PAGE UPDATED: December 14, 2023

Corporate Transparency Act

Congress passed the Corporate Transparency Act (CTA) in January 2021 as part of the National Defense Authorization Act. The Corporate Transparency Act goes into effect on January 1, 2024. Its purpose is to combat money laundering, the financing of terrorism, and other illegal activities. The CTA sets forth new reporting requirements for most companies in the U.S., including beneficial ownership information. The Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury, is charged with creating a national registry of beneficial ownership of business entities, and all information will be reported to FinCEN on Beneficial Ownership Information Reports, which will be filed online and will be available for law enforcement purposes. Additional information can be found on FinCEN’s website. FinCEN’s Final Rule with regard to the reporting requirements is published on the Federal Register’s website.

The Beneficial Ownership Information Form has not yet been released to the public, and we anticipate additional guidance being issued before the CTA goes into effect and during and after implementation.

The following is an overview of the Corporate Transparency Act and is not intended, and should not be considered, as legal advice. Please contact us if we can be of assistance with regard to your filing requirements under this new law.

Who Has to File?

Each reporting company is required to file unless it is exempt. A reporting company can be a domestic reporting company or a foreign reporting company.

  • A “domestic reporting company” is a corporation, a limited liability company, or any other entity that is created by the filing of a document with the secretary of state or a similar office under the laws of a state or Indian Tribe, such as limited partnerships, limited liability partnerships, and business/statutory trusts.
  • A “foreign reporting company” is any entity that is a corporation, limited liability company, or other entity that is formed under the laws of a foreign country and that is registered to do business in the United States by the filing of a document with a secretary of state or equivalent office under the law of a state or Indian Tribe.

Because they are not created by filing a document with the secretary of state or similar office, sole proprietorships and general partnerships are not reporting companies.

Which Companies are Exempt or Not Required to File a Report?

The Corporate Transparency Act specifically excludes 23 types of entities from the filing requirements, which generally apply to business entities that are not likely to be used for money laundering or other criminal enterprises. The entities that are exempt from the CTA are:

    1.  an issuer of securities registered under section 12 of the Securities Exchange Act of 1934
    2.  domestic governmental authorities
    3.  banks
    4.  credit unions
    5.  a bank holding company or savings and loan holding company
    6.  money transmitting businesses registered with FinCEN under 31 U.S.C. 5330
    7.  a broker or dealer registered under section 15 of the Securities Exchange Act of 1934
    8.  a securities exchange or clearing agencies
    9.  other entities registered under the Securities Exchange Act of 1934
    10.  registered investment companies and advisers
    11.  venture capital fund advisers
    12.  insurance companies
    13.  state licensed insurance producers
    14.  Commodity Exchange Act registered entities
    15.  accounting firms registered in accordance with section 102 of the Sarbanes-Oxley Act
    16.  public utilities
    17.  a financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010
    18.  pooled investment vehicles operated or advised by a bank, credit union, broker or dealer in securities, investment company or investment advisor, or venture capital
    19.  fund adviser
    20.  tax exempt entities
    21.  entities assisting tax exempt entities
    22.  large operating companies (see definition below)
    23.  subsidiaries of most exempt entities
    24.  inactive businesses (see definition below)
What is a Large Operating Company?

A large operating company is any company that:

  • employs more than 20 full-time employees in the U.S.,
  • filed in the previous year a Federal income tax return in the U.S. demonstrating more than $5 million in U.S.-sourced gross receipts or sales in the aggregate, including sales generated through  subsidiaries (for an entity that is part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504 that filed a consolidated return, the applicable amount shall be the amount reported on the consolidated return for such group), and
  • has an operating presence at a physical office within the U.S.
What is an Inactive Business?

An inactive business is one that:

  • was in existence on or before January 1, 2020,
  • is not engaged in active business,
  • is not owned by a foreign person, whether directly or indirectly, wholly or partially,
  • has not experienced any change in ownership in the preceding 12-month period,
  • has not sent or received more 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 12-month period, and
  • does not otherwise hold any kind or type of asset, whether in the U.S. or abroad, including any ownership interest in any corporation, limited liability company or similar entity.

When are Beneficial Ownership Reports Due?

