Corporate Transparency Act and its reporting requirements
On January 1, 2021, the United States Congress passed the National Defense Authorization Act (NDAA), which included the Corporate Transparency Act (CTA). The CTA’s purpose is to establish a federal database for the collection of beneficial ownership information (BOI) for corporations, limited liability companies and other similar entities. Notably, BOI must be reported for both newly-formed and existing entities. MSI's NYC law member Moses Singer provides further insight.
In adopting the CTA, Congress noted that more than 2,000,000 corporations and limited liability companies are being formed under the laws of the States each year. Congress further explained that, given most states do not require the filing or reporting of the beneficial owners of such entities, malign actors are able to conceal their ownership of such entities to facilitate illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, harming the national security interests of the United States and allies of the United States.
While the information collected pursuant to the CTA is to be used to facilitate important national security, intelligence and law enforcement activities, the reality is that most small businesses in the United States, and foreign businesses registered to do business in the United States, will be affected by the CTA, regardless of whether they pose a threat to national security.
On September 30, 2022, the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN) published its final rule (the “Final Rule”) implementing the CTA’s BOI reporting requirements. This alert will briefly review the BOI reporting requirements under the Final Rule.
Reporting Companies – Which Entities Must Report BOI?
Under the CTA, reporting companies (as described below,“reporting companies”) are required to provide a BOI report detailing their beneficial owners (as described below, “beneficial owners”). Further, reporting companies formed (in the case of domestic reporting companies) or registered to do business in the United States (in the case of foreign reporting companies) on or after January 1, 2024 are also required to detail their company applicants (as described below, “company applicants”). Reporting companies are, unless an exemption provided by the Final Rule applies, entities (i) “created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe” or (ii) “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 under the laws of a State or Indian Tribe.” Thus, corporations, limited liability companies, limited partnerships, and other entities that require a filing to establish legal existence will be considered a reporting company unless an exemption applies. On the other hand, general partnerships, trusts and other entities that do not require a filing to establish existence will not be considered reporting companies, although the beneficial owners of such an entity are subject to being reported be reported if such an entity owns a reporting company.
The CTA provides for 23 exemptions from being considered a reporting company. The Final Rule explains that many of the exempt entities are already subject to substantial federal and/or state regulation or are already required to report the BOI to a governmental authority. The exempt entities are as follows:
- Securities reporting issuer;
- Governmental authority;
- Credit union;
- Depository institution holding company;
- Money services business;
- Broker or dealer in securities;
- Securities exchange or clearing agency;
- Other Exchange Act registered entity;
- Investment company or investment adviser;
- Venture capital fund adviser;
- Insurance company;
- State-licensed insurance producer;
- Commodity Exchange Act registered entity;
- Accounting firm;
- Public utility;
- Financial market utility;
- Pooled investment vehicle;
- Tax-exempt entity;
- Entity assisting a tax-exempt entity;
- Large operating company;
- Subsidiary of certain exempt entities;
- Inactive entity.
If a company is considered a reporting company under the CTA, then the company must provide FinCEN with certain information about the company and BOI of the beneficial owners and company applicants.
Reporting Company Information to be Reported
The reporting company must provide its (i) full legal name, (ii) (x) for reporting companies with a principal place of business in the United States, street address of the principal place of business, or (y) for reporting companies with a principal place of business outside of the United States, street address of the primary location in the United States where the reporting company conducts business, (iii) jurisdiction of formation, (iv) United States tax identification number (TIN) or foreign tax identification number for foreign reporting companies without a TIN.
BOI – What BOI Must a Reporting Company Report?
A reporting company must provide the following information for each of its beneficial owners: (i) full legal name, (ii) date of birth, (iii) current residential address, and (iv) a unique identifying number from an acceptable identification document. Acceptable identification documents are: (i) a nonexpired passport issued by the United States, (ii) a nonexpired identification document issued by a State, local government, or Indian Tribe to the individual acting for the purpose of identification of that individual, (iii) a nonexpired driver's license issued by a State, or (iv) if the individual does not have one of the above, a nonexpired passport issued by a foreign government. Further, the reporting company must submit an image of the acceptable identification document.
