The Corporate Transparency Act (CTA) is a new US law that came into effect on January 1, 2024, that requires most companies formed or registered in the US (with limited exceptions) to file certain reports, known as Beneficial Owner Information (BOI) reports, in order to comply with the CTA.
If you have already filed such a report, great! Note that while the CTA does not require annual filing, companies do need to file updated reports after a change in beneficial ownership, so it is still helpful to review this blog post to understand the requirements and deadlines regarding the CTA, even if you’ve already done an initial filing.
For those who have not filed a BOI report yet, this blog post provides information regarding who has to file, what information needs to be filed and reported, and deadlines to file. Please note that for companies formed prior to January 1, 2024, a BOI report must be filed by January 1, 2025 – failure to do so may result in STEEP monetary penalties for each day the filing is late.
- What is the “Corporate Transparency Act”?
The Corporate Transparency Act (CTA) is a new US law that came into effect on January 1, 2024, as part of the Anti-Money Laundering Act of 2020. The purpose of the CTA is to curtail the use of anonymous shell companies in connection with money laundering and other illegal activity.
In particular, the CTA gives the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) and other law enforcement agencies access to beneficial ownership information (BOI) submitted by corporations, limited liability companies and similar entities (“reporting companies”) that are either formed in the United States or that are registered to do business in the United States – note that “reporting companies” may include both US and Non-US entities.
Information submitted by each reporting company will be used to create a database that will allow the government to identify certain beneficial owners of all reporting companies, to assist the US in its anti-money laundering and counter-terrorism financing efforts. This database will be non-public, housed within FinCEN.
- Why should I care about the Corporate Transparency Act?
There are potentially severe civil and criminal penalties for failure to comply with the CTA. Failure to provide complete, accurate, and timely information, or willfully providing false or fraudulent beneficial owner information, may result in civil penalties of up to $500 for each day the violation continues. Criminal violations may be punished by up to two years imprisonment and up to a $10,000 fine.
While there has been some discussion about the possibility that the CTA may be overturned in the future, it is unlikely that the CTA will be overturned prior to the upcoming deadlines. Given the severe potential penalties, we are advising all companies and clients to take these filing requirements seriously and file the requested information within the applicable deadlines as further discussed below.
- What types of companies are covered under the Corporate Transparency Act?
Unless there is a specific exemption, most smaller companies formed or registered to do business in the US must comply by reporting certain information regarding beneficial ownership to FinCEN (“reporting companies”).
In particular, “reporting companies” include (a) a corporation, limited liability company, or other entity that is created by the filing of a document in the United States with a secretary of state, or a similar office of a state or Indian tribe, or (b) a corporation, limited liability company, or other entity that is formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state, or a similar office of a state or Indian tribe.
As noted above, “reporting companies” are not limited to US companies – they may include both US entities as well as non-US entities that are registered to do business in the US.
Companies exempted from CTA reporting requirements generally share one characteristic: they are already subject to strict federal or state regulation. Exempted entities include banks and credit unions, US Securities and Exchange Commission-registered entities, insurance companies, tax-exempt entities, pooled investment vehicles, and public utilities. In these cases, the beneficial owner information would already have been provided to the government as part of the regulatory process.
Another exemption applies to “large operating companies” (any entity that employs more than 20 full-time employees in the United States, has an operating presence at a physical address in the United States, and filed a US federal income tax return for the previous year demonstrating more than $5 million in gross receipts or sales). Yet another exemption applies to any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by any exempt entity. Finally, certain “inactive entities” are also exempt from the CTA reporting requirements.
For a more detailed listing of the applicable exemptions, please refer to FinCEN’s BOI Small Compliance Guide v1.1. If there are any questions regarding whether a specific exemption applies to your company, we recommend you confer with legal counsel.
- What do I have to do to comply with the Corporate Transparency Act?
Reporting companies that do not fall within a specific exemption must file a Beneficial Ownership Information (BOI) report with FinCEN. These reports may be filed via FinCEN’s website at: BOI E-FILING. In addition, for those companies using Carta & Pulley for cap table management, both of those platforms also allow for online filing of a BOI report.
