Introduction

Pursuant to the Corporate Transparency Act (CTA), certain “Regulated Entities” must now file information concerning Beneficial Owners and Company Applicants with the Financial Crimes Enforcement Network (“FinCEN”) so that the data can be accessed by law enforcement, the IRS, certain other agencies, and select financial services companies in a new federal government database called Beneficial Ownership Secure System (BOSS).

Once these mandated disclosure provisions come into effect on Jan. 1, 2024, both newly-formed and previously-established companies, large and small (but mainly small) will be required to provide certain information to FinCEN. That information will include data detailing: (1) Beneficial Ownership and (2) Company Applicants.

What types of entities are covered and are there any exemptions?

There are two distinct categories of reporting companies that must file reports with FinCEN — domestic reporting companies[1] and foreign reporting companies.[2]

Mandated reporting categories also subsume all manner of legal entities, including: Corporations, limited liability companies (LLCs), partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), limited liability limited partnerships (LLLPs), and any other type of entity that is registrable with a Secretary of State’s office (or similar registrar).

Note, however, there are certain specific exemptions from the definition of reporting company under the CTA, which are covered in further detail below.

How is a “Beneficial Owner” defined?

The rule describes a “beneficial owner” as any individual who meets at least one of two criteria: (1) exercising substantial control over the reporting company; or (2) owning or controlling at least 25% of the ownership interest of the reporting company.

The rule further defines the terms “substantial control” and “ownership interest” and describes rules for determining whether an individual owns or controls 25% of the ownership interests of a reporting company.

Substantial Control

The CTA defines an individual who exercises “substantial control” over a reporting company as an individual that:

• Serves as a senior officer of the reporting company (e.g., President, CEO, CFO, COO, GC);

• Maintains authority over the appointment or removal of (i) any senior officer or (ii) a majority of the board of directors or similar body;

• Directs, determines, or has substantial influence over important decisions made by the reporting company, including:

  1. the nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;

  2. the reorganization, dissolution, or merger of the reporting company;

  3. major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;

  4. the selection or termination of business lines or ventures, or geographic focus, of the reporting company;

  5. compensation or incentive programs for senior officers;

  6. entry into or termination, or the fulfillment of non-fulfillment, of significant contracts; or

  7. amendments to any of the reporting company’s substantial governance documents, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or

• Has any other form of substantial control over the reporting company.

An individual may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through:

• Board representation;

• Ownership or control of a majority of the voting power or voting rights of the reporting company;

• Rights associated with any financing arrangement or interest in a company;

• Control over one or more intermediary entities that separately or collectively exercise substantial control over the reporting company;

• Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or

• Any other contract, arrangement, understanding, relationship, or otherwise.

Ownership Interest

The CTA defines “ownership interest” as:

• Any equity, stock, or similar instrument; preorganization certificate or subscription; or transferable share of, or voting trust certificate or certificate of deposit for, an equity security, interest in a joint venture, or certificate of interest in a business trust; in each such case, without regard to whether any such instrument is transferable, is classified as stock or anything similar, or confers voting power or voting rights;

• Any capital or profit interest in an entity;

• Any instrument convertible, with or without consideration, into any share or instrument described in the two bullets above, any future on any such instrument, or any warrant or right to purchase, sell, or subscribe to a share or interest described in the two bullets above, regardless of whether characterized as debt;

• Any put, call, straddle, or other option or privilege of buying or selling any of the items described in the three bullets above without being bound to do so, except to the extent that such option or privilege is created and held by a third party or third parties without the knowledge or involvement of the reporting company; or

• Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.

An individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship, or otherwise, including:

• Joint ownership with one or more other persons of an undivided interest in such ownership interest;

• Through another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual;

• With regard to a trust or similar arrangement that holds such ownership interest:

1. as a trustee of the trust or other individual (if any) with the authority to dispose of trust assets;

2. as a beneficiary who (a) is the sole permissible recipient of income and principal from the trust; or (b) has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or

3. as a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust; or

• Through ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the reporting company.

When determining whether an individual owns or controls at least 25% of the ownership interests of a reporting company, the total ownership interests that an individual owns or controls, directly or indirectly, shall be calculated as a percentage of the total outstanding ownership interests of the reporting company as follows:

• Ownership interests of the individual shall be calculated at the present time, and any options or similar interests of the individual shall be treated as exercised;

• For reporting companies that issue capital or profit interests (including entities treated as partnerships for federal income tax purposes), the individual’s ownership interests are the individual’s capital and profit interests in the entity, calculated as a percentage of the total outstanding capital and profit interests of the entity;

• For corporations, entities treated as corporations for federal income tax purposes, and other reporting companies that issue shares of stock, the applicable percentage shall be the greater of:

1. the total combined voting power of all classes of ownership interests of the individual as a percentage of total outstanding voting power of all classes of ownership interests entitled to vote; or

2. the total combined value of the ownership interests of the individual as a percentage of the total outstanding value of all classes of ownership interests; and

• If the facts and circumstances do not permit the calculations described in the bullets above to be performed with reasonable certainty, any individual who owns or controls 25% or more of any class or type of ownership interest of a reporting company shall be deemed to own or control 25% or more of the ownership interests of the reporting company.

The rule also describes five types of individuals who the CTA exempts from the definition of “beneficial owner,” including (i) minor children (provided the parent or guardian reports the required information for that child); (ii) an individual acting as nominee, intermediary, custodian, or agent for another individual; (iii) certain employees of a reporting company (provided they are not senior officers); (iv) individuals whose only interest in a reporting company is a future interest through a right of inheritance; or (v) certain creditors of a reporting company.

