The Corporate Transparency Act Went Into Effect Jan. 1 – What You Need to Know About New Reporting Requirements
What is the Corporate Transparency Act?
The Corporate Transparency Act (“CTA”) was enacted into law on Jan. 1, 2021 in order to collect, at the federal level, beneficial ownership information for corporations, limited liability companies and other similar entities formed under the laws of states.[1] Because the CTA went into effect on Jan. 1, 2024, we released this client alert in order to bring awareness to the new reporting requirements thereunder.
In enacting the CTA, Congress articulated certain findings, including: 1) most states do not require information about the owners of entities formed therein and 2) in order to facilitate certain illicit activity, malign actors seek to conceal their ownership of such entities. Congress thus determined that federal legislation providing for the collection of beneficial ownership information was necessary in order to address this and achieve a number of additional goals. Some of these goals include 1) setting a clear federal standard for incorporation standards, 2) protecting United States national security interests, 3) protecting interstate and foreign commerce, 4) better assisting law enforcement in combating money laundering and other crimes facilitated by the use of limited liability companies and other similar entities, and 5) bringing the United States into compliance with international anti-money laundering and countering the financing of terrorism standards. Since the enactment date, the Financial Crimes Enforcement Network (“FinCen”) has issued several rules implementing the CTA. Most notably, FinCen published the primary rule on Sept. 30, 2022.[2] The primary rule discusses, among other things, who must report under the CTA, what information must be reported, and when such reports must be filed.
Who must report under the CTA?
Under the CTA, any reporting company must submit to the FinCen a beneficial ownership information (“BOI”) report containing the information described below. A reporting company is defined as a corporation, limited liability company or other similar entity that is 1) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe or 2) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe. The CTA contains 23 exemptions to the definition of reporting company, most of which pertain to entities that are heavily regulated at the federal level such as public companies, financial institutions, public utilities, and tax-exempt entities.
What information must be reported?
A reporting company will need to report certain information about itself, including: 1) the entity’s full legal name, 2) any trade name or “DBA,” 3) the entity’s complete and current U.S. address of its principal place of business, 4) the entity’s state, tribal, or foreign jurisdiction of formation, and 5) the entity’s Taxpayer I.D. number.
In addition, the reporting company will need to report information about each beneficial owner. Generally speaking, a beneficial owner is an individual who owns or controls at least 25% of a company or has substantial control over the company. The definition of “substantial control,” as discussed in the Sept. 30, 2022 Final Rule, is broad and encompasses more than just large shareholders. Rather, “substantial control” includes many individuals with operational control of the reporting company, including senior officers. As a result, any individual with the authority to direct or influence certain key decisions of the reporting company may be subject to the reporting requirements of the CTA.
A reporting company that is formed or registered on or after Jan. 1, 2024 will also need to report information about its company applicants. A company applicant is an individual who files or is responsible for filing the formation or registration paperwork for the entity.
Information that must be reported about beneficial owners and company applicants includes each individual’s: 1) full legal name, 2) date of birth, 3) complete current address (company applicants who form entities in the course of business should use their business address), and 4) I.D. number, jurisdiction, and image from the individual’s (a) non-expired U.S. passport, (b) state driver’s license, (c) government-issued I.D., or (d) if the individual does not have any of these, foreign passport. If an individual has provided a FinCen identifier (a unique identifying number issued by FinCen) to the reporting company, the FinCen identifier may be used instead of the above information about the individual.
Special reporting rules apply for individuals who are minor children, whose ownership in the reporting company is through one or more entities that are exempt from the reporting company definition, or who are beneficial owners or applicants of a foreign company that would be a reporting company but for the pooled investment vehicle exemption.
When and how are BOI reports filed?
The reporting rule under the CTA became effective as of Jan. 1, 2024, and FinCen began accepting reports at that time.
Currently, existing companies must file their initial BOI reports by Jan. 1, 2025. Pursuant to a FinCen Final Rule published Nov. 30, 2023, effective Jan. 1, 2024, a company formed on or after Jan. 1, 2024 but before Jan. 1, 2025 must file its initial BOI report within 90 calendar days of the earlier of when the company receives actual or public notice that it has been created. The 90-day deadline is shortened to 30 days for companies created on or after Jan. 1, 2025. A 30-day deadline also applies to filing an updated report when there is any change to the company’s previously reported information about itself or its beneficial owners.[3]
Reports must be filed with FinCen through a secure electronic filing system. Instructions and technical guidance on filing the BOI report form have been published on FinCen’s website. Companies that are unable to electronically file BOI reports should contact FinCen directly.
Exempt entities
As noted above, the CTA contains 23 distinct exemptions from the reporting company definition (and, therefore, the CTA’s reporting requirements). Some of these key exemptions are discussed below.
Investment Advisors and Investment Companies
Any investment advisor or investment company (as defined in section 3 of the Investment Company Act of 1940 (the “40 Act”) that is registered with the Securities and Exchange Commission (“SEC”) under the 40 Act or Investment Advisors Act of 1940 is exempt from the reporting requirements of the CTA.
Pooled Investment Vehicles
Under the CTA, Pooled investment vehicles are defined as 1) any investment company, as defined in Section 3(a) of the 40 Act or 2) any company that (a) would be an investment company under that section but for the exclusion provided from that definition by Section 3(c)(1) or Section 3(c)(7) of the 40 Act and (b) is identified by its legal name by the applicable investment adviser in its Form ADV (or successor form) filed with the SEC. Any pooled investment vehicle that is operated or advised by one of the applicable exempt entities, including investment advisors and investment companies, is exempt under the CTA.
Large Operating Companies
Exempt entities also include entities that 1) employ more than 20 employees on a full-time basis in the United States, 2) filed in the previous year federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of (a) other entities owned by the entity and (b) other entities through which the entity operates, and 3) have an operating presence at a physical office within the United States.
Subsidiaries of Certain Exempt Entities
Any corporation, limited liability company, or other similar entity of which the ownership interests are owned or controlled, directly or indirectly, by one or more of certain enumerated exempt entities, is exempt under the CTA. Notably, subsidiaries of pooled investment vehicles are not eligible for this exemption.
Tax Exempt Entities
Organizations described in Section 501(c) of the Internal Revenue Code (“IRC”) that are exempt from federal income tax, and certain organizations operating exclusively to provide financial assistance to or hold governance rights over such tax exempt organizations, are exempt under the CTA. This includes many charitable entities. An entity that loses its tax-exempt status will continue to be exempt under the CTA for 180 days beginning on the date it loses its tax-exempt status.
[1] https://www.fincen.gov/sites/default/files/shared/Corporate_Transparency_Act.pdf.
[2] https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements.
[3] Note that the Protect Small Business and Prevent Illicit Financial Activity Act (H.R. 5119), if enacted, may change all or some of the above deadlines.
This material is provided as a general informational service to clients and friends of Stevens & Lee. It should not be construed as, and does not constitute, legal advice on any specific matter. The delivery of this material does not create an attorney-client relationship. This material may be considered ATTORNEY ADVERTISING in some states. Please note that prior results discussed in this material do not guarantee similar outcomes. Readers must not rely on this general information in making decisions.
