Basics of the Corporate Transparency Act
I. What is the Corporate Transparency Act?
The Corporate Transparency Act (“CTA”) was implemented as of January 1, 2024, to combat illicit financial activities. It requires certain companies to disclose information about the company’s “beneficial owners” to the Financial Crimes Enforcement Network (“FinCEN”). This information will be stored in a federal database accessible by some government officials.
II. What are the deadlines and penalties for noncompliance?
For companies in existence prior to January 1, 2024, they must file a Beneficial Ownership Information Report (“BOIR”) on or before January 1, 2025. Companies formed after January 1, 2024, must file a Beneficial Ownership Information Report within 90 days of creation. Non-compliance poses a potential civil fine of up to $10,000 and criminal penalties, including imprisonment for up to two years. For these reasons, it is imperative that qualified reporting companies and their beneficial owners file on time and accurately.
III. Which companies qualify as “reporting companies” and must report?
The U.S. Treasury Department has specified the following forms of companies, referred to as “reporting companies,” which must complete the BOIR. Reporting companies include corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States. This excludes any partnerships or sole proprietorships that are created without filing with a secretary of state and also trusts.
IV. Are there any exemptions?
Several specific business exemptions, 23 in total, exclude some companies from needing to file a BOIR. These include accounting firms, securities brokers, inactive entities, and large operating companies. Of particular interest to most businesspeople will be the exemptions for large operating companies and inactive entities. If the relevant criteria are met, then such businesses need not file a BOIR.
A large operating company is defined, in part, as companies having (a) more than 20 full-time employees; (b) gross receipts or sales in the previous year’s federal tax return of greater than $5,000,000; and (c) a physical office or operating presence in the United States.
An inactive entity is not as simple as it sounds. It is defined, in part, as companies having (a) existed before January 1, 2020; (b) no active business engagements; (c) not experienced a change in ownership in the previous 12 months; (d) not sent or received more than $1,000, directly or indirectly, in the previous 12 months; and (e) no assets of any kind. An entity created after January 1, 2020, would not be exempt from filing.
V. Who from my Company qualifies as a “beneficial owner” and needs to file?
If your company meets the definition of a “reporting company,” then all of its “beneficial owners” must provide the necessary information in the BOIR. To qualify as a “beneficial owner” one must either:
Exercise substantial control over the reporting company. This includes any board members, senior officers, chief executives, managers, and similar positions which have the authority, among other things, to bind the company to a contract, make major expenditures on behalf of the company, have the authority to hire/firm and set pay; or
Own or control at least 25 percent of the ownership interest in the reporting company. Ownership encompasses total equity, stock, or voting rights; a capital or profit interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership. A reporting company may have multiple types of ownership interests.
However, reporting companies are not required to report the reason (i.e., substantial control or ownership interests) that an individual is a beneficial owner.
VI. Are there any exemptions from being a beneficial owner?
There are limited exceptions to having to report as a beneficial owner of a reporting company. These include minor children, a custodian or agent of another person, an employee who is solely an employee and not a senior officer, someone whose only interest in a reporting company is a “future interest” through right of inheritance (i.e., a child of an owner who’s devised an ownership interest in a will upon said owner’s passing), and a creditor of a reporting company. Absent these few exceptions, a reporting company must report all of its beneficial owners.
VII. What information must be filed with the FinCEN?
A reporting company must include in the BOIR the following: (a) its full legal name; (b) any trade or “doing business as” name; (c) the complete current address for the principal place of business; (d) the jurisdiction of formation; (e) and its tax identification number.
In addition to the above information, the BOIR must include the following information for each beneficial owner: (a) full legal name; (b) date of birth; (c) address; and (d) and an image of one of a non-expired U.S. passport, state driver’ license, state or tribal issued identification card, or a foreign passport.
We provide filing services for CTA compliance. If you would like our assistance with filing, please do not hesitate to contact our firm at CTA@bernicklifson.com.