Starting on January 1, 2024, non-exempt statutorily-created business entities are required to report certain beneficial ownership information (“BOI”) to the United States Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, pursuant to the Corporate Transparency Act (“CTA”). The CTA was enacted by Congress in 2021 to help law enforcement agencies combat the use of shell and front companies to launder money and commit tax fraud and other crimes in the United States financial system.
Under the CTA, most non-public, non-banking entities, including corporations, limited liability companies and limited partnerships, will be subject to the BOI reporting requirements. Entities should determine as soon as possible whether the CTA applies to them in order to avoid the considerable penalties for noncompliance. This memo provides a high-level overview of key aspects of the CTA.
When to Report. Reporting companies formed prior to January 1, 2024 must file their BOI reports with FinCEN by January 1, 2025. Reporting companies formed after January 1, 2024 must file their BOI reports within 30-days of formation, although there is a pending amendment that would extend this period to 90 days for reporting companies formed after January 1, 2024 and before January 1, 2025. After the initial report is filed, there is no requirement to file any additional reports unless there is a change in the beneficial ownership information. There is no fee to file the report.
What to Report. The reporting company must provide its legal name, trade name, address and tax identification number. Additionally, the reporting company must provide the full legal name, date of birth, address and a unique identifying number (from documents such as a driver’s license or passport) for individuals who qualify as “beneficial owners” and “company applicants” under the CTA.
Beneficial owners are defined as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.” (31 CFR 1010.380(d)). An individual exercises “substantial control” over the entity if they:
- are a senior officer;
- have “authority over the appointment or removal of any senior officer or a majority of the board of directors”;
- “Direct, determine, or have substantial influence over important decisions made by the reporting company”; or
- “Have any other form of substantial control over the reporting company”
31 CFR 1010.380(d)(1).
Any individual may exercise “other forms of substantial control” through board representations, ownership or control of a majority of the voting power or voting rights of the company or through other contractual or other arrangements. (Id.) “Important decisions” are broadly defined as including, but not limited to, decisions regarding the transfer of principal assets of the company; reorganization, dissolution or merger of the company; and major expenditures of the company. (Id.)
Company applicants are defined as “the individual who directly files the documents” creating or registering the company and “the individual who is primarily responsible for directing or controlling such filing.”
Exemptions. The CTA includes 23 exemptions, including but not limited to:
- Large operating companies, defined as any entity that employs more than 20 full time employees in the United States; has an operating presence at a physical office in the United States; and reported more than $5,000,000 in gross receipts or sales in its prior year tax return
- Non-profit entities
- Public companies, including wholly-owned subsidiaries
- Insurance companies
- Banks
- Registered Investment Companies
Trusts. A trust is typically not “an entity created through a filing with the state” and thus would not be subject to the CTA reporting requirements. However, an entity that is the beneficiary of a trust may be required to comply with the reporting requirements.
Violations. The CTA provides for civil and criminal penalties up to $500 per day up to a maximum of $10,000 for failure to file or update a BOI report, and up to $10,000 and two-years imprisonment for willfully failing to report or for willfully providing false information.
If you have any questions about the application of the CTA to your business entity, please contact Peter Herman (pherman@kanekessler.com; 212-519-5118) in Kane Kessler’s Corporate Practice Group or Jonathan Sabin (jsabin@kanekessler.com; 212-519-5113) in Kane Kessler’s Litigation Practice Group.