Key Takeaways*

CTA Overview: The Corporate Transparency Act ("CTA") is a significant regulatory change affecting a broad range of U.S. and foreign business entities formed and registered in the U.S. As of January 1, 2024, entities formed or registered with filing with a state must report theirBeneficial Ownership Information("BOI"), unless exempted under one of the 23 specified exemption categories.

What are Reporting Companies: Corporations, limited liability companies, limited partnerships, limited liability partnerships, and other similar entities that are formed or registered in the United States with a state filing are "reporting companies," unless they meet one of the 23 listed exemptions. Most exemptions are intended to cover companies that are regulated businesses, such as licensed insurance companies, banks, brokers, securities brokers, credit unions, and public companies. Large companies are exempt if they have both at least 20 full time employees and greater than $5 million in gross receipts from the prior fiscal year as reported on their tax returns.

Reporting Requirements: Non-exempt entities, known as "reporting companies," must report detailed information about themselves and their beneficial owners. The information to be reported about the reporting company includes legal name, trade name and "doing business as" name, current U.S. address of the principal place of business, state of jurisdiction where formed (for domestic reporting companies) or where it was first registered to do business in U.S. (for foreign reporting companies), and tax identification number. Information about the person filing for the reporting company (the "Company Applicant") also must be reported and includes date of birth, current business or residential address, and unique identifying document number and copies of the identifying document, such as a drivers' license or passport.

Beneficial Owners Definition: Under the CTA, beneficial owners are individuals who either exercisesubstantial controlover the company or own/controlat least 25% of the company's ownership interests. Under the CTA, a "senior officer" is considered to possess substantial control over the reporting company and includes, but is not limited to, directors, presidents, CEOs, CFOs, general counsels, COOs, and any officer who performs similar functions. Information to be reported about the beneficial owners includes their full legal names, dates of birth, residential addresses, identification documents such as drivers' licenses or passports, issuing jurisdictions, and copies of the identification documents.

Important Filing Deadlines:

  • Entities formed or registered to do business in the U.S. before January 1, 2024, must file their initial reports with FinCENon or before January 1, 2025.
  • Entities formed or registered between January 1, 2024, and December 31, 2024, must file their initial reports within90 calendar dayspost-formation or registration.
  • Entities formed or registered on or after January 1, 2025, must file their initial reportswithin30 calendar dayspost-formation or registration.

Changes to Reported Information: Reporting companies are required to report changes to the reporting information within30 daysafter changesin the reporting information.

Penalties for Non-Compliance: Entities that willfully fail to file on time or submit false information face civil penalties of up to $500 per day and criminal penalties of up to $10,000 or imprisonment for up to two years.

Early Filing Recommendation: Given the expectation of over 32 million filings in 2024, entities formed or registered before 2024 are advised to file their reports early in the year to avoid the anticipated heavy burden on the FinCEN website towards the end of 2024.

*TheseKey Takeawaysprovide a brief overview. For complete and detailed information, please refer to the full article below.

I. What is the CTA?

A. Overview and Introduction

The Corporate Transparency Act ("CTA") is a federal statute that was passed in 2021 as part of the Anti-Money Laundering Act of 2020.

Beginning January 1, 2024, the CTA requires "reporting companies" (such as corporations, limited liability companies, or other entities that are created by filing a document with a secretary of state or any similar office under the law of a U.S. state or Indian tribe) to disclose personal information about their beneficial owners to the U.S. Department of Treasury's Financial Crimes Enforcement Network ("FinCEN").

What This Means:If you have ownership or control over a legal entity operating in the U.S., it is crucial to determine if your company falls under the CTA's reporting criteria. FinCEN estimates that at least 32 million entities, both U.S. and foreign, operating in the U.S., will be mandated to submit reports beginning January 1, 2024, with an additional five million new entities annually thereafter. While certain types of entities are exempt, a significant number of companies will still be required to comply. Understanding these requirements, further explained in FinCEN's guidelines andFAQs, is essential for accurate and timely compliance.

