Boston, MA (December 18, 2023) – The Corporate Transparency Act (“CTA”, or the “Act”) was enacted on January 1, 2021 to prevent and combat illicit corporate activities including money laundering, terrorist financing, and tax fraud. In addition to expanding existing anti-money laundering regulations, the Act also created reporting requirements for certain domestic and foreign business entities via the Treasury Department’s Financial Crimes Enforcement Network’s (FinCEN) Beneficial Ownership Reporting Rules. These rules are the primary subject of this alert.
The CTA and its accompanying FinCEN reporting rules require “Reporting Companies” to file a Beneficial Ownership Information Report (“BOI Report”) with FinCEN. Properly filed BOI Reports must include identifying information about the Reporting Company, its “Beneficial Owner(s)”, and, if the company was formed on or after January 1, 2024, the “Company Applicant(s)”. The Beneficial Ownership Reporting Rules go into effect on January 1, 2024. The CTA is far reaching and will impact tens of millions of businesses. This alert aims to help business owners and their counsel to ensure compliance with the CTA by providing a broad summary of the CTA’s BOI Reporting Rules, as well as highlighting key concepts that businesses should consider as they begin preparing their operations for compliance.
In addition to this alert, business owners may refer to FinCEN’s CTA Small Business Compliance Guide and Fact Sheet for more detailed information. FinCEN also provides periodic updates on proposed rule changes and other reference materials via their BOI Reporting webpage.
Definitions You Need to Know
“Reporting Company” is a broadly defined term inclusive of two different categories of entity: “Domestic Reporting Companies”, and “Foreign Reporting Companies”. Domestic Reporting Companies include domestic corporations, LLCs, LLPs, business trusts, and any other entity that is created by a filing with a federal or state government office. Entities that are not formed via a federal or state filing, including most sole proprietorships and general partnerships, are not Domestic Reporting Companies.
Foreign Reporting Companies are entities formed under the law of a foreign country that have registered to do business in the United States via a filing with a state’s secretary of state or equivalent office.
The CTA specifically carves out 23 exemptions to this definition, including tax exempt entities, publicly traded companies, and other types of entities that already report to FinCEN or other federal/state regulatory bodies such as the SEC. Notable among these exemptions are “Large Operating Companies”, which are defined as companies a) employing 20+ full-time employees; b) having an operating presence at a physical office within the US; and c) having filed a federal income tax or information return in the US for the previous year demonstrating more than $5m in gross receipts or sales.
Companies that are not Reporting Companies or otherwise fall under any of the 23 exemptions listed in the CTA are not subject to the Act’s reporting requirements. You may check to see if your business entity falls under one or more of the Reporting Company exemption categories using this chart in FinCEN’s CTA Small Business Compliance Guide.
All Beneficial Owners of a Reporting Company must be listed in that Reporting Company’s BOI Report. A “Beneficial Owner” is someone who either exercises “substantial control” over the company, or who owns or controls at least 25 percent of the company’s ownership or economic interests. To be clear, a person who exercises “substantial control” over the company, but does not have any ownership interest in the company, should still be categorized as a Beneficial Owner for BOI reporting purposes. Exemptions include a) minor children; b) nominees/intermediaries/custodians/agents; c) people acting solely as an employee (excluding senior officers); d) people whose only interest comes from an unvested right of inheritance; and e) creditors with no beneficial ownership rights. Exempted persons do not have to be listed in the BOI Report as Beneficial Owners.
For purposes of determining an entity’s Beneficial Owner(s), “substantial control” is an intentionally broad term meant to encourage disclosure and discourage exotic corporate structures designed to circumvent reporting requirements or facilitate illegal activity. Factors to consider when determining a potential Beneficial Owner’s substantial control over an entity include that person’s role as a senior officer of the company, the extent of their authority to appoint or remove senior officers/a majority of the board, their ability to influence important company decisions, and any other factor that may point to substantial control. None of these factors are determinative, however, and FinCEN encourages taking an inclusive approach to identifying Beneficial Owners.
If a Reporting Company is formed on or after January 1, 2024, the entity’s Company Applicant(s) must also appear in the BOI Report. An entity’s “Company Applicant” is the individual or individuals who filed the documents creating the entity and were primarily responsible for directing or controlling the filing of the relevant formation documents. The Company Applicant is often the entity’s legal representation/general counsel. For clarity, if the Reporting Company was formed prior to January 1, 2024, Company Applicants do not need to be identified in the BOI Report.
Note that more than one person may be a Company Applicant for a given entity. If two or more people were involved in the entity’s formation filings, then exactly two people should be designated as Company Applicants in the BOI Report. Those people should be (1) the person who directly filed the document that created or registered the company with the state, and (2) the person who was primarily responsible for directing or controlling the filing. Put another way, the Company Applicants should be the first person and the last person in the “filing chain”. Intermediary actors in that process or “chain” – other attorneys, paralegals, office staff, etc. – should not be listed as Company Applicants.
For example, a business’s Company Applicants may be (1) a supervising attorney whose client requested that they form a business entity on their behalf, and (2) the paralegal or attorney who actually filed the entity’s formation documents with the state under the supervising attorney’s direction. The supervising attorney began the “chain” by initiating and directing the filing process, and the paralegal ended it by actually filing the formation documents with the state. While other staff at the law firm may have been involved in the process – e.g. office staff printing or mailing documents on the attorney or paralegal’s behalf, other attorneys reviewing prepared formation documents, etc. – those people should not be listed as Company Applicants.
For more detailed information, see Section E. of FinCEN’s BOI Reporting Fact Sheet.