For reporting companies formed (in the case of domestic reporting companies) or registered to do business in the United States (in the case of foreign reporting companies) on or after January 1, 2024, the reporting companies will also need to provide similar information for company applicants and submit an image of the acceptable identification document.
Beneficial Owners – Who is a Beneficial Owner of the Reporting Company?
A beneficial owner is any individual who, directly or indirectly (i) exercises substantial control over a reporting company or (ii) owns or controls 25% or more of the ownership interests of a reporting company. FinCEN expects that every reporting company will have at least one beneficial owner to report, but there is no maximum number of beneficial owners to be reported.
FinCEN provided additional guidance on what will constitute substantial control. An individual exercises substantial control if the individual meets any of the following criteria: (i) the individual is a senior officer (president, chief financial officer, general counsel, chief executive officer, chief operating officer or any other officer, regardless of official title, who performs a similar function as these officers), (ii) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company, (iii) the individual is an important decision-maker, or (iv) the individual has any other form of substantial control over the reporting company. The reporting company must identify all individuals who exercise substantial control and provide the aforementioned BOI for each individual in the reporting company’s BOI report.
FinCEN also provided guidance on what constitutes ownership interests. Ownership interests can be equity, stock, or voting rights; a capital or profit interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership. It is important to note that an individual’s indirect ownership interests will also be counted (e.g., owning an intermediary entity that owns ownership interests in the reporting company or an individual’s ownership interests are held by another individual acting as a nominee, intermediary, custodian or agent). This also includes individuals that hold certain powers or rights over a trust, such as the power to make a distribution, the right to receive all of the income and principal of a trust, and the power to revoke a trust. The reporting company must provide BOI information for all individuals who (i) exercise substantial control over the reporting company or (ii) own or control 25% or more of the ownership interests of a reporting company. While beneficial ownership may be straight-forward in many instances, a more detailed review may be necessary for more complicated ownership structures.
The CTA also provides for exceptions to the definition of beneficial owner, including for: (i) a minor child, (ii) a nominee, intermediary, custodian, or agent of an actual beneficial owner, (iii) an employee that is not a senior officer, (iv) an individual with a future interest in the reporting company (e.g., through a right of inheritance), and (v) a creditor.
Company Applicant – Who is a Company Applicant of the Reporting Company?
FinCEN explains that there are two types of company applicants: (i) a direct filer and (ii) the individual who directs or controls the filing action. A direct filer is the individual who directly filed the (i) formation document of a domestic reporting company or (ii) the registration document for a foreign reporting company. Every reporting company will have a direct filer company applicant. The other category of company applicant is an individual who is responsible for directing or controlling the filing action (e.g., an individual that is to be an owner of the company who directs a filing agent to file the formation document on behalf of the company). This person is considered a company applicant, even though he or she did not directly file any documents.
Only reporting companies formed (in the case of domestic reporting companies) or first registered to do business in the United States (in the case of foreign reporting companies) on or after January 1, 2024 are required to report its company applicants. A maximum of two company applicants are to be reported.
FinCEN Identifier – What is a FinCEN Identifier and Who can use a FinCEN Identifier?
A “FinCEN identifier” is a unique identifying number that an individual or entity can apply for. In order to obtain a FinCEN identifier, the individual or entity must provide FinCEN with the BOI information described above (in the case of an individual) or the reporting company information required above (in the case of an entity). An individual will be able to electronically apply for a FinCEN identifier. After an individual receives a FinCEN identifier, the individual’s FinCEN identifier may be used on future BOI reports in place of the required BOI information (e.g., the reporting company would use a beneficial owner’s or company applicant’s FinCEN identifier in place of the BOI of such individual for the reporting company’s BOI report). An entity will have the option to apply for a FinCEN identifier when it submits its BOI report. Individuals and entities will be responsible for updating or correcting the information provided to FinCEN for the FinCEN identifiers. The FinCEN identifier could be useful to individuals that are beneficial owners of more than one reporting company or intend to form more than one reporting company.
Timing of Reports – When do BOI Reports need to be Filed?