B. Purpose

The CTA was enacted to enhance entity ownership transparency and to prevent anonymous shell corporations from engaging in illicit activities such as money laundering, drug trafficking, terrorist financing and tax fraud. Congress is seeking to prevent bad actors from concealing their ownership of "reporting companies" to facilitate such illicit activities. The CTA, which requires the collection of beneficial ownership information (discussed below in Section III), is intended to aid law enforcement, national security, and intelligence activities by exposing bad actors hiding their identities behind anonymous corporate structures.

II. Who Must Disclose?

A. Understanding Reporting Companies

At the heart of the CTA is the requirement that "reporting companies" timely file reports with FinCEN disclosing their beneficial owners. The CTA defines a "reporting company" as any entity formed by filing a document with a state secretary of state or a similar office under the law of a U.S. state or Indian tribe. This includes:

  • Corporations
  • Limited Liability Companies (LLCs)
  • Limited partnerships, including limited liability partnerships and limited liability limited partnerships
  • Business trusts (a/k/a statutory trusts or Massachusetts trusts)
  • Foreign entities registered to do business in the U.S.

Notably, common law trusts and general partnerships may be excluded, in those cases where no state filing is required for their creation. Statutory trusts are not excluded.

B. Exemptions

Under the CTA, certain entities are exempt from the beneficial ownership information reporting requirements, as detailed in 31 C.F.R. § 1010.380(c)(2). These exemptions include:

  1. Securities Reporting Issuer: Entities issuing registered securities under the Securities Exchange Act of 1934 (the "Securities Exchange Act").
  2. Governmental Authority: Entitiesestablished under U.S. or state law exercising governmental authority.
  3. Bank: As defined under various sections of federal banking laws.
  4. Credit Union: Federal and state credit unions.
  5. Depository Institution Holding Company: Bank holding companies and savings and loan holding companies.
  6. Money Services Business: Registered money transmitting and money services businesses.
  7. Broker or Dealer in Securities: Registered brokers or dealers under the Securities Exchange Act.
  8. Securities Exchange or Clearing Agency: Registered exchanges or clearing agencies under the Securities
    Exchange Act.
  9. Other Exchange Act Registered Entity: Entities registered under the Securities Exchange Act.
  10. Investment Company or Investment Adviser: SEC-registered entities under the Investment Company Act orInvestment Advisers Act.
  11. Venture Capital Fund Adviser: Investment advisers described in section 203(l) of the Investment Advisers Act.
  12. Insurance Company: As defined in the Investment Company Act.
  13. State-Licensed Insurance Producer: Authorized insurance producers with a U.S. physical office.
  14. Commodity Exchange Act Registered Entity: Entities registered under the Commodity Exchange Act.
  15. Accounting Firm: Public accounting firms registered under the Sarbanes-Oxley Act
  16. Public Utility: Regulated public utilities providing specific services in the U.S.
  17. Financial Market Utility: Designated by the Financial Stability Oversight Council.
  18. Pooled Investment Vehicle: Any pooled investment vehicle that is operated or advised by a person describedin exemptions 3 (bank), 4 (credit union), 7 (broker or dealer in securities), 10 (investment company orinvestment adviser), or 11 (venture capital fund adviser).
  19. Tax-Exempt Entity: Organizations under the Internal Revenue Code, meeting specific criteria (further discussed below).
  20. Entity Assisting a Tax-Exempt Entity: Entities operating solely for tax-exempt entities under specific U.S.criteria such as being a United States person, beneficially owned or controlled exclusively by one or more United States persons that are United States citizens or lawfully admitted for permanent residence, and derives at least a majority of its funding or revenue from one or more United States persons that are United States citizens or lawfully admitted for permanent residence.
  21. Large Operating Company: Entities meeting specific criteria (further discussed below).
  22. Subsidiary of Certain Exempt Entities: Controlled by other exempt entities.
  23. Inactive Entity: Entities meeting all 6 criteria for non-engagement in business, ownership, transactions, andassets (further discussed below).