BOI Report Requirements/Filing Instructions
All BOI Reports must include the following, regardless of when the Reporting Company was formed:
- The company’s full legal name;
- Any d/b/a names;
- Complete current street address of the principal place of business;
- Jurisdiction of formation;
- The company’s EIN/TIN;
- The full legal name of each Beneficial Owner;
- Each Beneficial Owner’s date of birth;
- The Beneficial Owners’ residential street addresses;
- A unique identifying number and issuing jurisdiction from a passport, state ID, etc. for each Beneficial Owner; and
- A copy of that ID for each Beneficial Owner.
If a Reporting Company is formed on or after January 1, 2024, the Reporting Company should also include the following information relating to its Company Applicant(s):
- Each Company Applicant’s TIN;
- The full legal name of each Company Applicant;
- Each Company Applicant’s date of birth;
- Each Company Applicant’s residential or business street address (see below);
- A unique identifying number and issuing jurisdiction from a passport, state ID, etc. for each Company Applicant; and
- A copy of the Company Applicant’s ID.
Note that if the Company Applicant(s) formed or registered the entity in the course of doing business (e.g. lawyers and paralegals), such Company Applicants should provide their business address instead of their residential address.
After a Reporting Company has filed its initial BOI Report, it will also have an ongoing responsibility to file an updated BOI Report if there is any change to the required information about itself or its Beneficial Owners. Updated BOI Reports must be filed within 30 days of the date on which the change occurred.
In lieu of providing personal information directly via a BOI Report, Reporting Companies, Beneficial Owners, and Company Applicants will be able to provide the required information directly to FinCEN in exchange for a FinCEN Identifier. This Identifier can be used in BOI Reports from that point on so long as the person or entity updates their information on the FinCEN record within 30 days of any change. As of this writing, attorneys and paralegals may only obtain FinCEN Identifiers as individuals and cannot get a single, firm-wide FinCEN Identifier, although that may change as FinCEN adapts and updates its enforcement guidelines. Individuals will be able to request a FinCEN identifier via an electronic web form on or after January 1, 2024.
BOI Reports will be filed via an electronic web form on the Beneficial Ownership Secure System (BOSS) and will not be able to be printed out and filed physically. Neither the BOI Report web form nor the BOSS has been made public, although both are expected to be publicly accessible starting on January 1, 2024. You may keep track of updates regarding the BOI Report web forms and BOSS via FinCEN’s BOI Reporting webpage.
Reporting Companies will be able to file their BOI Reports beginning on January 1, 2024. Reporting Companies formed before January 1, 2024 must file their report before January 1, 2025. Those formed on or after January 1, 2024, but before January 1, 2025, must file their report within 90 days of formation, beginning on the earlier of (1) the date upon which the Reporting Company received actual notice from the state that its formation is effective, or (2) the date upon which the state first provides public notice of the company’s formation. Similarly, Reporting Companies formed on or after January 1, 2025 must file their report within 30 days of formation.
Failure to comply with BOI Report requirements under the CTA can result in severe civil and criminal penalties. Willfully providing false or fraudulent information on a BOI Report, willfully failing to provide complete information on a BOI Report, and willfully failing to update information on a BOI Report may be penalized by:
- Up to $500 for each day a violation continues, up to $10,000; and/or
- Up to two years in prison.
Addressing the concerns of many commentators around the inappropriate use and disclosure of BOI reported by companies as required under the CTA, the Act also provides for stiff penalties against the unauthorized use and disclosure of BOI. Knowingly disclosing BOI obtained via unauthorized access to such BOI may result in the following penalties:
- Up to $500 per day that the violation continues, up to $250,000; and/or
- Up to five years in prison.
If a person or entity knowingly discloses BOI without authorization while violating another US law or as part of a pattern of illegal activity involving more than $100,000 in a 12 month period, the dollar maximum increases to $500,000, and the prison maximum increases to ten years.
Legal Challenges and Uncertainties
Businesses should note that the application and enforcement of the CTA’s reporting requirements may change significantly over the coming months and years. Congress has placed FinCEN’s rulemaking in relation to enforcing the CTA reporting requirements under considerable scrutiny in recent months, which may result in alterations to the regulatory scheme outlined in this alert. For example, a House bill called the Protecting Small Business Information Act of 2023 (H.R. 4035) would, if passed, move the effective date of BOI reporting requirements from January 1, 2024 to a later date after FinCEN finalizes proposed rules relating to permitted and unauthorized access to BOI and the reports containing it. The constitutionality of the CTA itself has also been challenged in the Northern District of Alabama in National Small Business United v. Yellen.
Nevertheless, businesses, their stakeholders and legal counsel should move forward operating on the assumption that the CTA’s reporting requirements will go into effect as described in this alert as of January 1, 2024.
Don’t be Scammed!
There have been a number of recent attempts by scammers to fraudulently solicit information from entities and individuals that may be subject to the CTA’s reporting requirements. Scammers will typically send an email or letter claiming to be from FinCEN and asking the recipient to scan a QR Code or click a URL to comply with CTA reporting requirements. FinCEN does not send unsolicited information requests. If you or your business receives any such email or letter, it is fraudulent, and you should not send any response or interact with any URL or QR code included in the correspondence.
Despite the uncertainties and potential rule changes discussed above, businesses operating in the United States should begin preparing as soon as possible to ensure compliance with the CTA’s reporting requirements as they presently stand. Businesses can do so by collaborating with legal counsel to determine their specific reporting obligations, and by establishing processes to gather, store, monitor, and report the required information.
If you would like more information about the contents of this alert or you would like to consult with one of our attorneys concerning your reporting obligations, please contact any of the following: