In 2021, the United States Congress passed the Corporate Transparency Act (CTA) for the purpose of combating illegal activities, such as money laundering and terrorist financing.   The CTA went into effect on January 1, 2024, bringing the United States in closer alignment with international standards on corporate transparency, similar to laws in place in the European Union and other regions.  

The CTA, with its primary focus on smaller and non-regulated companies, is one of the most sweeping corporate laws enacted in the US in many years, and is expected to impact over 30 million businesses.   Surprisingly, the CTA has not received broad publicity in some circles and, as a result, many business owners are not familiar with it.   In this Blog post, we describe the principal requirements of the CTA.   In our other Blog post,  we discuss a 10-step process for developing a CTA compliance program for your business. 

Overview

Under the CTA, non-exempt Reporting Companies (defined below) are required to file what is known as a BOI Report with the Financial Crimes and Enforcement Network (FinCen), a bureau of the US Department of Treasury.  A BOI Report includes the following three categories of information:

1. Information about the Reporting Company
2. Information about the Reporting Company's Company Applicant
3. Information about the Reporting Company's Beneficial Ownership

It's important for business owners to understand that the CTA does not solely apply to new companies formed after the effective date of the law.  Rather, the CTA applies to new companies and companies which existed before the law went into effect.

The information contained in BOI Reports is stored by the federal government in a confidential database and is not available to the public; however, the information can be shared among government agencies and used for law enforcement, national security, and intelligence purposes.    Given that FinCen is a part of the US Department of Treasury, it is reasonable to expect that BOI Reports will be shared with the IRS, among other governmental agencies.

BOI Reports are filed with FinCen, and not with a state Secretary of State office.  Moreover, unlike state corporate filings, BOI reporting is not done on an annual or biennial basis, but instead is simply done one time (unless an amendment or correction is required, as described below).   There is no filing fee, and filings are done electronically, through a secure filing system.  

Below we discuss the three categories of BOI reporting information in greater detail.

Information about the Reporting Company

The first type of information which must be included in a BOI Report is information about the Reporting Company itself.  Subject to the BOI exemptions (discussed below), a Reporting Company is any company, whether domestic or foreign, which is formed or operates in the U.S. by the filing of a document with a state Secretary of State (or other similar office), or with an Indian Tribe.  For instance, unless exempt, a Reporting Company includes corporations (c-corporations and s-corporations), limited liability companies, limited partnerships, and statutory trusts.  Sole proprietorships, general partnerships, and most non-statutory trusts, on the other hand, are not Reporting Companies and therefore are not required to file a BOI Report.  

Reporting Companies must include the following information in their BOI Report:

• the legal name of the Reporting Company
• trade name/dba name
• business street address (can not be a PO box, registered agent address, or other third party address)
• jurisdiction of formation
• unique business number (typically, its EIN)

Exemptions from the Definition of Reporting Company

There are 23 types of entities that are exempt from BOI Reporting. 

One important exemption is the "large operating company" exemption.  An entity falls into this category if it meets each of the following three requirements: 

• employs 21 or more employees in the US,
• has more than $5 million in gross receipts or sales in the US, and
• has a physical office in the US.

Other types of companies which are exempt from BOI Reporting include highly regulated companies, such as publicly traded corporations, banks, credit unions, broker dealers, insurance companies, accounting firms, and public utilities.  Also exempt from BOI Reporting are tax exempt entities (such as 501(c)(3) corporations), governmental bodies, and subsidiaries of certain exempt companies.

A company does not need to report to FinCEN that it is exempt from the BOI reporting requirements if it has always been exempt.

If a company filed a BOI Report and later qualifies for an exemption, that company should file an updated BOI Report to indicate that it is newly exempt from the reporting requirements.

Information about the Company Applicant 

The second type of information which must be disclosed in a BOI Report is information regarding the Company Applicant.   A Company Applicant is defined as the person who filed the documents with the state Secretary of State (or similar office) to form or register the Reporting Company.  For example, if you formed your own company, you are the Company Applicant.  If you used an attorney, paralegal, or other third party to form or register your company, then that individual is the Company Applicant.  

