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The Corporate Transparency Act Goes Into Effect 01/01/2024 – Here’s How It Impacts Your Business and What You Need to Know

What is the Corporate Transparency Act?

The Corporate Transparency Act (the “CTA,” 31 U.S.C. § 5336) was enacted in 2021 and goes into effect on January 1, 2024. It is intended to assist law enforcement in dealing with money laundering, tax fraud, financing of terrorism, etc. through the use of anonymous shell and front companies.  But, its scope is very broad and the majority of our clients that operate limited liability companies or small corporations will be forced to , meaning they will have to report information concerning the beneficial ownership of their company (a “BOI Report”) to the federal government, specifically to the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

Is Your Company a Reporting Company?

Unless your limited liability company or corporation meets one of the exemptions to the CTA, your company is a reporting company and must file a BOI Report and any necessary updates during the year. Existing reporting companies (in existence prior to January 1, 2024) have until the end of 2024 to report. Any companies formed on or after January 1 must report their beneficial ownership within 30 days of formation.

What companies are exempt from reporting?

The principal exemptions to the CTA’s reporting requirements include:

  • Companies with more than 20 full-time employees in the US that reported more than $5 million in gross receipts or sales on their prior year’s US federal income tax return (excluding gross receipts or sales from sources outside the US, but including the gross receipts or sales of other entities owned by the entity and through which the entity operates), and that have an operating presence at a physical location in the US;
  • Public companies;
  • Inactive entities that existed on or before January 1, 2020;
  • SEC-registered investment companies or advisers;
  • Venture capital fund advisers;
  • Pooled investment vehicles;
  • Insurance companies and insurance producers;
  • Highly regulated financial services companies, like banks, credit unions, and registered securities brokers or dealers;
  • Public accounting firms;
  • Tax-exempt entities, including 501(c)(3) nonprofit organizations, political organizations, and certain trusts, and entities that assist tax-exempt entities;
  • Governmental authorities; and
  • Subsidiaries that are wholly-owned or controlled, directly or indirectly, by other exempt entities.

Note that any company that was exempt but that no longer qualifies for an exemption must file a BOI Report with FinCEN within 30 calendar days after the date that it no longer meets the exemption criteria.  Also, a company that becomes an exempt entity must update its BOI Report to show that it is no longer a reporting company within 30 calendar days of the date it meets the exemption criteria.

What are BOI Reports and how are they filed?

In addition to reporting certain beneficial ownership information (BOI), the CTA requires that entities formed or registered on or after the CTA’s January 1, 2024 effective date, disclose information about who created the entity or registered it to do business in the US (including attorneys). All such BOI Reports must be filed within 30 calendar days of the date the entity was formed. For entities formed prior to January 1, 2024, only BOI is required to be reported and those BOI Reports must be submitted before the end of the 2024 calendar year. Any changes to previous information included in a BOI Report must also be reported within 30 calendar days.

As of January 1, 2024, reporting companies will be able to electronically file BOI Reports through the Beneficial Ownership Secure System (“BOSS”). No BOI Reports may be filed prior to January 1, 2024, as BOSS will not be available to filers until that date. BOI information may only be disclosed to authorized government authorities, financial institutions, and other authorized parties on request in certain circumstances.

Information required in the BOI Report:

  1. The full legal name of the reporting company;
  2. Any trade names, fictitious names or doing business as (d/b/a) names through which it conducts business, whether or not formally registered;
  3. Its current street address;
  4. Its state or tribal jurisdiction of formation (for a foreign reporting company, the state or tribal jurisdiction where it first registered in the US); and
  5. Its employer identification number (EIN) (or taxpayer identification number (TIN), if the company is foreign reporting company).
  6. The following information concerning its “beneficial owner(s)”:
    1. full legal name;
    2. date of birth;
    3. residential street address;
    4. an identifying number from one of the following (current) documents: a US passport; a state, local government, or Indian tribal identification document; a state-issued driver’s license; or a foreign government-issued passport, if the individual does not have any of these other documents; and an image of the identification document bearing the above number.

A “beneficial owner” is any one or more individuals (a natural person) who, directly or indirectly, either:

    • exercises “substantial control” over the company; or
    • owns or controls 25% or more of the “ownership interests” of the company.

(Note that if the beneficial owner is a minor, that person’s information does not need to be reported, however a parent or legal guardian’s information must be substituted. When the minor child reaches majority, an updated report must be filed with that individual’s information.)

Individuals are deemed to exercise “substantial control” over the company if they meet any of the following requirements:

    • serve as a “senior officer” of the company, including the president, the chief financial officer, the general counsel, the chief executive officer, the chief operating officer, or any other officer, regardless of title, performing a similar function;
    • have authority over the appointment or removal of any senior officer or a majority of the board of directors or similar body;
    • direct, determine, or have substantial influence over important decisions made by the company; or
    • have any other form of substantial control over the reporting company.

G. For entities that are created on or after January 1, 2024, the same information as required for beneficial owners is required for its “applicants, except that instead of a residential address, the business address of the individual is required if the applicant is an attorney or other formation agent.

A company’s “applicant” is an individual who directly files the document that creates a domestic reporting company or first registers a foreign entity to do business in the US; or who is primarily responsible for directing or controlling the filing of the relevant document by another person, if more than one individual is involved in the filing.  This would include attorneys who file articles of organization/incorporation to create LLCs/corporations, for example.

What qualifies as Ownership Interests that must be reported under the CTA?

