The Corporate Transparency Act: What You Need To Know Ahead Of The January 1, 2025 Deadline

The January 1, 2025 deadline for any "reporting company" formed prior to January 1, 2024 to file a Beneficial Ownership Information Report ("BOIR") with the Department of the Treasury's Financial Crimes Enforcement Network ("FinCEN") under the Corporate Transparency Act (the "CTA") is quickly approaching. If you have not yet filed a BOIR or determined whether your company is required to do so under the CTA, this article will provide you with an overview of the most frequently asked questions regarding the CTA, its requirements, deadlines, penalties and most recent updates.

What is the CTA?

The CTA came into effect on January 1, 2024 as part of the Anti-Money Laundering Act of 2020 and was enacted to combat money laundering, terrorist financing and other financial crimes. The CTA promotes transparency of certain business entities by requiring each domestic and foreign entity that qualifies as a "reporting company" to file a BOIR with FinCEN. The BOIR requires reporting companies to disclose information about the reporting company itself as well as its owners and other persons who exercise substantial control over the reporting company, and, for all entities formed on or after January 1, 2024, the individuals who filed, and directed the filing of, the formation/registration documents of the reporting company with the Secretary of State. Although there are several exemptions to the CTA as outlined on Appendix A, it is likely that many companies, both large and small, will be deemed reporting companies and must comply with the CTA.

When does my company have to file?

What happens if I don't comply with the CTA by the deadline?

A person who willfully violates the BOIR requirements of the CTA may be subject to (1) civil penalties of up to $500 for each day that the violation continues, adjusted annually for inflation (as of January 25, 2024, this amount is $591), and (2) criminal penalties of up to two years imprisonment and a fine of up to $10,000. Potential violations include willfully failing to file a BOIR, willfully filing false beneficial ownership information, or willfully failing to correct or update previously reported beneficial ownership information.

Both individuals and corporate entities can be held liable for willful violations. This can include not only an individual who actually files (or attempts to file) false information with FinCEN, but also anyone who willfully provides the filer with false information to report. Both individuals and corporate entities may also be liable for willfully failing to report, complete or update beneficial ownership information; in such circumstances, individuals can be held liable if they either cause the failure or are a senior officer at the company at the time of the failure.

How do I know if my company is a "Reporting Company" subject to the CTA?

Your entity is most likely a "reporting company" if it is (1) a corporation, limited liability company, or other entity created by filing a formation document with a Secretary of State within the U.S., or (2) a foreign company that is registered with a Secretary of State or similar office to do business in the U.S.

However, the CTA does provide a list of 23 exemptions that may apply to your entity. If your entity meets the specific criteria for an exemption, you will not be required to file a BOIR under the CTA. A few notable exemptions are listed below (and a full list of exemptions can be found on Appendix A):

• Public Companies (Securities and Exchange Act issuers)
• Investment Companies (pursuant to Section 3 of the Investment Company Act) and Investment Advisers (pursuant to Section 202 of the Investment Advisers Act), in each case, registered with the SEC
• Certain tax-exempt entities
• Large operating companies ("LOC") – an entity is an LOC if it (1) employs more than 20 full-time employees in the U.S. (independent contractors, leased employees, and, for an S corporation, any shareholders owning two percent (2%) or more of the entity, do not count as employees), (2) generates more than $5,000,000 in annual gross receipts (as reported in the federal income tax returns of the year prior), and (3) has an operating presence at a physical office in the U.S. that it owns or leases.
• Subsidiaries of most (but not all) exempt entities

If you determine that your company is not a reporting company under the CTA, it does not have to report that it is exempt to FinCEN. However, if your entity later loses its exemption, it must file an initial BOIR within 30 days of losing that exemption.

FinCEN's Small Entity Compliance Guide includes helpful information about each of the 23 exemptions FinCEN has outlined and checklists to help you determine whether a company qualifies for an exemption. Please carefully review the qualifying criteria and each of the exemptions before concluding that a company is exempt from CTA reporting.