For reporting companies that were formed (in the case of domestic reporting companies) or first registered to do business in the United States (in the case of foreign reporting companies) prior to January 1, 2024, the BOI report must be filed by January 1, 2025. For reporting companies that were formed (in the case of domestic reporting companies) or first registered to do business in the United States (in the case of foreign reporting companies) on or after January 1, 2024, the BOI report must be filed within 30 calendar days after receiving notice that the formation or registration of the reporting company is effective.
On September 28, 2023, FinCEN proposed amending the BOI reporting rules to extend the BOI report filing deadline for reporting companies formed (in the case of domestic reporting companies) or first registered to do business in the United States (in the case of foreign reporting companies) in 2024 from 30 days to 90 days. While this is a proposed rule, it could change the filing deadline for reporting companies formed (in the case of domestic reporting companies) or first registered to do business in the United States (in the case of foreign reporting companies) in 2024 if the proposed rule is enacted.
Review – What needs to be filed?
Filing Process – Where to File BOI Reports?
Reporting companies will be required to file their BOI reports through a secure filing system that is to be created by FinCEN. The filing system, the Beneficial Ownership Secure System (BOSS), is not yet available and is currently under development. BOSS will not be accessible until January 1, 2024. FinCEN intends to publish instructions and other technical guidance to assist reporting companies with filing BOI reports and using BOSS. Once available, FinCEN will make such instructions and other technical guidance available at www.fincen.gov/boi.
Changes or Inaccuracies in BOI Report – When to Correct BOI Reports?
Reporting companies are responsible for the accuracy of the BOI report it files. Reporting companies must file an updated BOI report within 30 days of any change occurring or within 30 days of becoming aware of an inaccuracy within the BOI report.
Penalties – What Will Happen if a Reporting Company does not Follow the CTA Reporting Requirements?
Covering reporting violations, the CTA states that it shall be unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN or willfully fail to report complete or updated beneficial ownership information to FinCEN. The CTA provides that any person that commits a reporting violation, shall be liable to the United States for a civil penalty of not more than $500 for each day that the violation continues or has not been remedied and may be fined not more than $10,000, imprisoned for not more than 2 years, or both. Thus, reporting violations can lead to civil and criminal penalties.
Who can access BOI information once reported?
FinCEN may disclose beneficial ownership information reported to it in one of the following ways: (i) if it receives a request from a Federal agency engaged in national security, intelligence, or law enforcement activity, for use in furtherance of such activity, or (ii) to a State, local, or Tribal law enforcement agency, if a court of competent jurisdiction has authorized the law enforcement agency to seek the information in a criminal or civil investigation. FinCEN may also disclose beneficial ownership information upon a request from a Federal agency on behalf of a law enforcement agency, prosecutor, or judge of another country, under certain circumstances.
New York LLC Transparency Act
While the CTA is federal legislation, some states have considered enacting similar legislation (which would be in addition to the CTA). The State legislature in New York passed the New York LLC Transparency ACT (NYLLCTA), which still requires the signature of New York governor, Kathy Hochul, to be enacted. The NYLLCTA adopts large parts of the CTA but has some key differences. For instance, the NYLLCTA will only apply to limited liability companies (LLCs) formed in New York or foreign LLCs that are registered to do business in New York, although the same exemptions that are available under the CTA would be available under the NYLLCTA. The NYLLCTA would require applicable LLCs to report the same reporting company information and BOI as the CTA to the New York Department of State. However, the NYLLCTA, if enacted, would allow for public access via a searchable database to the name and address of each beneficial owner (as defined in the CTA and described above) of an applicable LLC. The NYLLCTA will allow for an exception to this public disclosure for beneficial owners with significant privacy interests, such as a beneficial owner participating in an address confidentiality program. If Governor Hochul signs the NYLLCTA, the requirements of the NYLLCTA will go into effect on January 1, 2025.
The BOI reporting requirements of the CTA will apply to most companies formed in or registered to do business in the United States. As such, these reporting requirements will likely apply to your company.
 The Final Rule further defines these terms.
 The Final Rule defines a large operating company as any entity that (i) employs more than 20 employees on a full-time basis in the United States; (ii) filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of (x) other entities owned by the entity or (y) other entities through which the entity operates; and (iii) has an operating presence at a physical office within the United States.