The term “ownership interests” is defined broadly under the law, and includes:

  • any equity instrument (including stock in a corporation or membership interest in an LLC);
  • any instrument convertible, with or without consideration, into any such equity instrument, whether or not characterized as debt;
  • any capital or profits interest;
  • any warrant, option or other right to purchase, sell, or subscribe to any equity instrument;
  • any put, call, straddle, or other option or privilege of buying or selling any of the above interests without being bound to do so (except if the option or privilege is held by a third party and not known to the company); and
  • any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.

The law provides guidance for calculating an individual’s percentage of ownership percentage, as follows:

For entities taxed as corporations (including LLCs that elect such treatment), a beneficial owner’s ownership interest is the individual’s voting power as a percentage of the total outstanding voting power, or the individual’s ownership interest value as a percentage of the total outstanding ownership interest value, whichever is greater, and treating all options and other convertible instruments as exercised and including all classes of ownership interest.

For LLCs and other interests in pass-through entities, an individual’s ownership percentage is calculated based on their total of all equity interests (membership interests and economic/profits interest) in the entity as a percentage of the entity’s total outstanding capital and profits interests and treating all options and other convertible instruments as exercised, and including all classes of ownership interest.

If a calculation cannot be made with reasonable certainty, an individual owning or controlling 25% or more of any class or type of interests of a reporting company is deemed to own or control 25% of all interests in the reporting company.

If an entity has owners that are trusts, an individual is deemed to have ownership or control of trust assets if they serve as trustee or otherwise have authority to dispose of trust property; a trust beneficiary who is the sole permissible recipient of trust income and principal, or who has authority to withdraw trust assets, is deemed to have ownership or control of the trust property; and the grantor of a trust is deemed to have ownership or control if the grantor has the authority to revoke the trust or otherwise withdraw trust assets.

What are FinCEN Identifiers?

A “FinCEN identifier” (FinCEN ID) is a unique identifying number that FinCEN issues to individuals or entities on request and submission of their relevant information to FinCEN. A reporting company can then list the FinCEN ID on its BOI Report instead of collecting the personal information for the particular individuals.

Individuals will be able to request a FinCEN ID on or after January 1, 2024, by completing an electronic web form and supplying the identifying information required of beneficial owners described above. After an individual submits this information, the individual will immediately receive a FinCEN ID unique to that individual.

Reporting companies may request a FinCEN ID by checking a box on the BOI Report when they submit the report. After the company submits the report, the company will immediately receive a FinCEN identifier unique to that company. If a reporting company wishes to request a FinCEN ID after submitting its initial BOI Report, it will need to submit an updated beneficial ownership information report requesting a FinCEN ID, even if the company does not otherwise need to update its information.

If an individual obtains a FinCEN ID, the individual does not need to provide their requisite personal information to the company; and is then responsible for reporting any changes to their personal information to FinCEN within 30 calendar days. This means that the reporting company is not required to monitor any changes to the individual’s previously reported personal information.  However, reporting companies with a FinCEN ID must update or correct the company’s information by filing an updated or corrected BOI Report, as appropriate.

Updates and Corrections

If previously reported information about the company or its beneficial owners (including the name, date of birth, address, or unique identifying number) was incorrect or changes after the reporting company files an initial BOI Report, the company must file an updated BOI Report within 30 calendar days of when the change occurs or the incorrect information is identified.  Note that if a report is filed to correct any inaccurate information, the law provides a safe harbor against any penalties as long as the corrected report is filed within 90 calendar days after the date on which the inaccurate report was filed. Note that the company is not required to update any information concerning its applicants, as long as the information was accurate when originally reported.

Penalties

The CTA provides for civil and criminal penalties for violations, including a fine of up to $10,000, imprisonment for up to two years, or both, for any person who willfully provides or attempts to provide false or fraudulent BOI or willfully fails to report complete or updated BOI to FinCEN. Penalties may also be imposed on companies and individuals who cause a company not to report or are senior officers of a reporting company at the time of its failure to fulfill its obligation to accurately report or update BOI.

Action Items For Clients

Companies not otherwise exempt from the law will need to take action, including:

  • Consider designating an officer or other person to be responsible for compliance. Note, that reporting companies may use third-party service providers (including law firms) to submit BOI Reports.
  • Ensure that the company’s ownership and other entity records are complete and up to date, including, updating ownership records to reflect any recent stock or other equity interest transfers, grant of options or other incentive equity, or other actions that may affect ownership interest calculations; and verify current contact information for beneficial owners with whom the company has not had recent contact.
  • For companies that are subject to the CTA’s reporting requirements, consider, as applicable: (i) developing a communication strategy to advise beneficial owners of the company’s BOI reporting obligations under the CTA; (ii) amending existing corporate governing documents (e.g., operating agreements and shareholder agreements) and provide forms to require a company’s beneficial owners to provide their requisite personal information to the company and to update the company of any changes to previously reported information.
  • Reviewing privacy policies and confidentiality provisions of governing documents and forms to confirm whether disclosure to comply with the CTA is permitted and amending policies or agreements, if necessary.
  • Developing a secure process for collecting and storing personal information of beneficial owners and, as applicable, company applicants, all in compliance with US privacy and data security laws relating to the collection, use, processing, and disclosure of personal information.
  • Dissolving any inactive subsidiary companies.

We are ready to help.

Compliance with the CTA is mandatory unless your company is exempt. The law is complex and the penalties for non-compliance are harsh. Widerman Malek will work with you to assure that you comply with the CTA and avoid any penalties. Unless your company is exempt, this law applies to you whether your company is newly formed or has been in business for years.

If you have questions related to your company’s compliance with the new Corporate Transparency Act, and whether or not your company is a reporting entity, please contact our team of corporate attorneys.

Ralph Dyer has been a Florida Bar member since 1996 and practices primarily in the areas of corporate and business law, including corporate formation, mergers and acquisitions and corporate transactions as well as employment law.