It looks like I have a Reporting Company that does not qualify for an exemption. How do I determine who is a "beneficial owner"?

Once you determine your entity must file a BOIR, you need to identify the "beneficial owners" for your entity. A reporting company must disclose all of its beneficial owners and provide certain required personal identifying information and corresponding documents for each beneficial owner.

The CTA defines a "beneficial owner" as an individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25% of the ownership interests of a reporting company.

1. Substantial Control: An individual has "substantial control" if the individual:
   • Is a senior officer of the reporting company, such as the President, Chief Executive Officer, Chief Financial Officer, General Counsel, Chief Operating Officer, or any other officer who performs a similar function;
   • Has the authority to appoint or remove senior officers or a majority of directors;
   • Exerts substantial influence over important decisions regarding the business, finances or structure of the reporting company, including, but not limited to: (a) the nature, scope, and attributes of the reporting company (e.g., the sale, lease, mortgage, or other transfer of principal assets), (b) any reorganization, dissolution, or merger, (c) the selection or termination of business lines or ventures, (d) any compensation schemes or incentive programs for senior officers, or (e) the entry into or termination of significant contracts; or
   • Otherwise has substantial control over the reporting company (e.g., through a parent or intermediary entities, through rights associated with a financing arrangement, or through other financial or business arrangements, whether formal or informal)
2. 25% Ownership Interest: This test relates to all direct and indirect owners and may include reviewing intermediary entities. In order to conduct an ownership analysis of the reporting company, you will need to consider all of the following types of ownership interest (on a fully diluted basis):
   • Equity, stock, or voting rights;
   • A capital or profit interest;
   • Convertible instruments;
   • Options or other non-binding privileges to buy or sell any such interests; and
   • Any other instrument, contract or other mechanism used to establish ownership.
3. Beneficial Owner Exceptions: The CTA identifies five (5) groups of individuals who may otherwise be beneficial owners, but for one of the following exceptions:
   • Minor children (the reporting company should instead report the information of the minor's parent or legal guardian);
   • Nominee, intermediary, custodian, or agent (an individual merely acting on behalf of an actual beneficial owner, e.g. tax professionals);
   • Employee (but only if that employee is not a senior officer and the employee's substantial control over the reporting company is derived solely from the employee's employment status);
   • Inheritor (the individual's only interest in the reporting company is a future interest through right of inheritance); and
   • Creditor (an individual who would meet the definition of a beneficial owner of the reporting company solely through rights or interests for the payment of a predetermined sum of money, such as a debt incurred by the reporting company, or a loan covenant or similar right associated with such right to receive payment).

What information does each beneficial owner need to provide?

The information that must be provided for each beneficial owner includes his or her (1) full legal name, (2) date of birth, (3) residential street address (this cannot be a company address), (4) ID number and issuing jurisdiction of a non-expired US passport, driver's license, or other government-issued ID, and (5) an image/photocopy of such ID. A significant amount of the information a reporting company must collect and report may qualify as personal data under state and federal privacy laws. Entities governed by these laws must take various measures to comply with privacy laws while ensuring their reporting obligations.

For this reason, reporting companies may consider requiring their beneficial owners to provide the reporting company with a "FinCEN ID" in lieu of collecting the beneficial owners' personal information. The FinCEN ID number can then be provided on a BOIR in lieu of the items above. This is also helpful if an individual is a beneficial owner with respect to more than one reporting company, and will need to report information on multiple BOIRs. Individuals can apply for a FinCEN ID at https://fincenid.fincen.gov/landing.

Is there any other information my reporting company will need to provide to FinCEN?

In addition to the information of each beneficial owner, your entity will need to provide certain company information, including its name, all trade names or DBAs, the current address of its principal place of business in the U.S., its state of formation or registration, and its IRS Taxpayer Identification Number ("TIN") or, if it has no TIN, a tax number issued by a foreign jurisdiction.

