The Corporate Transparency Act Will Impose Unprecedented Federal Reporting Requirements On U.S. Business Owners In 2024
John D. Mirkin
Background. Starting on January 1, 2024, many newly formed companies and millions of existing companies in the United States (“U.S.”) will be required to report certain personal information about their beneficial owners to the federal government for the first time. These federal reporting requirements have been set forth under the Corporate Transparency Act (“CTA”), which mandates the creation of a federal database of “Beneficial Ownership Information” (defined below) maintained by the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). FinCEN is developing an information technology system called Beneficial Ownership Secure System (“BOSS”), where companies will submit reports electronically.
Unlike several other countries, the U.S. does not currently have a centralized database of information about the owners and operators of legal entities within the country. Although state and local laws vary, most jurisdictions do not presently require the identification of an entity’s beneficial owners upon or after formation. The stated purpose of the CTA is to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity.”
The goal is for this increased transparency to assist U.S. government agencies in targeting financial criminals and other bad actors operating through shell companies. For example, more than $300 billion dollars in concealed transactions is moved around the U.S. every year, according to the Federal Bureau of Investigation (“FBI”) and a U.S. Department of Treasury report.
Which Companies Will Need to Report? It is estimated that around 90% of all domestic entities will be subject to the reporting requirements. All domestic entities must report if they do not meet an applicable exemption from the reporting requirements.
Exemptions From Reporting Requirements. There is a “large operating company” exemption for companies that satisfy the following requirements:
Filed federal income tax returns in the previous year showing more than $5 million in gross receipts or sales from sources within the U.S.; and
An operating presence at a physical office in the U.S.
There are also exemptions for companies that operate in certain heavily regulated industries. These exempted industries include but are not limited to publicly traded registered issuers of securities, registered investment advisors, registered investment companies, registered broker-dealers, banks, public utilities, credit unions, governmental authorities, 501(c)(3), and political organizations, exchange and clearing agencies, insurance companies, and certain business concerns affiliated with State or Indian Tribes.
Subsidiary companies that are wholly owned or controlled, either directly or indirectly, by most exempt entities will also be exempt from the reporting requirements. The exemption for subsidiaries will not apply to pooled investment vehicles, certain tax-exempt entities, and money service businesses.
Timing of Reporting. The reporting requirement will be immediate (within 30 days after formation) for entities that are formed after January 1, 2024. Existing entities will have one year (until January 1, 2025) to file the report with FinCEN.
What is the Penalty for Not Reporting? The CTA provides significant penalties for failing to file a report or providing false information. These penalties include monetary fines of up to $10,000, two years in prison, or both. Fines may be up to $500 each day that the report is late (capped at $10,000).
What Information Must be Reported? The CTA requires that each reporting company must report certain information regarding the beneficial owners of the reporting company. This information is known as “Beneficial Ownership Information” (“BOI”). Companies will also need to report similar information about the person(s) who formed the entity (the “applicant”). Specifically, each beneficial owner and each applicant will be required to report:
Full legal name
Date of birth
For an applicant who registers companies as a part of the applicant’s business, such as a professional advisor, the complete address of the applicant’s business, and in all other cases, the individual’s residential address
Unique identifying number, such as from a passport, driver’s license, or state-issued ID number
An image of the document used for identification
Who is a Beneficial Owner? Generally, a beneficial owner is defined as any individual who, directly or indirectly:
Owns or controls at least 25% of the reporting company; or
Exercises “substantial control” over the reporting company.
Factors indicating substantial control include:
A position as a senior officer of a reporting company
Authority over the appointment or removal of any senior officer
Direction, determination, or substantial influence over important decisions made by the reporting company, including the sale, lease, or transfer of any principal assets of the reporting company; the entry into or termination of significant contracts, major expenditures, investments by the company, compensation schemes for senior officers, etc.)
There is also broad catch-all language in the CTA, providing that “any other form of substantial control over the reporting company” is included.
Expedited Annual Reporting for Owners and Applicants: FinCEN Identifiers. According to FinCEN, applicants and beneficial owners will be able to apply for and obtain “FinCEN identifiers” by submitting their BOI to FinCEN. Once approved and issued a FinCEN identifier, beneficial owners and applicants would then report their FinCEN identifier (instead of their BOI), which would link to the BOI they had provided and make reporting easier for individuals who frequently serve as applicants or individuals who are the beneficial owners of multiple entities.
FinCEN is still developing the BOSS system, which will process and store the information that companies will be required to report. Our firm is monitoring guidance from FinCEN as it continues to develop. In the meantime, companies, business owners, and their advisors should proactively determine whether these reporting requirements are applicable or if an exception can be met. Entities that will be required to report should identify beneficial owners and prepare to request the necessary BOI from them.
If you have questions about the CTA, please contact our Corporate team.