Please download the full client alert here.
As we noted in a previous client alert here, effective January 1, 2024, companies doing business in the United States are subject to new reporting requirements under the Corporate Transparency Act ("CTA"). The CTA is part of the U.S. government's effort to promote transparency in an effort to detect and minimize terrorism, money laundering, and other business crimes.
Summary of General Reporting Requirements
Reporting companies must file their beneficial ownership information ("Beneficial Ownership Information" or "BOI") with the Financial Crimes Enforcement Network ("FinCEN"), a bureau of the Department of Treasury responsible for administering and enforcing the CTA.
Under the CTA, there are two types of "reporting companies":
i. A "domestic reporting company" is a corporation, limited liability company, partnership (depending on the laws of the state of formation), or other similar entities formed by filing a document with the secretary of state or a similar office of a U.S. state or Indian tribe; and
ii. A "foreign reporting company" is a corporation, limited liability company, or other similar entity formed under foreign law and which has qualified to do business in the United States by filing a document with a secretary of state or similar office of a U.S. state or Indian tribe.
A trust may be considered a reporting company if it is created or registered to do business by filing a document with a secretary of state or similar office.
A reporting company must file an initial BOI report to FinCEN. No further regular periodic filing is required. However, a reporting company must update its BOI report if any of the reported information changes.
The deadlines for submitting BOI reports are as follows:
- For reporting companies formed or registered before January 1, 2024, the reporting deadline is any time before January 1, 2025.
- For reporting companies formed or registered on or after January 1, 2024 and on or before December 31, 2024, the deadline is 90 days after the earlier of: 1) receipt of actual notice of formation or registration from a secretary of state or similar office; and 2) the date on which a secretary of state or similar office first provides public notice of formation or registration (i.e., through a publicly available registry).
- For reporting companies formed or registered on or after January 1, 2025, the deadline will be 30 days after the earlier of: 1) receipt of actual notice of formation or registration from a secretary of state or similar office; and 2) the date on which a secretary of state or similar office first provides public notice of formation or registration (i.e., through a publicly available registry).
Willful violations of the BOI reporting requirements can result in civil penalties (of up to $500 for each day the violation continues) and criminal penalties (a fine of up to $10,000, imprisonment for not more than two years, or both) for the reporting company and the individual or senior officer who causes the failure. Understanding the CTA rule is important to avoid potential penalties.
Updated FinCEN Guidance
FinCEN provides official reference materials to clarify application of the CTA. This client alert highlights certain of FinCEN's recent guidance that may have broad applicability to reporting companies, including interpretations in FinCEN's updated FAQs. For a more general overview of the CTA, please refer to our previous client alert.
Although a Federal District Court ruled that the CTA is unconstitutional, reporting companies are still required to comply with the CTA
On March 1, 2024, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional, and enjoined its enforcement against the plaintiffs in that case (National Small Business United v. Yellen, Case No. 5:22-cv-01448 (N.D. Ala. Mar. 1, 2024)). The government filed an appeal on March 11, 2024. Meanwhile, on September 20, 2024, the U.S. District Court for the District of Oregon denied a motion for a preliminary injunction to halt enforcement of the CTA, finding that the plaintiffs had not shown a likelihood of success on the merits of their claim that the CTA is unconstitutional (Michael Firestone, et al. v. Janet Yellen, Case No. 3.24-cv-1034 (D. Or. Sept. 20, 2024)).
While legal challenges are ongoing and a nationwide resolution can be expected to take time, FinCEN has announced that it will continue enforcing the CTA and that reporting companies, except for those entities and individuals specifically covered by a court's ruling otherwise, are still required to comply with the CTA and submit reports as required by FinCEN's CTA regulations.
A person a reporting company authorizes to act on its behalf may file a BOI report on behalf of the reporting company
BOI reports must be submitted through FinCEN's BOI E-Filing System. A reporting company may authorize anyone within the organization, including its owners, to act on its behalf and file a BOI. The CTA and FinCEN's regulations also permit a third-party to file or otherwise assist in the preparation of a BOI report on behalf of a reporting company.
If a reporting company legally existed or was registered to do business for any period of time on or after January 1, 2024, the company is required to report BOI to FinCEN
A company is not required to report its BOI to FinCEN if it ceased to exist as a legal entity or if it ceased to be registered to do business in the United States (i.e., it entirely completed the process of formally and irrevocably dissolving or withdrawing any and all registrations) before January 1, 2024 when the BOI reporting requirements became effective. However, if a reporting company continued to exist as a legal entity or was registered to do business in the United States for any period of time on or after January 1, 2024, it is required to report its BOI to FinCEN, even if the company had wound up its affairs and ceased conducting business or, in the case of a non-U.S. entity, ceased conducting business in the United States before January 1, 2024. The date of completion of the process of formal and irrevocable dissolution or withdrawal of all registrations is determinative as to whether a company is required to report its BOI to FinCEN.
If a company changes its corporate form, it may be required to file a new initial BOI report or an amendment to its existing BOI report
A domestic reporting company is a company "created" by the filing of a document with a secretary of state or similar office under the laws of a state or Indian tribe. A conversion from one type of entity to another may result in the creation of a "new" entity under the laws of the state or Indian tribe. If the conversion results in the creation of a new entity, then the new domestic reporting company is required to file an initial BOI report.
Even if the conversion filing does not create a new entity, an entity may be required to file an updated BOI report with FinCEN after the conversion, as changes in previously submitted information also triggers reporting obligations. As an example, FinCEN noted that if "Company, Inc." converts into an LLC, its name may have changed to "Company, LLC," and therefore it may be required to file an updated BOI report because such change is a change in required information previously filed with FinCEN.