Additionally, if the entity was formed on or after January 1, 2024, the reporting company will need to disclose the information of a minimum of one (1) and maximum of two (2) company applicant(s). A "company applicant" as an individual that either (a) directly filed the document that created or registered the entity with the Secretary of State, or (b) is primarily responsible for directing or controlling the filing of the formation or registration documents by another.

What happens if information on my BOIR changes or I find a mistake?

A reporting company must update or correct a BOIR if the information included on a filed BOIR changes or the reporting company becomes aware or has reason to know of an inaccuracy. In the case of an update, the reporting company must submit an updated BOIR within 30 days of the change. In the case of a correction, a reporting company must submit a corrected BOIR within 30 days after becoming aware or having reason to know of such inaccuracy. Note that the requirement to update a BOIR does not apply to any change to a company applicant's identifying information.

Recent Key Updates

CTA Litigation

There are several lawsuits in both federal and state courts challenging the constitutionality of the CTA currently pending. On March 1, 2024, in the Northern District of Alabama, in National Small Business United v. Yellen, Case No. 5:22-cv-01448 (N. D. Ala. Mar. 1, 2024), the court held that the CTA could not be justified as a constitutional exercise of Congress's powers. The district court permanently enjoined any requirements for registration as well as any potential penalties for noncompliance, but only for the specific plaintiffs in the case. The case is currently on appeal to the Eleventh Circuit Court of Appeals, Case No. 24-10736. On the other hand, on September 20, 2024, the U.S. District Court for the District of Oregon found in favor of the federal government in Firestone v. Yellen, Case No. 3:24-cv-1034-SI (D. Ore.). The Order denied the plaintiffs' motion for a preliminary injunction, finding that they had not demonstrated likeliness of success on the merits with respect to their list of constitutional arguments. Lawsuits challenging the CTA on constitutional grounds have also been filed in the federal district courts of Ohio, Maine, Michigan and Texas. Notwithstanding current litigation and until further notice, the CTA remains in effect for all reporting companies and failing to timely file a BOIR could result in civil and criminal penalties.

State-Specific Frameworks

Individual states, including California, Maryland, Massachusetts and others, continue to consider their own individual frameworks for corporate transparency requirements. In New York, legislation has already been enacted. The New York LLC Transparency Act ("NY LLCTA") will require limited liability companies formed or qualified to do business in New York State to report individual beneficial ownership information to the New York Department of State. The NY LLCTA will become effective on January 1, 2026. As the legislative landscape continues to take shape, it is important for companies to keep apprised of potential state-specific obligations and continue to comply with the federal CTA requirements already in effect.

BOIR Relief to Victims of Recent Natural Disasters

FinCEN announced that certain victims of Hurricane Milton, Hurricane Helene, Hurricane Debby, Hurricane Beryl, and Hurricane Francine will receive an additional six months to submit BOIRs, including updates and corrections to prior reports. FinCEN has issued five Notices, which can be found on the FinCEN website, extending the filing deadlines for reporting companies that (1) have an original reporting deadline beginning one day before the date the specified disaster began and ending 90 days after that date, and (2) are located in an area that is designated both by the Federal Emergency Management Agency as qualifying for individual or public assistance and by the Internal Revenue Service as eligible for tax filing relief.

FinCEN FAQs

FinCEN continues to provide published guidance in the form of "Frequently Asked Questions" to help companies understand their reporting obligations. We have compiled a short list of the most common and helpful FAQs as set forth on Appendix B.

Additional information about the CTA requirements can be found at the following FinCEN websites:

• FinCEN's website regarding beneficial ownership information (https://www.fincen.gov/boi)
• FinCEN's BOI Brochure (https://www.fincen.gov/sites/default/files/shared/BOI-Informational-Brochure-April-2024. pdf)
• FinCEN's Small Entity Compliance Guide (https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_ Guide.v1.1-FINAL.pdf)
• FinCEN's BOIR Frequently Asked Questions (https://www.fincen.gov/boi-faqs)

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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.