Initial Reports: For all “reporting companies” formed prior to January 1, 2024, an initial Beneficial Ownership Information (BOI) report must be filed between January 1, 2024 and December 31, 2024. BOI will be collected for each beneficial owner.

On November 29, 2023, FinCEN issued a final rule that extends the deadline for certain reporting companies that are formed during 2024 to file their initial BOI reports. For any new reporting companies formed during 2024, an initial BOI report must be filed within 90 days of the date the organizer receives the acknowledgement of filing from the secretary of state. For any new reporting companies formed on or after January 1, 2025, an initial BOI report must be filed within 30 days of the date the organizer receives the acknowledgement of filing from the secretary of state. BOI will be collected for each beneficial owner and company applicant.

Updated Reports: Commencing January 1, 2024, any change in the information from the company’s initial/last BOI report must be reported to FinCEN within 30 days of the effective date of the change, including changes of address of the company and its beneficial owners and transfers of ownership. In addition, any changes in a company’s filing status must be reported within 30 days. For example, if an exempt company experiences a loss in revenues below $5 million or number of employees below 20 on a full-time basis, it immediately becomes a reporting company and the 30-day reporting deadline is triggered.

A reporting company, and only a reporting company, is required to file reports under the CTA disclosing BOI with regard to its beneficial owners and company applicants.

What Information will be Required?

The Corporate Transparency Act, a reporting company must disclose and report Beneficial Ownership Information on each “company applicant” and each “beneficial owner.”

Who is a Beneficial Owner?

A “beneficial owner” is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, exercises substantial control over the entity, or who owns or controls not less than 25% of the ownership interest of the entity.

An individual has substantial control over a reporting company if that individual (i) serves as a senior officer, (ii) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body), or (iii) who can direct, determine, or has substantial influence over important decisions made by the reporting company.

Who is Not a Beneficial Owner?

The CTA includes five exceptions to the definition of beneficial owner:

  • A minor child
  • A nominee, intermediary, custodian or agent acting on behalf of another individual
  • An employee of a reporting company acting solely as an employee, whose control over or economic benefits from a reporting company are derived solely from the employment status of such person (this exception is not applicable to senior officers)
  • An individual whose only interest in the reporting company is through the right of inheritance
  • A creditor of the reporting company, unless the creditor exercises substantial control over the entity or owns 25% or more of the entity.
Who is a Company Applicant?

A “company applicant” is any individual who:

  • directly files a document that creates a domestic reporting company (such as a legal assistant or employee of a service firm)
  • directly files document that first registers a foreign reporting company (such as legal assistant or employee of a service firm), or is primarily responsible for directing such filing (such as attorney).

What is Beneficial Ownership Information?

Under the CTA, each reporting company must submit a report to FinCEN identifying for each beneficial owner of the reporting company and, for entities formed on or after January 1, 2024, each company applicant, the following:

  • Full legal name
  • Date of birth
  • Current residential address (a business street address may be used for the company applicant)
  • A unique identifying number from an acceptable identification document:
    • A non-expired U.S. passport
    • A non-expired identification document issued by a state, local government or Indian Tribe
    • A non-expired driver’s license
    • A non-expired foreign passport if the individual does not possess one of the other acceptable documents
  • An image of the identifying document.

In lieu of providing the Beneficial Ownership Information above, a beneficial owner or company applicant can supply this information to FinCEN in exchange for a FinCEN identifier, which is a unique identifying number assigned by FinCEN. Beneficial owners and company applicants would then only need to provide their FinCEN identifier number to the reporting company in connection with its reporting obligations.

Are There Penalties for Noncompliance?

FinCEN imposes a civil penalty of $500 per day (up to $10,000) for each day the violation continues and authorizes criminal penalties for providing false or fraudulent beneficial ownership information or willfully failing to provide complete or updated beneficial ownership information.

This is not intended to be a complete analysis of the Corporate Transparency Act, but merely an overview, and should not be relied on as legal advice. Additional definitions and limitations are set out in the Final Rule issued by FinCEN that may be applicable to your company. Let us know if we can help you analyze your company’s specific facts and circumstances or if we can be of any assistance.

For more information, contact Hector Delgado or Catherine Than.