December 03, 2024

UPDATE (December 3, 2024): A U.S. District Court in Texas has issued a nationwide injunction against enforcement of the Corporate Transparency Act (CTA) and a stay of the compliance dealine (Texas Top Cop Shop, Inc. et al. v. Merrick Garland, Attorney General of the United States, et al.). Gilpin Givhan is closely tracking this recent development, as well as the status of other legal challenges and legislative efforts to delay, alter or repeal the implementation of the CTA, and will provide updates as more information becomes available. 

What is the Corporate Transparency Act?

Effective as of January 1, 2024, the Corporate Transparency Act (“CTA”) requires most business entities to disclose certain information about their beneficial owners to the federal government in an effort to assist law enforcement in combatting money laundering, the funding of terrorism, and other illicit activities facilitated through anonymous corporate structures. Unless specifically exempt from the CTA's reporting requirement, such "reporting companies" must report their beneficial ownership information to the Financial Crimes Enforcement Network (“FinCEN”), a bureau within the U.S. Department of the Treasury.

The scope of this new law is purposefully broad, and despite some statutory exceptions, the CTA’s disclosure requirements will have a significant impact on most businesses and legal entities in the United States. Willful failure to comply with the CTA’s reporting requirements or willfully providing false or fraudulent information may result in civil penalties of up to $500 for each day that the violation continues (no maximum amount) and criminal penalties of up to two (2) years imprisonment and a fine of up to $10,000.

Who Is Required To Report?

The CTA applies to any “reporting company,” which is broadly defined to include nearly all types of domestic and foreign business entities (including corporations and limited liability companies) created or registered by filing a document with a secretary of state or similar office.

Trusts, estates, general partnerships, sole proprietorships and other legal entities which are not formed or registered by filings with a secretary of state typically would not be treated as reporting companies under the CTA. However, the trustees, beneficiaries, partners or other individuals associated with such entities may nevertheless be treated as beneficial owners (and required to provide beneficial ownership information) based on their degree of indirect ownership and/or substantial control of a reporting company.

How is Beneficial Ownership Information Reported to FinCEN?

A reporting company files its beneficial ownership information report ("BOI Report") electronically through a secure filing system available at FinCEN's BOI E-Filing website (https://boiefiling.fincen.gov/). There is no fee for submitting BOI Reports to FinCEN. This database will not be publicly accessible, and access is to be limited to certain U.S. federal, state and local law enforcement agencies and regulatory bodies.

Who Can File a Beneficial Ownership Information Report?

Any authorized individual of the reporting company (e.g., owners, employees, attorneys, CPAs or third-party service providers) may file BOI Reports on behalf of the reporting company. Authorized filers will be required to provide basic contact information about themselves, including their name, email address and phone number.

When Does a Company Have To Report?

• A reporting company formed prior to Jan. 1, 2024, will have until Jan. 1, 2025 to file its initial BOI Report.
• A reporting company formed between January 1, 2024 and December 31, 2024, will have ninety (90) calendar days from the date of formation to file its initial BOI Report.

• A reporting company formed on or after Jan. 1, 2025, will have thirty (30) calendar days from the date of formation to file its initial BOI Report.

Following submission of the initial BOI Report, reporting companies are required to update their BOI Reports within thirty (30) days of any change in the reporting company's beneficial ownership information. This would include, for example, certain events such as: (i) the sale, transfer or issuance of any new ownership interests, (ii) the appointment and resignation of certain directors, managers and company officers, and (iii) the change to any beneficial owner’s personal information (e.g., a change of address or renewed driver’s license). Additionally, if any information contained in a previously filed BOI Report is discovered to be inaccurate, the reporting company must correct such error no later than thirty (30) days after the date the reporting company became aware of the inaccuracy or had reason to know of the inaccuracy. Updated and corrected BOI Reports will require all fields to be submitted, not just the updated/corrected pieces of information.

IMPORTANT NOTE: CTA compliance and the filing of BOI Reports is not a one-time event, nor should it be treated as an annual report.

Are Any Entities Exempt from Reporting?

Yes, the CTA exempts twenty-three (23) types of entities from the definition of a “reporting company.” In general, these entities are exempt because they are subject to existing federal or state regulation, and/or their beneficial ownership information is already reportable to governmental agencies. Examples of exempt entities include banks, credit unions, tax-exempt organizations, insurance companies, broker-dealers, registered investment advisors, governmental authorities, and certain large operating companies. The full scope of the CTA exemptions is complex and not addressed in this article; however, if you believe your entity may qualify for an exemption from the CTA, please contact us to further review and discuss your situation.

What Information Does a Reporting Company Have to Provide?

Each reporting company must disclose certain basic information about itself, including:

(1) the company’s full legal name;

(2) any trade name or “doing business as” (d/b/a) designations;

(3) the company’s business street address (cannot be a P.O. box);

(4) the jurisdiction of the company’s formation; and

(5) the company’s taxpayer identification number.

Reporting companies must also provide the following information about its beneficial owners and company applicants:

(1) full legal name;

(2) date of birth;

(3)  residential address; and

(4)  a unique identifying number from a non-expired driver’s license, passport, other state-issued identification document or FinCEN identifier (discussed further below). An image of the identification document must also be provided.

