The reporting requirements of the Corporate Transparency Act (CTA), included as part of the Anti-Money Laundering Act of 2020, went into effect on January 1, 2024, and certain deadlines of January 1, 2025, are fast approaching.

While some might have hoped that a federal district court decision in Alabama in early 2024—successfully challenging the “beneficial owner” disclosure provisions of the CTA—would relieve them of potential reporting obligations, that decision is so far limited to the plaintiffs in that particular case. Everyone else? Be prepared to know the law—and comply if necessary.

As we noted in our December 2023 Insight, the CTA requires “reporting companies” to file information to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) as to (1) their beneficial owners and (2) individuals who have filed an application with authorities to create the entity or register it to do business (“company applicants”).

The FinCEN database of beneficial ownership information (BOI) will be used in national security, intelligence, and law enforcement efforts to combat corruption through shell companies, money laundering, drug and human trafficking, tax evasion, terrorism, and other illicit activity.

Set forth below is a refresher from our earlier Insight on CTA reporting requirements and exemptions, as well as developments since that last publication.

As the requirements are complex, potential reporting companies should refer to the Beneficial Ownership Information Reporting Requirements of the CTA, to FinCEN’s September 2022 regulations implementing those requirements, or to detailed guidance published by FinCEN, including a Small Entity Compliance Guide, a list of Frequently Asked Questions (FAQs), and a Beneficial Ownership Reporting Outreach and Education Toolkit.

Reporting Companies

Under the CTA, the following legal entities—both U.S. and non-U.S.—are deemed to be “reporting companies” subject to disclosure requirements unless an exemption applies:

• Domestic (U.S.) reporting companies are corporations, limited liability companies, or other entities created by filing a document with a secretary of state or similar office under a law of a state or Indian tribe.
• Foreign (non-U.S.) reporting companies are those formed under the law of a foreign country but registered to do business in any U.S. state or tribal jurisdiction.

The CTA sets forth 23 exemptions that exclude an entity from being considered a “reporting company” for purposes of the statute. We will discuss some common exemptions further below.

Know the Deadlines

There are three sets of deadlines that all potential reporting companies need to be mindful of, depending on when the reporting company was created or registered to do business:[1]

• Any reporting company created or registered to do business in 2024 must file an initial beneficial ownership report with FinCEN within 90 days of receiving notice that the creation of the reporting company is effective.
• Any reporting company created or registered to do business before January 1, 2024, must file an initial report with FinCEN by January 1, 2025.
• Any reporting company created on or registered after January 1, 2025, must file an initial report within 30 days of receiving notice that the creation of the reporting company is effective.

Exemptions from “Reporting Company” Requirements

As noted above, there are 23 exemptions to the term “reporting company,” meaning that entities that can satisfy one of the exemptions do not have to report information on beneficial owners or company applicants.

Two of the more common exemptions are the so-called “large operating company” exemption and the subsidiary exemption.

• The large operating company exemption applies to those companies that employ more than 20 employees, have an operating presence at an office within the United States, and have more than $5,000,000 in gross receipts and sales.
• To qualify for the subsidiary exemption, a subsidiary’s ownership interests must be fully, 100-percent owned or controlled by an exempt entity. Note that a subsidiary whose ownership interests are partially controlled by an exempt entity does NOT qualify for the subsidiary exemption, and a subsidiary that has more than one owner will not qualify for the subsidiary exemption, even if all of the owners are themselves exempt entities.

Other common exemptions include securities reporting issuers, governmental authorities, banks, and credit unions. For a full list of exemptions, see page 4 of FinCEN’s Small Entity Compliance Guide.

Not Exempt? Who Is a Beneficial Owner? Who Is a Company Applicant?

Because the CTA requires the filing of information about beneficial owners and company applicants, a reporting company, if not exempt, must determine who those are.

Beneficial Owners

The term “beneficial owner” with respect to a reporting company does not necessarily mean ownership. Rather, a beneficial owner is any individual who, directly or indirectly:

• owns or controls at least 25 percent of the ownership interests of such reporting company, or
• exercises substantial control over such reporting company. An individual exercises substantial control by:
  • serving as a senior officer[2] of the reporting company;
  • having authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); or
  • directing, determining, or having substantial influence over important decisions made by the reporting company.

FinCEN’s FAQs clarify that beneficial owners must be individuals (i.e., natural persons). Trusts, corporations, or other legal entities are not considered to be beneficial owners. Further exceptions to the term are described in section 2.4 of FinCEN’s Small Entity Compliance Guide.

Company Applicants

A “company applicant” means:

• the individual who directly files the document creating the domestic reporting company or registering the foreign reporting company, and/or
• the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.

A company applicant could include an accountant or lawyer who directly filed the document creating or registering the reporting company—or if they were primarily responsible for directing or controlling the filing. Either a paralegal or an individual at a corporate service provider could also be a company applicant along with an attorney. (Note that the number of company applicants for any reporting company is limited to two individuals.) 

No company applicant information needs to be reported for any reporting company created or registered prior to January 1, 2024.

