What this is: The Corporate Transparency Act (CTA) is a law aimed at preventing criminals from using business entities to commit crimes. The goal of the CTA, along with its enforcement guidelines, is to supply vital data to law enforcement, national security organizations and other parties in order to thwart criminals, terrorists, weapons proliferators and unscrupulous oligarchs from concealing illegal funds or assets within the United States.
What this means: There are many nuances to the law. Let’s answer some of the basic questions many of you have about what this is, what it does and what it means to you and your business.
What is the Corporate Transparency Act?
The CTA was passed into law on January 1, 2021, after 13 years in the making. The CTA creates beneficial ownership disclosure requirements aimed to prevent criminals from using anonymously owned companies for illicit activities such as money laundering, tax evasion and terrorism financing. The CTA requires all “reporting companies” to disclose to the Financial Crimes Enforcement Network (FinCEN), personal identifying information (PII) for each of the “reporting company’s” “beneficial owners” and “company applicants.” FinCEN is storing the information in a secure, confidential database, not available to the public and only accessible to certain authorized parties.
On September 29, 2022, FinCEN issued Final Rules on beneficial ownership information reporting (the Final BOI Reporting Rules). The Final BOI Reporting Rules are the first of 3 sets of regulations that FinCEN is responsible for creating related to the CTA. On December 22, 2023, FinCEN issued Final Rules on protocols for access to and disclosure of the beneficial ownership information to authorized parties (the Final Access Rules). FinCEN has 1 year from the CTA’s January 1, 2024 effective date to issue its third set of rule-making, which will address amendments to the Customer Due Diligence section of the Bank Secrecy Act.
When Did it Take Effect?
The CTA took effect on January 1, 2024.
What Are Some Key Terms Found in the CTA?
A “reporting company” is defined in the CTA as “a corporation, LLC or other similar entity that is created by the filing of a document with the Secretary of State or a similar office under the law of a state or Indian Tribe; or formed under the law of a foreign country and registered to do business in the US by the filing of a document with such a filing office.” The CTA does not further define “other similar entity” and neither does FinCEN in its Final BOI Rules. But FinCEN does emphasize that “the core consideration for the purposes of the CTA’s statutory text and the final rule is whether an ‘entity’ is ‘created’ by the filing of the document with the relevant authority.”
A “beneficial owner” is defined in the CTA as an “individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, exercises substantial control over the entity, or owns or controls 25 percent or more of the ownership interests of the entity.” The definition excludes minors and certain others. The Final BOI Reporting Rules describe “substantial control” in more detail.
An “applicant” (referred to as a “company applicant” in the Final BOI Reporting Rules) is defined in the CTA as “any individual who files an application to form a corporation, limited liability company or other similar entity under the laws of a state or Indian Tribe; or registers or files an application to register a corporation, limited liability company or other similar entity formed under the laws of a foreign country to do business in the US.” The Final BOI Reporting Rules specify that the term “company applicant” means “the individual who directly files the document to create or register the reporting company, and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.”
What Do Reporting Companies Need to Report to FinCEN?
All “reporting companies” are required to disclose to FinCEN information about the reporting company itself: Its true name, any assumed names, the state of formation and physical address for its principal place of business, as well as the following information for each of the reporting company’s beneficial owners: Full legal name, date of birth, residential address and unique identifying number (e.g., unexpired state identification card number, unexpired driver’s license number or an unexpired US passport number or if the beneficial owner does not have any of these identifying documents, then a foreign passport) and provide a scanned copy of the identifying document. Additionally for reporting companies formed on or after January 1, 2024, the reporting company also needs to disclose the following information for each of its company applicants (up to 2): Full name, date of birth, business address (if the individual forms entities in the course of the individual’s employment, and the residential address if the individual does not), the unique identifying number from the identifying document and provide a scanned copy of the identifying document
What Makes an Individual 'Primarily Responsible' for Directing or Controlling the Filing of a Formation Document?
FinCEN recently added more FAQs to its website to help clarify the definition of company applicant and states the following:
At most, 2 individuals need to be reported as company applicants:
- The person who directly files the document with a secretary of state or similar office, and
- If more than one person is involved in the filing of the document, the person who is primarily responsible for directing or controlling the filing.
For the purposes of determining who is a company applicant, it is not relevant who signs the creation or registration document, for example, as an incorporator. To determine who is primarily responsible for directing or controlling the filing of the document, consider who is responsible for making the decisions about the filing of the document, such as how the filing is managed, what content the document includes and when and where the filing occurs.
What is a FinCEN Identifier and How Can I Get One?