Who is a “Company Applicant”?

In the case of a domestic reporting company, a “company applicant” is the individual who files the document that forms the entity. In the case of a foreign reporting company, a “company applicant” is the individual who files the document that first registers the entity to do business in the United States. The rule specifies that a “company applicant” includes anyone who directs or controls the filing of the document by another.

Are there any exemptions?

There are 23 specific exemptions from the definition of reporting company under the CTA.

These exemptions cover larger, generally more seasoned or highly regulated types of entities, including: Public companies; large private companies; public accounting firms; regulated insurance companies; registered investment companies and advisors; registered venture capital fund advisors; banks, broker-dealers, and exchanges; regulated public utilities; as well as certain tax-exempt entities.

Note that this list is not exhaustive and very high-level, and that the lines as to whether an entity is exempt or not are nuanced.

An exempt entity that ceases to qualify for an exemption must file a BOI report within 30 days after the date that it no longer meets the criteria for any exemption.

What is the timing of reports?

The time at which a required report is due depends on: (1) when the reporting company was created or registered; and (2) whether the report is an initial report, an updated report providing new information, or a report correcting erroneous information in a previous report.

Initial report timing

Domestic reporting companies created, or foreign reporting companies registered to do business in the U.S., before Jan. 1, 2024, have until Jan. 1, 2025 to file their initial report with FinCEN.

Domestic reporting companies created, or foreign reporting companies registered to do business in the U.S. for the first time, on or after Jan. 1, 2024, are required to file their initial report with FinCEN within 30 calendar days of the date on which they are created or registered, respectively.

Updated report timing due to change in information

If there is a change in the information previously reported to FinCEN under these regulations, reporting companies would have 30 calendar days to file an updated report.

Timing to correct an inaccurate report

Finally, if a reporting company filed information that was inaccurate at the time of filing, the reporting company would have to file a corrected report within 30 calendar days of the date it knew, or should have known, that the information was inaccurate.

What type of information is required to be provided?

The reporting company must submit information to FinCEN about: (1) the reporting company, and (2) each beneficial owner and company applicant. This includes:

• the name, date of birth, and street address of each beneficial owner and company applicant; and

• an image of an approved identifying document (e.g., a non-expired passport or driver’s license) proving the veracity of that information, among other things.

What if an entity fails to comply?

The CTA provides that it is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information to FinCEN, or to willfully fail to report complete or updated beneficial ownership information to FinCEN. It is important to note that a failure to provide certain required information in connection with the formation of a covered entity, which perhaps previously would have resulted (at worst) in a state-level administrative fine, will now (if found to be a violation of the CTA) constitute a federal crime subject to both federal civil penalties and, in egregious cases, criminal prosecution.

Estimated Compliance Costs and Impact

Overall, FinCEN estimates Year 1 compliance with the rule will impact at least 32.6 million entities and cost upwards of $21.6 billion, with the total initial compliance burden for a complex entity structure to be $2,615, which is probably on the low-end of reasonable. In addition, FinCEN estimates that their methodology will require over 14.4 million entities to file updated reports in the Year 2 at a cost of up to $561 per entity, which, again, is probably on the low-end. FinCEN estimates the aggregate burden imposed on business to be $22.8 billion in Year 1, and $5.6 billion in Year 2.

FinCEN doesn’t attempt to downplay the impacts either, noting in dry language only a bureaucrat could love, that “[t]he aggregate cost of this regulation is reflective of the large number of corporations and other entities that are covered in order to implement the broad scope of the CTA.”

Conclusion

This rule is a striking departure from centuries of prior precedent. Corporations, partnerships, limited liability companies, etc., have historically been creatures of state law with initial formation detail typically maintained by a secretary of state’s office (or equivalent). By adding a mandated federal reporting layer on top of these traditionally state functions, this rule completely changes the ballgame for compliance and recordkeeping purposes, particularly for smaller entities that have not yet invested in robust compliance and recordkeeping functions.

Given the intentionally broad scope of this federal mandate, all impacted companies, regardless of size, should anticipate devoting additional attention to compliance efforts and recordkeeping functions regarding beneficial ownership and other reporting requirements in the coming years.

Additionally, impacted entities should factor the cost of these new disclosure obligations into their legal budgets for 2024 and beyond, including budgeting to engage outside counsel to advise and assist in structuring and evaluating those functions and disclosures, particularly in complex or high-profile circumstances, including those involving celebrities and public figures, or others that put a high value on their personal privacy.

APPENDIX: Forms of Beneficial Ownership Information Report & FinCEN Identifier Application

In order to help companies work through these complex provisions in an organized manner, we have prepared illustrative forms of:

• Beneficial Ownership Information Report; and FinCEN Identifier Application.

These draft forms are based on data fields likely to be collected by FinCEN pursuant to information disclosed in public filings but are intended for demonstrative purposes only and do not represent official report forms of any type.

[1] A “domestic reporting company” is any entity that is a corporation, limited liability company, or other entity that is created by the filing of a document with a secretary of state or similar office of a jurisdiction under the law of a State or Indian tribe.

[2] A “foreign reporting company” is any entity that is a corporation, limited liability company, or other entity that is formed under the law of a foreign country and registered to do business in any State or Tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.