The Corporate Transparency Act (CTA) became effective on January 1, 2024. While the Act does not create a public registry of business entities in the United States, it is intended to set a clear standard for federal incorporation practices, protect national security, combat money laundering and terrorism financing, and ultimately bring the United States into compliance with international money laundering and counter terrorism financing standards.
The Act requires any entity registered with a Secretary of State (Reporting Company), to file a Beneficial Owner’s Information Report (“BOIR”) with the federal Financial Crimes Enforcement Network (“FinCEN”) and disclose information about its Beneficial Owners and the Company Applicant (if a Company is registered with a State after January 1, 2024). A Company Applicant is the individual who directly files a document creating a domestic reporting company, or the individual who supervises or is primarily responsible for directing such a filing. The disclosures must include the Reporting Company: name and any assumed name(s), tax identification number, address, and the State/Jurisdiction of formation or registration. Additionally, each Reporting Company must report or disclose each Beneficial Owner’s and Company Applicant’s full legal names and date of birth, each Owner’s current residential address and each Company Applicant’s current business address (including the County), a copy of an identifying document (which may be a driver’s license or passport in picture or pdf format) that must be uploaded to the reporting website, the identification number from the identifying document, and the State/Jurisdiction which issued the identifying document. In the alternative to providing copies of identification every time a person or Company files a BOIR, the filer may request and use a FinCEN Identifier Number (FinCEN ID), which can be requested through the “Login.gov” website.
Per the CTA, a Beneficial Owner is defined as an individual who directly or indirectly (through any contract, arrangement, understanding, relationship, or otherwise) either exercises “substantial control” over the entity, or who owns or controls at least 25% of the ownership interests of the entity. The CTA defines “substantial control” as individuals who are senior officers; those with authority to appoint or remove any senior officer; those with authority to appoint or remove a majority of the board of directors or the equivalent; or, those who can direct, determine, or have a substantial influence over important decisions made by the Reporting Company.
Additionally, if a person can dispose of the assets of the Reporting Company, that person is considered a “Beneficial Owner” under the “Substantial Control Standard.” This is important because if the Reporting Company is owned by a Trust, then the Trustee, Investment Adviser, Distributing Trustee or possibly the Trust Protector may be a “Beneficial Owner.”
Not every company is required to file a BOIR. The Act defines a Reporting Company as a corporation, LLC, or other similar entity created by filing a document with a Secretary of State or another similar office or one that is formed under the laws 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 another similar office. The definition of Reporting Companies includes LPs, LLPs, and business trusts, but has twenty-three exemptions. Some of the Reporting Company exemptions are noteworthy:
- Entities that are already required to register or are licensed by a governmental authority such as Securities Firms, registered Broker/Dealers, Accountants and Accounting Firms, Insurance Agents and Insurance Companies, with the exception of Lawyers and Law Firms;
- General partnerships;
- Large Operating Companies, defined as a company with 20 or more full time employees, gross receipts of sales as reported on a federal income tax return of over $5 million and an operating presence at a physical office in the United States;
- 501(c) tax exempt charitable organizations and foundations;
- 527(e)(1) political organizations; and,
- 4947(a)(1) and (2) charitable and split interest trusts.
Domestic and Foreign Reporting Companies formed January 1, 2024 and after must file a BOIR with a State Business Registration Office within 90 calendar days of their registration. Existing Reporting Companies must file a BOIR by January 1, 2025. If a Reporting Company has any change to the information previously submitted to FinCEN, they must report the updated information within 30 calendar days. Further, an individual who willfully provides false or fraudulent information or fails to report complete or updated information faces a civil penalty of $500 per day as long as the violation is unremedied as well as a criminal fine of up to $10,000 per day and/or two years in prison. However, there is a 90-day safe harbor if an individual voluntarily submits a report which contains correct information.
To simplify the process, for reporting or filing a BOI Registration we recommend Reporting Companies, Company Applicants, and Beneficial Owners, and any Beneficial Owners who exercise substantial control over an entity obtain a FinCEN ID.
We recommend addressing the CTA in your business formation documents (e.g. operating agreements, bylaws, or even trusts that may own entities). You should be taking steps to comply with the CTA now and not wait to file your BOIR. Please contact us at info@frltd.com if you require assistance in complying with the Corporate Transparency Act.