There is no maximum number of beneficial owners that must be reported
A "beneficial owner" is defined as an individual who, directly or indirectly, either exercises "substantial control" over the reporting company, or owns or controls at least 25% of the "ownership interest" in the reporting company. FinCEN has clarified that a reporting company can have multiple beneficial owners and that there is no maximum number of beneficial owners that must be reported.
FinCEN also expects that each reporting company will have one or more persons who substantially control the reporting company and, therefore, that each reporting company will be able to identify and report to FinCEN at least one beneficial owner, even if the reporting company has no persons who own or control 25 percent or more of the company. Of note, however, FinCEN has clarified that a member of a reporting company's board of directors is not always a beneficial owner. Rather, it is an issue that reporting companies must evaluate on a director-by-director basis according to the factors described above.
When a reporting company has one or more trusts as shareholders or members, the individual or individuals who exercise substantial control of the reporting company (and are therefore its beneficial owners) will depend on the particular facts and circumstances
A significant issue in the case of trusts is how to determine the beneficial owners of a reporting company that is owned or controlled by a trust. According to FinCEN, since trust arrangements vary, particular facts and circumstances determine who are beneficial owners among trustees, beneficiaries, grantors, settlors, and other individuals with roles in a particular trust.
FinCEN provides the following as examples of factors that may indicate that an individual owns or controls, through a trust, an ownership interest in a reporting company:
- a trustee (or any other individual) has the authority to dispose of trust assets;
- a beneficiary is the sole permissible recipient of income and principal from the trust, or has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or
- a grantor or settlor has the right to revoke the trust or otherwise withdraw the assets of the trust.
The beneficial owners of a reporting company with a trust in its ownership structure could include the individuals who act on behalf of a corporate trustee of the trust, as well as individuals who are beneficial owners of the corporate trustee
Unique issues arise when the determination of beneficial ownership relates to a corporate trustee of a trust that is an owner of a reporting company. Consideration must be given to whether any owners of, or individuals employed or engaged by, the corporate trustee exercise substantial control over the reporting company. In addition, a reporting company must consider whether any individual beneficial owners of the corporate trustee indirectly own or control at least 25 percent of the ownership interests of the reporting company through their ownership interests in the corporate trustee. FinCEN has, however, clarified that a reporting company may report the name of the corporate trustee instead of information about an individual beneficial owner if all of the following three conditions are met:
- the corporate trustee is an entity that is exempt from the reporting requirements;
- the individual beneficial owner owns or controls at least 25 percent of ownership interests in the reporting company only by virtue of ownership interests in the corporate trustee; and
- the individual beneficial owner does not exercise substantial control over the reporting company.
A reporting company must provide a tax identification number (TIN) when reporting its BOI to FinCEN
A reporting company must provide a TIN on its BOI report. A reporting company will not be able to file its BOI report without including a TIN.
A reporting company must provide one of the following types of TINs (IRS-issued TINs) issued by the Internal Revenue Service (IRS) if it has been issued one: an Employer Identification Number (EIN); a Social Security Number (SSN); or an Individual Taxpayer Identification Number (ITIN). If a foreign reporting company does not have an IRS- issued TIN, it must provide a tax identification number issued by a foreign jurisdiction and the name of that jurisdiction.
A disregarded entity that does not have a TIN of its own must still provide on its BOI one of the types of TINs described above. FinCEN has clarified that disregarded entities may provide TINs in compliance with IRS rules regarding the use of TINs, and explains as follows:
- If the disregarded entity has its own EIN, then it may report that EIN as its TIN.
- If the disregarded entity does not have a TIN of its own, it is not required to obtain one to meet its BOI reporting requirements as long as it can instead provide another person's TIN according to the IRS rules regarding use of TINs or, if it is a foreign reporting company, a TIN issued by a foreign jurisdiction and the name of that jurisdiction.
o If the disregarded entity is owned by a U.S. entity that has an EIN or a single individual with an SSN or ITIN, then the disregarded entity may provide its owner's EIN, SSN or ITIN, as applicable, on its BOI.
o If the disregarded entity is owned by another disregarded entity or a chain of disregarded entities, then the disregarded entity may report as its TIN the TIN of the first owner up the chain of disregarded entities or individual owner that has a TIN.
Reporting companies must update FinCEN on changes to their exempt or reporting status within 30 days of the triggering change
A company that satisfies the "reporting company" definition must file a BOI report unless it meets the criteria for an exemption. If the company files a BOI report and then becomes an exempt entity, then the company must file a "newly exempt entity" BOI report to indicate that the company is now exempt. If the company later loses its exempt status, then it must file an updated BOI report with FinCEN to report this change. Updated reports must be submitted to FinCEN within 30 calendar days of the change in status.
Access to the BOI submitted to FinCEN is limited, and BOI is not subject to disclosure under the Freedom of Information Act
BOI provided to FinCEN under the CTA is not publicly available and access to it is limited. In accordance with the CTA, FinCEN may provide access to the BOI to: (i) federal agencies engaged in national security, intelligence, or law enforcement activities; (ii) state, local, and tribal law enforcement agencies with court authorization; (iii) Treasury Department officials; (iv) foreign law enforcement agencies, judges, prosecutors, and other authorities who submit a request through a U.S. federal agency to obtain BOI for authorized activities; (v) financial institutions with customer due diligence requirements under applicable law; and (vi) federal functional regulators or other appropriate regulatory agencies that supervise or examine financial institutions with access to BOI.
FinCEN has also clarified that BOI reported to FinCEN is exempt from disclosure under the Freedom of Information Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