The BOI filing requires that the reporting company submit certain information about the company, including “Beneficial Owner” information. In addition, reporting companies formed on or after January 1, 2024, must also submit information regarding the “Company Applicants” who prepared and submitted the filing that created or first registered the company with a Secretary of State’s office or similar office.
As part of the reporting process, reporting companies must submit a TIN (Tax Identification Number, typically an EIN (Employer Identification Number) for businesses in the US) or, where a foreign reporting company has not been issued a TIN from the US Internal Revenue Service (IRS), a tax identification number issued by a foreign jurisdiction. US companies that do not have an TIN or EIN can obtain a Tax ID from the IRS: Taxpayer identification numbers (TIN) | Internal Revenue Service
In addition, the reporting company must submit a FinCEN ID for each “Beneficial Owner” (and for reporting companies formed after January 1, 2024, a FinCEN ID for the “Company Applicant”). Each “Beneficial Owner” and “Company Applicant” must be a natural individual (not a company or entity).
Prior to the reporting company being able to complete a BOI report, each “Beneficial Owner” and “Company Applicant” must first obtain a “FinCEN ID” and provide that FinCEN ID to the reporting company to allow it to complete its BOI report.
FinCEN IDs can be obtained by each “Beneficial Owner” and “Company Applicant” through the following process:
- Visiting the FinCEN website at https://www.fincen.gov/boi
- Navigating to the section for Creating a FinCEN ID.
- Creating a login account as needed
- Completing the required information and submitting the application.
Each “Beneficial Owner” and “Company Applicant” must upload a scanned image of a government issued document such as a passport or driver’s license when requesting a FinCEN ID.
- What are the deadlines for complying with the CTA? What if I’m late in reporting?
Reporting companies in existence on or before January 1, 2024 must submit this information to FinCEN by January 1, 2025 (end of this year).
Reporting companies formed or initially registered in the US after January 1, 2024 but before January 1, 2025 must submit an initial report to FinCEN within 90 calendar days from the earlier date on which the company receives actual notice of the formation or registration, or the date on which the secretary of state or similar office first provides public notice.
Reporting companies formed on or after January 1, 2025, must submit an initial report to FinCEN within 30 calendar days.
While reporting companies do not have to report or update their BOI report annually, reporting companies must ensure that the information in their BOI report is kept current. The reporting company must report changes to information about the company (e.g., the addition of a trade name or a change of the main address) as well as information about new beneficial owners and changes to existing beneficial ownership information or documentation (e.g., a change of a beneficial owner’s residential address) no later than 30 days after the date on which the change occurred.
Failure to provide complete, accurate, and timely information, or willfully providing false or fraudulent beneficial owner information, may result in civil penalties of up to $500 for each day the violation continues. However, a safe harbor exists for a safe harbor for reporting companies who inadvertently report erroneous information to FinCEN: a reporting company will not incur penalties for filing an inaccurate BOI report provided it is corrected within 90 calendar days of when it was filed.
- What information do I have to report under the CTA?
For reporting companies, the initial BOI report must include the following information about the reporting company:
- Full legal name
- Trade or fictitious names used
- Address of the principal place of business
(must be a U.S. street address and cannot be a P.O. box; for reporting companies whose principal place of business is outside the U.S., this would be the current address from which the company conducts business in the U.S. (for example, a foreign reporting company’s U.S. headquarters))
- Jurisdiction of formation or, in the case of a foreign company, jurisdiction in which first registered
- Taxpayer Identification Number (TIN) or, where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction.
In addition, the reporting company must submit a FinCEN ID for each Beneficial Owner and a FinCEN ID for the Company Applicant (if the reporting company is formed after January 1, 2024).
With respect to filing for a FinCEN ID, the Beneficial Owner or Company Applicant must submit the following information: (i) full legal name; (ii) date of birth; (iii) current residential street address (or business street address in the case of a company applicant); and (iv) a unique identifying number from an acceptable identification document (eg government issued document such as a passport or driver’s license).
- Who is a “Beneficial Owner” under the CTA?
The CTA provides for a two-prong test as to who constitutes a “Beneficial Owner” with respect to a reporting company. A “Beneficial Owner” is an individual (eg a natural person, not an entity) who, directly or indirectly:
(a) exercises substantial control over the reporting company (the “substantial control” prong); or
(b) owns or controls at least 25% of the ownership interests of the reporting company (the “25% ownership” prong).
