Beginning on January 1, 2024, business entities will be required to comply with the Corporate Transparency Act (“CTA”). The CTA, which will be enforced by the Financial Crimes Enforcement Network (“FinCEN”), is designed to limit money laundering and other fraudulent acts by requiring entities to disclose their beneficial owners. This article provides a general overview of the CTA.
Who is Affected by the Corporate Transparency Act?
The CTA applies to “Reporting Companies.” Generally, a Reporting Company is any entity created by filing a document with a Secretary of State in any state in the U.S. This includes corporations, limited liability companies, limited liability partnerships, limited liability limited partnerships, certain business trusts, and more. Typically, sole proprietorships, general partnerships, and family trusts do not file any formation documents with the Secretary of State and therefore would not be Reporting Companies. There are 23 exemptions to the definition of Reporting Companies, largely consisting of heavily regulated businesses, such as publicly traded companies, accounting firms, investment advisory firms, and insurance companies. Notable exemptions for our clients include tax-exempt entities (who have a 501 designation), subsidiaries wholly owned by exempt entities, and “large operating entities.” To qualify for the “large operating entity” exemption the entity must: (1) employ more than 20 full time employees in the United States; (2) have an operating presence at a physical office in the United States; and (3) have filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5,000,000 in gross receipts or sales on the applicable IRS form, excluding gross receipts or sales from sources outside of the U.S.
Deadlines for Filing
Entities that were formed prior to January 1, 2024 have until January 1, 2025 to file an initial beneficial ownership interest (“BOI”) report. Entities formed in 2024 have 90 days from the date of confirmation of formation to file an initial BOI report. Entities created in 2025 or later will have 30 days from the date of confirmation of formation to file an initial BOI report. Unless any information in the initial report changes, the CTA only requires one BOI report (i.e., there is no annual filing requirement).
If any of the information in a previously filed BOI report changes, or if an exempt entity loses its exempt status, the entity must file an updated report within 30 days of the change(s). This will pose a challenge for Reporting Companies that have diverse owners who may change their addresses without notifying the Reporting Company or who have entity owners that have a change of beneficial ownership within that entity and do not notify the Reporting Company. We recommend the inclusion of certain language in a Reporting Company’s shareholders agreement, limited liability company agreement, or partnership agreement to address this issue.
Failure to file an initial or updated BOI report may result in civil and criminal penalties.
Generally, the reports require disclosure of basic information about the Reporting Company and its beneficial owners. “Beneficial owners” are individuals who directly or indirectly either (1) exercise substantial control over the Reporting Company; or (2) own or control at least 25% of the ownership interests of the Reporting Company. With respect to indirect control, the report must disclose the natural persons who control any entity that holds an ownership interest in the Reporting Company (i.e., it cannot stop with entity owners or trusts). There are many nuances to these rules, particularly with respect to determining which employees may be deemed beneficial owners by virtue of their substantial control over the Reporting Company, and how to report beneficial owners when an ownership interest is held in a trust or by a minor.
Additionally, for entities formed on or after January 1, 2024, initial reports require information about the company applicant (i.e., the person who filed and/or directed the filing of the formation documents with the Secretary of State).
With respect to each beneficial owner or company applicant, the Reporting Company must include their names, street addresses, and dates of birth, and upload a copy of their current driver’s license, U.S. passport, or other acceptable identification.
BOI reports can be filed online at FinCEN.
FinCEN published a Small Entity Compliance Guide to help companies comply with the Corporate Transparency Act. Montgomery Purdue is available to advise clients on the CTA requirements and BOI report filing process. If you have any questions about the CTA, contact Kristi O’Brien, Mitch Wallum, or one of the firm’s other business attorneys.