FinCEN has issued additional guidelines and FAQs outlining specific criteria for qualifying for certain exemptions under the CTA, as follows:

  • Large Operating Company(Issued November 16, 2023):
    1. The entity itself employs more than 20 full-time employees in the U.S. A "full-time employee" means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer.
    2. The entity has an operating presence at a physical office in the U.S.; and
    3. The entity filed a federal income tax or information return in the U.S. for the previous yeardemonstrating more than $5 million in gross receipts or sales.
  • Tax-Exempt Entity(Issued September 29, 2023):
    1. The entity is an organization that is described in section 501(c) of the Internal Revenue Code of 1986 (the "Code") (determined without regard to section 508(a) of the Code) and exempt from tax under section 501(a) of the Code;
    2. The entity is an organization that is described in section 501(c) of the Code, and was exempt from tax under section 501(a) of the Code, but lost its tax-exempt status less than 180 days ago;
    3. The entity is a political organization, as defined in section 527(e)(1) of the Code, that is exempt from tax under section 527(a) of the Code; and
    4. The entity is a trust described in paragraph (1) or (2) of section 4947(a) of the Code.
  • Inactive Entities(Issued September 18, 2023):
    1. The entity was in existence on or before January 1, 2020;
    2. The entity is not engaged in active business;
    3. The entity is not owned by a foreign person, whether directly or indirectly, wholly or partially. "Foreignperson" means a person who is not a United States person. A United States person is defined in section 7701(a)(30) of the Code as a citizen or resident of the United States, domestic partnership and corporation, and other estates and trusts;
    4. The entity has not experienced any change in ownership in the preceding twelve-month period;
    5. The entity has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding twelve-month period; and
    6. The entity does not otherwise hold any kind or type of assets, whether in the United States or abroad,including any ownership interest in any corporation, limited liability company, or other similar entity.

Although entities qualifying for these exemptions may not be required to comply with the CTA's reporting mandates, should their exempt status change for any reason such that they no longer meet the applicable exemption criteria, they must notify FinCEN within 30 days of any and all such changes, and comply with the requirements of the CTA.

Practical Consideration:For entities formed on or after January 1, 2024, it is important to recognize that the Large Operating Company exemption will not apply in the initial year of operation. This is due to that exemption's requirement for over $5 million in gross receipts or sales, which specifically relates to the previous year's financials. New entities, lacking a financial history from the prior year, inherently cannot meet this criterion. This detail is essential in planning for compliance under the CTA.

Further Practical Insight:Determining whether your company is exempt under the CTA involves comprehensive self-assessment and precise documentation. Companies need to conduct a detailed analysis to ensure they align with the CTA's exemption criteria, thoroughly examining exempt categories and scrutinizing their own corporate or other applicable entity structures. While there is no requirement for formal confirmation or acknowledgment from FinCEN, the responsibility for demonstrating compliance lies with the company. This process involves compiling legal evaluations, detailed accounts of the company's structure, and oversight records. Staying informed of CTA updates and regulations is critical, and companies should re-evaluate their status if there are any significant changes in their operations. If your company's exempt status changes, it is important to notify FinCEN within the above referenced 30-day period. Adhering to these guidelines is crucial for compliance with the CTA's requirements.

III. What Must Be Disclosed?

A. Reporting Company Information

From and after January 1, 2024, reporting companies are required to disclose important details about themselves. This includes: their full legal name, all trade names or "doing business as" names, the complete current U.S. address of their principal place of business (or, if the principal place of business is not in the U.S., the primary location in the U.S. where the company conducts business), the jurisdiction of formation or registration, and a unique identification number, such as an IRS Taxpayer Identification Number (TIN) or an Employer Identification Number (EIN).