A BOI Report must include the following information about the Reporting Company's Company Applicant(s):

• Company Applicant's name
• Company Applicant's date of birth
• Company Applicant's business or residential address
• copy of the Company Applicant's unexpired driver's license or passport (including the document number and photo).

It's important to note, however, that Company Applicant information is not needed for Reporting Companies which were formed before January 1, 2024. 

Information about the Reporting Company's Beneficial Ownership 

The third type of information which must be included in the BOI Report - and the most controversial aspect of the CTA - is the Reporting Company's beneficial ownership information.  Under the CTA, a "Beneficial Owner" is someone who (i) owns 25% of the Reporting Company's ownership interests; or (ii) exercises substantial control over the Reporting Company.  "Substantial control" is broadly defined under the CTA, and typically includes corporate officers and directors, LLC managers, the general partner of a limited partnership, persons who have the authority to appoint or remove any of the foregoing, and persons who have substantial influence over important decisions made by the Reporting Company.  Beneficial Owners must be natural persons.  

Options, warrants, and convertible securities generally count towards the 25% ownership threshold mentioned above. For example, if a person merely owns options to acquire 25% of a Reporting Company, that person may nonetheless be a Beneficial Owner for purposes of the CTA.  

The following Beneficial Owner information must be included in the BOI Report:

• Beneficial Owner's legal name
• Beneficial Owner's date of birth
• Beneficial Owner's residential or business street address
• copy of the Beneficial Owner's unexpired driver's license or passport (including the document number and photo).

A child under the age of 18 is exempt from Beneficial Owner disclosure, and in that case, the child's parent or legal guardian's information is supplied instead.  However, once the child reaches the age of 18, an amended BOI Report must be filed to add such person to the Beneficial Owner disclosure.  

FinCen Identifier

A FinCen identifier (also referred to as a FinCen ID) is a unique identification number issued to individuals by FinCen.  Obtaining a FinCen identifier is not mandatory, and there is no filing fee associated with it.

Obtaining a FinCen identifier can be useful for individuals who will be identified as a Beneficial Owner and/or Company Applicant for multiple Reporting Companies.  Specifically, using a FinCen identifier streamlines the BOI reporting process by allowing individuals to provide their FinCEN identifier instead of having their detailed personal information repeatedly submitted in each of their BOI Reports.  Using a FinCen identifier can be beneficial for data security and administrative efficiency in the BOI reporting process overall.

When to File 

The CTA was designed with a phased rollout, with the timing of reporting obligations dependent upon when the Reporting Company was formed.   The timing requirements are as follows.

• For Reporting Companies formed before January 1, 2024, their BOI Report is due by December 31, 2024.  
• For Reporting Companies formed during calendar year 2024, they have 90 days to file their BOI Report. 
• For Reporting Companies formed after January 1, 2025, they have 30 days to file their BOI Report. 
• Changes, updates, and corrections to BOI Reports must be filed with FinCen within 30 days.  This includes, without limitation, changes in beneficial ownership, a new mailing address, a change of legal or dba name, a change to drivers license or passport, attainment of the age of 18 of a child Beneficial Owner, or the discovery of an error in a previous BOI Report.  

Penalties for Noncompliance with the Corporate Transparency Act

Failure to comply with the CTA has steep potential civil and criminal consequences, including up to $10,000 in fines and up to two years of jail time.  Fines of $500 per day for non-compliance can be assessed by the federal government.   Accordingly, its critical for business owners and managers to understand the CTA requirements, and to develop a process for timely filing BOI Reports for all non-exempt entities.

Next Steps - FinCen BOI Reporting Compliance 

Companies should consider developing an internal FinCen BOI compliance program.  This is especially important for organizations with multiple subsidiaries and affiliates where tracking may be complicated, and for due diligence purposes for organizations who are entering into joint ventures or other equity partnerships or bringing in new Board members/decision-makers.    Please see our 10-step CTA Compliance Program for more information. 

The Law Office of Jennifer M. Settles helps companies understand their Corporate Transparency Act reporting obligations, and files BOI Reports on clients' behalf.  Contact us today at (602) 617-3938 or through our website at www.jsettleslaw.com, for more information.  

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