A FinCEN Identifier is a unique number that FinCEN will issue to either a reporting company, beneficial owner or a company applicant. A reporting company can provide a beneficial owner’s or company applicant’s FinCEN Identifier on its BOI Report in lieu of having to provide the beneficial owner’s or company applicant’s PII on the report. An individual can obtain a FinCEN Identifier by applying for one online and supplying the information to FinCEN that would otherwise be required on the report along with a scanned copy of the identifying document. FinCEN began accepting FinCEN Identifier applications on January 1, 2024. Once an individual provides the requisite information to obtain a FinCEN Identifier, FinCEN’s electronic filing system issues the FinCEN Identifier immediately. FinCEN requires those with FinCEN Identifiers to keep their information up to date with FinCEN and notify FinCEN within 30 days of any changes to the individual’s name, address or identifying document number.
Are There Any Exemptions to the Reporting Requirements?
The CTA provides 23 exemptions to the reporting company definition, including any entity that: Employs more than 20 full-time employees in the US, in the previous year filed federal income tax returns in the US demonstrating more than $5 million in gross receipts or sales in the aggregate and has an operating presence at a physical office within the US. The exemptions in the CTA also include many industries that are already heavily regulated, such as banks and insurance providers, as well as publicly traded companies subject to SEC reporting.
When Does a Reporting Company That is Formed or Registered on or After the January 1, 2024 Effective Date Need to File its BOI Report?
Reporting companies that are newly formed or registered on or after the January 1, 2024 effective date must file initial BOI reports within 30 days* from the earlier of: “The date on which the reporting company receives actual notice that its creation (or registration) has become effective; or a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the reporting company has been created (or registered).” The initial BOI report must include the required information/documentation about the reporting company, its beneficial owners and its company applicants.
| *NOTE: On November 29, 2023 FinCEN extended the deadline for reporting companies created or registered in 2024 to file their initial reports from 30 to 90 calendar days. Companies formed or registered on or after January 1, 2025, will need to follow the 30-day rule for filing the initial BOI report. |
What About Pre-Existing Reporting Companies? When Do They Need to File BOI Reports?
Reporting companies that were in existence prior to the January 1, 2024 effective date must file their initial BOI reports within a year of the effective date. The initial BOI report must include the required information/documentation about the reporting company and its beneficial owners. Importantly, the Final Rules do not require reporting companies existing prior to January 1, 2024 to include company applicant information in their BOI reports. In its commentary to the Final BOI Reporting Rules, FinCEN noted the potential burden on those reporting companies in having to locate company applicants and indicated that, for reasons explained in the commentary, the burden outweighs the potential usefulness of this information.
What if Inaccuracies Are Discovered in the Initial BOI Report After it's Filed, or if the Information in the Initial BOI Report Changes?
The Final BOI Reporting Rules require reporting companies to correct any inaccurate information in the initial BOI report within 30 days from when the inaccuracy is discovered. For information that has changed since the initial BOI report filing, the reporting company has 30 days from the date of the change to file an updated report.
What Happens if a Reporting Company Fails to File a Report?
The CTA includes substantial civil and criminal penalties for willful failure to report, willfully providing false or fraudulent information and for unauthorized disclosure or use of the reporting information. Penalties for reporting violations can be as high as $10,000 or 2 years in prison, or both, and penalties for unauthorized disclosure or use violations can be up to $250,000 or 5 years in prison, or both (or higher if part of violating another law).
What About Delayed Effective Dates? If I Submit Formation Documents in 2023 With a Delayed Effective Date of January 1, 2024 or Later, When is the Entity Considered 'Formed' for Reporting Deadline/Requirement Purposes?
The CTA and FinCEN’s final BOI rules do not address such delayed effective dates expressly, and FinCEN has noted that filing rules often vary state to state. Generally, however, it appears that since the entity would not come into existence until the delayed effective date, the “formation” date would likely be on the delayed effective date rather than on the date of submission to the filing office.
Who is Responsible for Filing the BOI Report?
The reporting company itself is responsible for submitting its BOI report to FinCEN. However, FinCEN has stated that it will allow third parties, such as law firms and registered agents, to submit BOI reports on a reporting company’s behalf, provided that the reporting company authorized the third party to do so.
Who Certifies the BOI Report?
The reporting company itself is required to certify that the BOI report it submits to FinCEN is true, accurate and complete. The individual submitting the BOI report is required to check a box certifying on behalf of the reporting company.
What if the Reporting Company Does Not Have a Principal Place of Business Address? Can it Instead Provide a PO Box on its BOI Report?
No. FinCEN states in its preamble to the final BOI reporting rules that a reporting company cannot use a PO Box or a third party’s address for its address on the BOI report.
More Corporate Transparency Act Resources
We have resources to help you understand the history and impact of the CTA. Start with Key Points on the CTA and Beneficial Ownership Requirements, which is a brief video introduction to the CTA, created far in advance of recent developments.
And just in case you missed our other webinars in this series, why not watch them on demand as well? You’ll get a good sense of where this act started, what it means and where it’s going.
Beneficial Ownership Disclosure Requirements Part 2: The Proposed Rules Interpreting & Clarifying the New Corporate Transparency Act.
Beneficial Ownership Disclosure Requirements: What the New Corporate Transparency Act Means for All Business Entities in the US.
This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