Special Reporting Rules

Under a special reporting rule, a reporting company may report a parent company’s name in lieu of information about its beneficial owners if (1) the beneficial owners hold their ownership interest in the reporting company through the parent company exclusively and (2) the parent company is itself exempt from the “reporting company” definition. But this special reporting rule will not allow beneficial owners who own ownership interests through exempt or nonexempt entities to obscure their standing as beneficial owners who may still exercise substantial control of a reporting company. Such BOI would still be required to be reported. For a full list of special reporting rules, see page 39 of the Small Entity Compliance Guide.

Information Required for Reporting

If no exemption exists to exclude entities from the CTA’s reporting requirements—and the reporting company’s beneficial owners / company applicants have been identified—what needs to be reported?

For Reporting Companies

A reporting company must report the following company information:

• Full company legal name and any “doing business as” or “DBA” name;
• Current address of the principal place of business in the United States;
• Jurisdiction of formation (e.g., state, tribal, etc.); and
• Tax identification number issued by the Internal Revenue Service.

For Beneficial Owners / Company Applicants

For every individual who is a beneficial owner—and, if applicable, a company applicant—of such a reporting company, the company’s report must include the following information:

• Full personal legal name;
• Date of birth;
• Current residential street address; and
• A copy of an unexpired, government-issued, identifying document that contains a unique identifying number (e.g., an unexpired U.S. passport or state driver’s license).

In practice, companies may be providing information to their financial institutions in the context of their “know your customer” (KYC) obligations. The obligation to provide information to financial institutions, while similar, is independent of a reporting company’s CTA reporting obligations. FinCEN has published a comparison of the differences between the kind of beneficial ownership information that many financial institutions are required to collect from certain customers and the BOI that FinCEN requires. In any event, a company’s KYC obligations are fulfilled by reporting information to the financial institutions, while a company’s CTA obligations are fulfilled by reporting BOI to FinCEN.

Updated Reports

If there is any change with respect to information previously submitted to FinCEN regarding a reporting company or its beneficial owners, the reporting company must file an updated report within 30 calendar days of the change. As we noted in our December 2023 Insight, these types of changes include the following: (1) a change to the information reported for the company, such as a new business name; (2) a change in any of the beneficial owners; or (3) a change in the beneficial owners’ reporting information.

Circumstances that would trigger an updated report include “active” changes—for example, if a beneficial owner obtained a new identifying document, such as a driver’s license, and the reporting company was required to file an updated report and an image of the new document. Other changes might be considered “passive.” For example, if a company has five equal shareholders (i.e., owning 20 percent each) and one of those shareholder’s equity is redeemed by the company, upon such redemption, the remaining four shareholders would then own 25 percent each, and each becomes, without any action on their part, a beneficial owner subject to the reporting requirements.

Disclosure/Protection of Beneficial Ownership Information

BOI, which FinCEN will retain for five years, will not be publicly available. FinCEN is authorized to disclose BOI to federal, state, local, and tribal officials and to certain foreign officials for purposes of national security, intelligence, and law enforcement.

Updates to FinCEN’s Frequently Asked Questions

FinCEN has continued to update its FAQs since our December 2023 Insight. FAQ clarifications in 2024 include those listed below. (If you believe that any of these clarifications apply to you and would like to investigate further, please contact us.)

FinCEN may continue to update, revise, and clarify its FAQs and other published guidance.

Penalties

Persons who willfully violate BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues, adjusting for inflation. They may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000. Both individuals and corporate entities may be liable for willful violations.

Takeaways

With the January 1, 2025, deadline approaching, companies should evaluate how BOI reporting requirements apply to them, proceed with the collection of necessary information, and ultimately file at the FinCEN portal. As noted in our December 2023 Insight, we recommend a step-by-step approach:

First, entities should determine if they are a “reporting company” subject to the CTA’s reporting requirements.

Second, reporting companies should carefully review the criteria to determine whether they qualify for one of the 23 applicable exemptions. If no exemption applies, the reporting company should do the following:

• Identify the beneficial owners—the individuals who either exercise substantial control over a reporting company or who own and control at least 25 percent of the ownership interests—and collect the information required to be reported for those beneficial owners.
• For companies formed on or after January 1, 2024, identify the company applicants and collect information to be reported for those individuals. No company applicant information needs to be reported for any reporting company formed prior to January 1, 2024.
• File the BOI report with FinCEN.
• Monitor BOI in case updates or corrections need to be made to information previously reported to FinCEN. Reports containing updates or corrections are due within 30 days after the change occurs.
• Be mindful of changes that might cause an existing exemption not to apply—and file a BOI report within 30 days of the date of the change eliminating the exemption.

Determining a company’s status as a reporting company, assessing whether a company qualifies for an exemption, and analyzing its reporting obligations are each highly fact-specific and determined on a case-by-case basis. Epstein Becker Green is available to discuss issues concerning a company’s situation in more detail.

ENDNOTES

[1] For a full rendition of these rules, please see FinCEN’s September 30, 2022, Beneficial Ownership Information Requirements and November 30, 2023, Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024.

[2] “Senior officer” is defined as any individual holding the position or exercising the authority of a 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.