It is the responsibility of the reporting company to identify its beneficial owners and company applicants, and to report those individuals to FinCEN. AT the time the BOI Report is filed, each reporting company is required to certify that its report or application is true, correct and complete.

IMPORTANT NOTE: Reporting companies should consider revising their bylaws, operating agreements and other relevant governing documents to include additional representations, covenants and indemnification provisions with respect their beneficial owners and the information required to be provided under the CTA.

Who Is Considered a Beneficial Owner of a Reporting Company?

A beneficial owner is any individual who, directly or indirectly: (1) owns or controls at least twenty-five percent (25%) of the ownership interests of a reporting company; or (2) exercises “substantial control” over a reporting company. An individual might be a beneficial owner by virtue of his or her ownership interests, substantial control, or both. There are some exceptions to the definition of beneficial owner, including minor children, nominees, intermediaries, custodians, agents, employees, inheritors and creditors.

“Ownership interests” include equity, stock or voting rights; capital or profits interests; convertible instruments; options or privileges; and any other instrument, contract or other mechanism used to establish ownership.

An individual exercises “substantial control” over a reporting company if the individual meets any of the following criteria:

1. the individual is a senior officer (e.g., president, CEO, CFO, COO, general counsel, etc.);
2. the individual has the authority to appoint or remove certain officers or a majority of the directors of a reporting company;
3. the individual is an important decision-maker (any individual who directs, determines or has substantial influence of the reporting company's business, finances or structure); or
4. the individual has any other form of substantial control over the reporting company.

Merely serving on the board of directors, or as the "partnership representative," "tax matters partner" or the registered agent of a reporting company does not automatically make such individual a beneficial owner. Beneficial ownership is ultimately determined by direct or indirect ownership in, and/or the extent to which such individual exercises substantial control over, the reporting company.

Who is a Company Applicant?

A “company applicant” is the individual who directly filed the document that created or first registered a reporting company under state law, or who directs or controls the filing of the relevant document. Typically, this will be the attorney, paralegal or company officer responsible for directing or controlling the filing for the reporting company. It is irrelevant which individual actually signs the formation document (i.e., the incorporator). At most, two (2) individuals need to be reported as company applicants. The company applicant may not be removed from a BOI Report even if the company applicant no longer has any relationship with the reporting company.

Reporting companies formed prior to January 1, 2024, do not need to report their company applicants. Entities formed after January 1, 2024, are only required to report their company applicant information one time and will not be required to update it.

What is a FinCEN Identifier?

In lieu of providing the required personal information to each applicable reporting company, a beneficial owner or company applicant may instead provide the reporting company with a "FinCEN identifier" or "FinCEN ID," which is a unique, 12-digit identifying number issued by FinCEN to such individual. In order to obtain a FinCEN identifier, individuals must provide their full legal name, date of birth, address, unique identifying number and image of the identification document to FinCEN. These individuals must update and correct their information through FinCEN within thirty (30) days of any changes.

For reporting companies with multiple beneficial owners and/or individual owner who must report information multiple entities, we strongly recommend that all such persons acquire and maintain a FinCEN ID as it will greatly simplify the reporting process on a go-forward basis. The application for a FinCEN ID can be found at https://fincenid.fincen.gov/.

What if a Reporting Company is Owned Through Multiple Entities?

Only individuals can be reported as beneficial owners of a reporting company. Reporting companies which are owned in tiered structures by other legal entities must "look through" each entity-owner until the individual(s) behind such entity-owner(s) are identified.

EXAMPLE: If a reporting company is owned 50% by Entity X, and Entity X is owned equally by Individual A and Individual B, then Individual A and Individual B would qualify as beneficial owners of the reporting company by virtue of their 25% indirect ownership (through Entity X) of the reporting company.

There is an exception for entity-owners which themselves are exempt under the CTA. However, individuals associated with such exempt entity-owner(s) may nevertheless be required to report their beneficial ownership information if their role within the reporting company satisfies the definition of "substantial control."

EXAMPLE: If a nonprofit organization (exempt from the CTA) owns 50% of a reporting company, only the name of the nonprofit organization needs to be reported among the beneficial owners. However, if the nonprofit's CEO is also an important decision-maker with respect to the reporting company, then the CEO is deemed to exercise substantial control and must individually provide his or her beneficial ownership information to the reporting company.

Does Each Subsidiary in a Related or Consolidated Group Have to File a BOI Report?

Generally, yes. Except in limited circumstances, each reporting company, regardless of its ownership structure, must separately file and maintain a BOI Report with FinCEN.

Where Can I Find More Information on the CTA?

Additional information and resources from FinCEN, including the helpful Small Entity Compliance Guide, can be found at www.fincen.gov/boi.

What Does All This Mean?

The CTA will impose a new and significant reporting and compliance regime upon most companies. As noted above, the penalties for noncompliance with the CTA can be severe. Therefore, reporting companies should take action to determine their obligations in advance of the reporting deadline and to develop a structure and process to ensure ongoing compliance.