Practical Consideration:Reporting companies should maintain updated records of their legal, trade names and fictitious names, as well as, addresses, and jurisdictional information to ensure accurate and timely reporting. Failure to report or update this information can lead to non-compliance penalties (discussed further in Section V).

B. Information on Beneficial Owners

The CTA mandates the disclosure of information about"beneficial owners"of the reporting company. A beneficial owner is defined as an individual who, either directly or indirectly:

  1. Exercisessubstantial controlover the entity; or
  2. Owns or controlsat least 25% of the ownership interestsin the entity.

Substantial controlincludes, but is not limited to, individuals who serve as senior officers, have authority over significant decisions, or to influence key business practices of the reporting company. In clarifying the extent of "substantial control," FinCEN has specified that routine managerial decisions alone may not constitute substantial control. For instance, a property manager making operational decisions under the direction of property owners may not necessarily be considered a beneficial owner under this criterion.

For each beneficial owner, reporting companies must provide:

  • Full legal name.
  • Date of birth.
  • Current residential street address
  • A unique identifying number from a non-expired identification document (e.g., state issued driver's license or other identification, a U.S. passport, or, if the individual does not have U.S., state or local identification, a foreign passport)
  • A copy of the identification document

Practical Consideration: Reporting companies should establish procedures to identify, verify and update the requisite information regarding their respective beneficial owners. This could involve internal audits, regular updates from each beneficial owner, and processes to verify the authenticity of the provided documents and other information provided. It is important to ensure that the information about beneficial owners is kept current and that all such information accurately reflects each beneficial owner's stake and role in the company.

C. Company Applicant Information

As used in the CTA, the term "Company Applicant" refers to the individual(s) responsible for filing the document that creates a domestic reporting company or first registers a foreign reporting company in the U.S. This definition includes up to two individuals that:

  • The individual who directly files the formation or registration document.
  • If more than one individual is involved, the person primarily responsible for directing or controlling the filing.

Reporting companies formed or registered on or after January 1, 2024, are required to disclose specific details about their Company Applicants, including such individual's full legal name, date of birth, residential or business address, and a copy of an acceptable photo ID which contains a unique identifying number such as a valid driver's license or a passport or a FinCEN identifier.

Practical Consideration:It is crucial for reporting companies, especially those created or registered on or after January 1, 2024, to accurately identify and document all CTA required information regarding their Company Applicant. This information becomes a part of the permanent record and is key to compliance with the CTA.

D. FinCEN Identifier

The "FinCEN Identifier" is a unique identifying number issued by the Financial Crimes Enforcement Network (FinCEN). It serves as an alternative to providing the required personal information for each reporting company or beneficial owner. For company applicants, such as law firms or corporate agents involved in the formation of multiple entities, the FinCEN Identifier may be particularly beneficial. Instead of repeatedly providing the required personal information for each Company Applicant or beneficial owner, they can use the then current corresponding FinCEN Identifier.

FinCEN outlines specific conditions for using another entity's FinCEN Identifier in reporting beneficial ownership information. These conditions are intended to ensure transparency and prevent misuse. An entity may use another entity's FinCEN Identifier only if the beneficial owners of both the reporting company and the other entity are the same individuals. This provision is designed to maintain clarity in ownership structures and prevent the concealment of beneficial owner identities in complex corporate structures.

IV. When to File and What to Include in Each Report?

Reporting companies will not only need to prepare and file their initial reports, but must also thereafter from time to time correct or update their initial reports (and any previously filed corrections or updates) as set forth below.

A. Initial Report Obligations and Timelines

Reporting companies formed or registered to do business in the U.S. before January 1, 2024 (each an "Existing Reporting Company" and, collectively, "Existing Reporting Companies") must file their initial reports with FinCEN by January 1, 2025. Initial reports filed by Existing Reporting Companies must include the reporting company information and beneficial owners information. However, Existing Reporting Companies are not required to disclose any Company Applicant information.

