental authority
3 Bank
4 Credit union
5 Depository institution holding company
6 Money services business
7 Broker or dealer in securities
8 Securities exchange or clearing agency
9 Other Exchange Act registered entity
10 Investment company or investment adviser
11 Venture capital fund adviser
12 Insurance company
13 State-licensed insurance producer
14 Commodity Exchange Act registered entity
15 Accounting firm
16 Public utility
17 Financial market utility
18 Pooled investment vehicle
19 Tax-exempt entity
20 Entity assisting a tax-exempt entity
21 Large operating company
22 Subsidiary of certain exempt entities
23 Inactive entity
While most exemptions are pretty specific and will not impact small business, exemption #21 “Large Operating Company” provides an exemption for many businesses. This generally exemption applies to businesses with more than 20 full time employees and more than $5,000,000 in revenue.
An entity qualifies for this exemption if all six of the following criteria apply:
- The entity employs more than 20 full time employees, when applying the meaning of full-time employee provided in 26 CFR 54.4980H-1(a) and 54.4980H-3. In general, “full-time employee” means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer.
- More than 20 full-time employees of the entity are employed in the “United States,” as that term is defined in 31 CFR 1010.100(hhh).
- The entity has an operating presence at a physical office within the United States. “Operating presence at a physical office within the United States” means that an entity regularly conducts its business at a physical location in the United States that the entity owns or leases and that is physically distinct from the place of business of any other unaffiliated entity.
- The entity filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales. If the entity is part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504, refer to the consolidated return for such group.
- The entity reported this greater-than-$5,000,000 amount as gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form.
- When gross receipts or sales from sources outside the United States, as determined under Federal income tax principle, are excluded from the entity’s amount of gross receipts or sales, the amount remains greater than $5,000,000
While not listed an official exemption, remember that sole-proprietorships (not including single-member LLCs) are not included in the definition of “Reporting Company” and do not have to file.
A more detailed list of exemptions was published by the American Bar Association.
Beneficial owners:
A beneficial owner can fall into one of two categories defined as any individual who, directly or indirectly, either:
- Exercises substantial control over a reporting company, or
- Owns or controls at least 25% of the ownership interests of a reporting company.
The beneficial owners must report to FinCEN their name, date of birth, address, and unique identifier number from a recognized issuing jurisdiction and a photo of that document. If an individual decides to file their information to FinCEN directly, they may be issued a “FinCEN identifier” which can be provided on a BOI report instead of the required information.
Company applicants:
Company applicants can only be:
- The individual who directly files the document that creates the entity, or the document that first registers the entity to do business in the United States.
- The individual is primarily responsible for directing or controlling the filing of the relevant document by another.
When do reports need to be filed for the Corporate Transparency Act?
The Corporate Transparency Act comes into effect on January 1, 2024. Reporting companies that are in existence on the effective date must file their initial reports within one year.
Reporting companies created after the effective date have 30 days after receiving notice of their creation or registration. However, FinCEN has proposed to extend the initial filing deadline for BOI reports from 30 to 90 days for entities created or registered in 2024.
Reports must be updated within 30 days of a change to the beneficial ownership, e.g., through the sale of a business, merger, acquisition, or death, or 30 days upon becoming aware of or having reason to know of inaccurate information previously filed.
High penalties and the potential for imprisonment, this is an area that should be closely monitored. Non-compliance can result in high penalties and possible imprisonment. The escalating fines range from $500 to $10,000 per violation and jail time of up to two years.
Next Steps for Compliance with the Corporate Transparency Act:
Existing companies should start gathering beneficial ownership information and should consider adopting a compliance policy and incorporate the policy into its governing documents (i.e., shareholder agreements or operating agreements) as a contractual duty that binds shareholders, members, and managers of the company to provide and update the necessary information.
Even companies who are presently exempt from the requirements should consider implementing policies and amending their governing documents as the facts and circumstances which forms the basis for their exemption may change (for example, they could drop below the relevant employee or revenue thresholds in a particular period).
As companies begin to include compliance clauses into their governing documents, parties likely will be required by agreements and transactions to represent to the opposing side that their CTA beneficial ownership reports are true, accurate, and have been timely filed. This is especially true for agreements with banks, as financial institutions are an authorized recipient of beneficial ownership reports if consent is given by the reporting company.
Staying compliant will also require frequent monitoring for changes and updates to the Corporate Transparency Act.
Where can I find additional information about BOI reporting?
- Additional information about the Reporting Rule and guidance materials are available at www.fincen.gov/boi
- FinCEN has issued and will continue to issue frequently asked questions to address specific questions on the topic. They can be found here: www.fincen.gov/boi-faqs
- If you have any questions regarding BOI reporting obligations, you can
contact FinCEN at www.fincen.gov/contact.
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