The Corporate Transparency Act – Required reporting casts a wide net

Confronted with the steady increase in money laundering, trafficking, counterfeiting, securities fraud, tax fraud, and other malevolent schemes, Congress passed the Corporate Transparency Act (“CTA”). It assigned enforcement to the Financial Crimes Enforcement Network (FinCEN), the same department that for years has been involved in tracking large foreign accounts owned by U.S. citizens and residents. FinCEN issued final regulations in September 2022, and enforcement will begin on January 1, 2024. MSI's NYC accounting member Gettry Marcus provides further insight.

The problem, according to Congress, is that malign actors spread their activities across multiple small corporations and limited liability companies, formed in various states and with tiered ownership, all to disguise both the real scale of their activities and the real identity of their owners. Congress considers this to be a national security issue.

It is not uncommon for a new enforcement provision to be overly broad and for Congress to narrow and better aim its scope after gathering experience, and the CTA is no exception. 

In this case, “overly broad” means that every small company across the United States will be subject to additional and possibly even burdensome reporting requirements. Companies must report their beneficial owners to FinCEN, and keep the reports current if any beneficial owners move, leave the company, or become part of the company. While this beneficial ownership information reporting is not income tax related and is not reported on an income tax return/form, it is important to be aware of your responsibility to comply with these reporting obligations given the wide applicability of these rules. FinCEN refers to the rules as the Beneficial Ownership Information (BOI) reporting requirement.

If you are required to report your company’s beneficial ownership information to FinCEN, you will do so electronically through a secure filing system available via FinCEN’s website. This system is currently being developed and will be available before your report must be filed. Updates will be provided as additional guidance is issued.

What companies have to report?

Reporting companies are those that are formed by filing a document with the secretary of state (or similar office) of any state or Native American tribe. This includes corporations, limited partnerships, and limited liability companies but generally exclude private trusts. 

Reporting companies also include foreign companies that register to do business in any state or tribal jurisdiction by filing a document with a secretary of state (or similar office).

There are exemptions for companies that either already are required to register with the federal government and for large companies; there are 23 types of entities that are exempt.

  • Companies already required to be registered include, for example, securities brokers and dealings, certain banks, and certain insurance companies.
  • A “large” company is one that has at least 20 full-time employees, more than $5 million in gross receipts, and a physical office within the United States. This might not be considered “large” in other contexts, but lawmakers consider that a company meeting those requirements is not likely to be a shell company created for financial malfeasance. 
Who are the beneficial owners?

A beneficial owner is an individual who either:

  • Exercises substantial control over the entity; or
  • Owns or controls at least 25% of the ownership interests of the entity.
Who are company applicants?

A company applicant is either:

  • The individual who files the document that creates the entity or, for a foreign entity, registers it to do business in the United States; or
  • The individual who directs or controls the filing of the document by another person.

Company applicants need not be reported for companies that existed prior to January 1, 2024. 

What information must be reported?

For each beneficial owner (and company applicants for companies formed on or after January 1, 2024, the company must report:

  • Name
  • Birthdate
  • Address
  • Identifying number from an acceptable identification document, plus
    • An image of the identification document.

An individual may get a FinCEN identifier by providing the above information to FinCEN. The individual may give the FinCEN identifier to the companies they are involved with, and the company may report the FinCEN identifier instead of providing the four pieces of information and the image of the identification document. 

When is the initial report due?

There are different due dates depending on when the company was formed.

  • Company formed before January 1, 2024, has until January 1, 2025, to file its first report
  • Company formed on or after January 1, 2024, had to file its first report no later than 30 days after formation
When must changes be reported?
  • Any changes to ownership or addresses must be reported no later than 30 days after the change
  • Corrections must be reported no later than 30 days after the company becomes aware of or has reason to know an earlier report was inaccurate.
Violations of the reporting requirements

Any person that violates the rules relating to reporting is subject to penalties:

  • Civil penalty of not more than $500 per day until remedied; and in addition
  • Possible criminal fine of not more than $10,000, imprisonment for not more than two years, or both.

The rules are extensive and complex, and it is anticipated that a company’s attorneys will guide compliance with the CTA. A company and its reporting individuals should refer to and follow the rules under the CTA Act, 31 U.S.C. §5336, and the regulations, 31 C.F.R. §1010.380.