For reporting companies formed or registered to do business in the U.S. on or after January 1, 2024 (each a "New Reporting Company" and collectively "New Reporting Companies"), the initial reporting deadlines have been updated based on the final rule published in the Federal Register on November 30, 2023. Specifically:

  • Entities formed or registered between January 1, 2024, and December 31, 2024: These New Reporting Companies must file their initial reports within90calendar days post-formation or registration. This extension from the originally proposed 30 days provides additional time for understanding and preparing for the new reporting obligations.
  • Entities formed or registered on or after January 1, 2025: The standard30-calendar-day deadline to file initial reports remains applicable for these New Reporting Companies.

Practical Consideration:The extension of the filing deadline for New Reporting Companies formed in 2024 reflects FinCEN's recognition of the challenges entities may face in adapting to new regulatory requirements. Companies and their advisors should be aware of these updated timelines to ensure timely compliance with the CTA.

B. Filing Updated or Corrected Reports

While there is no annual reporting requirement under the CTA, all reporting companies have an obligation to update a report filed with FinCEN under the CTA. A reporting company must file the "updated report" within 30 days after any change to any reported information regarding the reporting company or its beneficial owners. While the obligation to update the report applies even if such change is de minimis, no update is necessary for updates to information regarding the Company Applicant. Note that a reporting company, which becomes exempt after a report is filed, is required to file an updated report indicating that it is newly exempt from reporting requirements.

Moreover, reporting companies are required to submit a "corrected report" revising previously reported inaccurate information related to the reporting company, its beneficial owners, or company applicant, within 30 days of when the reporting company becomes aware, or has reason to know, of the inaccuracy.

Practical Consideration:Implementing a system for monitoring changes in ownership and company details will aid in maintaining compliance. Companies may consider designating a compliance officer or team to oversee these updates and ensure timely communication with FinCEN.

V. What are the Penalties Associated with CTA Filings?

The CTA imposes civil and criminal penalties, including civil penalties of up to $500 per day as long as the violation continues and criminal penalties of up to $10,000 or imprisonment for up to two years (or both), for any person that willfully fails to report complete or update beneficial ownership information to FinCEN, or that willfully provides, or attempts to provide, false or fraudulent beneficial ownership information.

Similar penalties apply to beneficial owners or Company Applicants causing a reporting company to not file a required report or to report incomplete or false beneficial ownership information to FinCEN.

Those who submit incorrect information to FinCEN are, however, shielded from these penalties, provided they can prove that: (i) they had no knowledge of the inaccuracy; (ii) they were not knowingly trying to evade the CTA requirements; and (iii) the information is corrected within 90 days of the initial filing.

VI. CTA Compliance Quick Checklist:

1.Confirm"Reporting Company"Status: Refer toSection II.Bof this article to determine if your entity qualifies as a reporting company under the CTA or falls under any of the 23 exemptions.

2.Identify"Beneficial Owners": If your entity is a reporting company, identify beneficial owners based on the criteria outlined inSection III.B– specifically, those owning at least 25% interest or exercising substantial control.

3.GatherBeneficial Ownership Information ("BOI"): Collect the required information for each beneficial owner as detailed inSection III.B, including full legal name, date of birth, residential address, unique identification number, a copy of the identification document.

4.FileInitial BOI Report: Submit your initial report, adhering to the timelines and procedures discussed inSection IV.A. Check the article for specific deadlines based on your entity's formation or registration date.

5.SeekImmediate Assistance: For expert guidance and detailed clarification on complying with the CTA, we urge you to seek immediate assistance. An in-depth understanding of the CTA is crucial for ensuring thorough compliance. To ensure that your entity navigates these requirements efficiently and accurately, please contact the authors, editors or related attorneys of this alert for specialized and expert guidance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.