There is no limit to the number of beneficial owners a reporting company may have, although for early stage companies, it is often the founders and/or early lead investors who often meet the definition of Beneficial Owners (further detail regarding each of the “substantial control” and “25% ownership” prongs below).
Where, as may often be the case for early stage, private venture backed companies, a fund or institutional investor meets the “Beneficial Owner” definition for a reporting company, then the fund or institutional investor must provide the FinCEN ID for an individual who exercises substantial control over such fund or investing entity, often the managing director or other general partner for such fund or investing entity.
- What constitutes “substantial control” for purposes of determining who is a “Beneficial Owner” under the CTA?
Unfortunately with respect to the “substantial control” prong the definition in the CTA is expansive. There are four general criteria for whether an individual exercises “substantial control” over a reporting company:
- Serves as a senior officer of the reporting company (e.g., president, secretary, treasurer, CEO, COO, CFO or general counsel)
- Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body)
- Directs, determines, or has substantial influence over important decisions made by the reporting company; or
- Has any other form of substantial control over the reporting company.
A number of considerations come into play with respect to each of the four general criteria regarding substantial control. For instance, the third criteria “Directs, determines, or has substantial influence over important decisions made by the reporting company” includes the exercise of substantial influence over “important decisions”, such as:
- Amendments of governance documents, such as the articles of incorporation, bylaws, and
significant policies and procedures
- The nature and scope of the entity’s business or selection or termination of business lines or
areas of geographic focus
- The reorganization, dissolution or merger of the entity
- The sale, lease, mortgage or transfer of the entity’s “principal assets”
- The approval of the entity’s operating budget
- Major expenditures or investments
- Agreement to or termination of significant contracts
- Compensation and incentives for senior officers
As can been seen, these factors relating to the third general criteria, along with the final “catch-all” fourth criteria of “any other form of substantial control over the reporting company” is largely fact driven. Given the breadth and fact-driven nature of the determination relating to “substantial control”, we suggest that you confer with your legal counsel regarding reviewing these provisions to understand who may be considered a Beneficial Owner under the “substantial control” prong.
- What constitutes “25% ownership” for purposes of determining who is a “Beneficial Owner” under the CTA?
The CTA provides for five categories of interests that could potentially qualify as an “ownership interest”:
- Equity, stock, and similar instruments, including both voting and non-voting shares
- Any capital or profit interest, including limited and general partnership interests
- Any proprietorship interest
- Any instrument convertible into any of the above, including any future, warrant or convertible debt
- Any put, call, straddle, or other option on any of the above
- any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership
While it may seem that determining whether the 25% interest is met for a particular beneficial owner should be relatively straight forward, a few things need to be considered that could potentially complicate the determination:
- Any of the above interest should be considered, whether held directly or indirectly (eg holdings by affiliates or entities under common control may need to be aggregated)
- Options or convertible interests must be assumed to be exercised or converted for purposes of the calculations
- If calculations cannot be performed to identify 25% ownership with reasonable certainty (eg for instance calculating conversion of a SAFE), any individual who owns or controls 25% or more of any class or type of ownership interest of a reporting company is deemed to own or control 25% or more of the ownership interests of the reporting company and therefore must be identified as a Beneficial Owner.
For these reasons we recommend that you confer with your counsel regarding making determinations with respect to whether a particular investor or owner holds 25% or more ownership.
- Who has access to information reported under the CTA? Is this information public?
Beneficial ownership information provided to FinCEN is confidential and may not be publicly disclosed by any government representative or the officers and employees of financial institutions that have access to the data.
Notwithstanding the foregoing, CTA provides that, with limited exceptions, the information may be accessible by US government law enforcement, prosecutors, the courts, and national security agencies. And in some cases, the information may be disclosed if requested by a federal agency to assist the law enforcement, courts, prosecutors, or judges of a foreign country. In addition, financial institutions may have access to the information for due diligence purposes with consent of the reporting company.
However, information may not be disclosed to any of the above unless requested, meaning FinCEN does not appear to have the ability to send data to another federal agency on its own accord.
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