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Corporate Transparency Act: Reporting Requirements; Preparing Your Company and Other Related Considerations
Thursday, June 22, 2023

The Corporate Transparency Act (“CTA”) was enacted as part of the National Defense Authorization Act for Fiscal Year 2021. The CTA aims to enhance transparency of beneficial ownership information for certain types of business entities in an effort to combat money laundering, terrorist financing, and other illicit activities. The CTA becomes effective on January 1, 2024 (“Effective Date”), but reporting companies will have either 30 days or one year to comply, depending on whether they were formed before or after the Effective Date.

Under the CTA, certain types of corporations, limited liability companies, and other similar entities must report to the Financial Crimes Enforcement Network (“FinCEN”) certain information about their beneficial ownership (the “BOI Report”). Specifically, these entities must report the identity of each beneficial owner who directly or indirectly owns 25% or more of the ownership interests of the entity, as well as certain information about each beneficial owner, such as their name, address, date of birth, and other identifying information.

The CTA also establishes civil and criminal penalties for individuals who knowingly provide false or fraudulent information in connection with the beneficial ownership reporting requirements, as well as for entities that fail to comply with the reporting requirements.

Who the CTA Applies to

The CTA requires reporting companies to report information on beneficial owners and company applicants.

What is a “Reporting Company”

Reporting companies are privately held companies. Publicly traded companies already provide ownership information to their respective government entities and are not subject to the CTA. There are two types of reporting companies: Domestic and Foreign. A domestic entity is a corporation, LLC, or other entity created by filing a document with a secretary of state or a similar office under the law of a state or Indian tribe. A foreign entity is a corporation, LLC, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction of the United States by the filing of a document with a secretary of state or any similar office.

Who is a “Beneficial Owner”

A beneficial owner is an individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company.

An individual can exercise substantial control over a company if they serve as a senior officer in the company, have authority over the appointment or removal of senior officers or a majority of the board, have “substantial influence over important decisions” of the company, or have any other form of substantial control over a company. This definition can also include third parties.

Who is a “Company Applicant”

A company applicant is one of two people:

  1. The individual who directly files the document that creates the entity (including legal counsel, as the case may be), or in the case of a foreign reporting company, the document that first registers the entity to do business in the United States; or

  2. The individual who is primarily responsible for directing or controlling the filing of the relevant document by another.

Reporting companies existing or registered at the time of the effective date of the rule (January 1, 2024) are not required to identify and report on their company applicants.

What Information Must be Reported

When filing BOI reports, a reporting company must identify itself and provide four pieces of information about each beneficial owner:

  1. Name

  2. Date of birth

  3. Address

  4. Unique identifying number and issuing jurisdiction from acceptable identifying document (e.g. a passport or driver’s license), and a copy of the document.

If the beneficial owner provides this information to FinCEN directly, they can obtain a “FinCEN identifier” to be provided on a BOI report in lieu of the above information. Reporting companies formed or registered after the Effective Date must also provide the above information and document image for company applicants.

When Must Information be Reported

The CTA Effective Date is January 1, 2024, but reporting companies will have either 30 days or one year from such date to comply with the CTA. Reporting companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file initial reports. Reporting companies created or registered after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file initial reports.

Reporting companies have 30 days to report changes to the information in previously filed reports and must correct inaccurate information in previously filed reports within 30 days of when the reporting company becomes aware or has reason to know of the inaccuracy of information in earlier reports. 

Exemptions

There are 23 exemptions to the definition of “reporting companies.” Various exemptions will be applicable to certain industries:

  1. Securities issuers[1]

  2. Domestic governmental authorities

  3. Banks

  4. Domestic credit unions

  5. Depository institution holding companies

  6. Money transmitting businesses

  7. Brokers or securities dealers

  8. Securities exchange or clearing agencies

  9. Other Securities Exchange Act of 1934 entities

  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

  16. Public Utilities

  17. Financial market utilities

  18. Pooled investment vehicles

  19. Tax-exempt entities

  20. Entities assisting tax-exempt entities

  21. Large operating companies**

  22. Subsidiaries of certain exempt entities

  23. Inactive businesses

Organizations that fall into the “large operating company” category are exempt from reporting. The large operating company exemption has broad potential application for many mid-size companies. The three criteria for an entity to be considered a large operating company are:

  1. Employs more than 20 employees on a full-time basis in the United States. In this case, FinCEN uses the IRS definition of “full-time employee”, which includes anyone who works at least 30 hours per week or 130 hours per month.[2]

  2. Has filed a Federal U.S. income tax return for the previous year that showed more than $5,000,000 in gross receipts or sales.

  3. Operates from physical premises in the United States. Under this criterion, to be exempt, the entity must own or lease the office space, the space cannot be a personal residence, and they can’t share the space with anyone other than affiliated entities.

Further Considerations

To prepare for compliance, CTA companies should begin preparing reporting information and updating internal policies for obtaining information from other companies they enter into dealings with. For example, requiring BOI reporting information from investors before engaging in financings and confirming target companies have satisfied their reporting obligations for those engaged in M&A activities. CTA companies should also consider creating internal policies to track changes to company reporting status or beneficial ownership on a regular basis.

In addition, the information subject to reporting may constitute personal information under various state and federal privacy laws. Entities that are subject to these laws will need to take various steps to ensure that they are not simultaneously running afoul of privacy laws while trying to meet their reporting obligations. Staying complaint with the ever-changing patchwork of U.S. and global privacy laws would likely require CTA companies, at minimum, to:

  1. Revise existing data inventories and records of processing activities to reflect the collection, processing, and storage of the reporting information;

  2. Review existing privacy policies and procedures and if, necessary, revise them to include express notice regarding the new collection, use and disclosure of each beneficial owner’s personal information;

  3. Obtain and document consent for the additional use and processing of the information where required; and

  4. Implement and maintain reasonable technical, administrative, and physical security measures to ensure the information at issue (in particular the copies of the identifying documents) are protected from unauthorized, access, use or disclosure.

The CTA will place a large responsibility on companies, and specifically small businesses, to collect, prepare and submit reporting information to FinCEN. It is in the interest of all companies that are subject to the CTA requirements to prepare for compliance prior to when the regulation goes into effect on January 1, 2024. 

FOOTNOTES

[1] Securities issuers are entities that are already required to register with the SEC under the Securities Exchange Act of 1934 (i.e. public companies).

[2] Companies are NOT permitted to consolidate employee headcount across affiliated entities even though gross receipts or sales are to be consolidated. This exemption only applies to an “entity that … employs” more than 20 employees, indicating that the determination of the number of employees is to be made on an entity-by-entity basis. 

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