What is the CTA?
Congress passed the Corporate Transparency Act (“CTA”) at the end of 2020 as part of a larger bill referred to as the Anti-Money Laundering Act, which in turn was part of the National Defense Authorization Act of 2021. It was signed into law by President Biden on January 1, 2021. The CTA was enacted to target perceived money laundering taking places through the use of entities. As such, the CTA expanded anti-money laundering laws and created new reporting requirements for certain companies doing business in the US.
We have written several articles on the CTA in the past, the most recent being in September of 2023.[1] Fast forward to 2024 and the CTA is now active. As such, many small businesses are required to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) in an effort to create a national database for use by national security and law enforcement agencies to prevent the use of shell companies for criminal activity.
What is Required by the CTA?
The CTA mandates the disclosure of beneficial ownership information for certain entities, necessitating owners and/or those that control a company to provide this information. This disclosure is made through the filing of a Beneficial Ownership Information (“BOI”) report with FinCEN.
Who is Required to File a BOI Report?
In short, any company, whether foreign or domestic, that was created or registered in the US through the filing of a document with the Secretary of State or a similar office. This includes all LLCs, LPs, LLPs, PLLCs, and Corporations. Sole proprietorships and general partnerships are generally not considered reporting companies as they generally do not file a formal document with the Secretary of State. Likewise, a trust is generally not considered a reporting company as a trust generally does not file a formal document with the Secretary of State. Companies required to file a BOI report are each referred to as a “Reporting Company”.
Are There Exceptions?
Yes, there are a number of exceptions to the filing requirement which may be applicable. The exception that is likely to be used the most is the exemption for large operating companies. A large operating company is any entity with (a) more than 20 full-time US employees, (b) an operating presence at a physical office within the US, and (c) more than $5,000,000 of US-sourced gross receipts reported on its prior year federal income tax return. Companies meeting these qualifications are not subject to the new reporting requirements.
What Information Must be Reported?
A Reporting Company must report the information of its “Beneficial Owners”, and if formed after 2023, all of its “Company Applicants” as well, both of which are discussed below. This information on each Beneficial Owner, and Company Applicant, if applicable, includes the individual’s full legal name, date of birth, street address, and a unique ID number which can come from a non-expired US passport, state driver’s license, or other government-issued ID card. If the individual does not have any of those documents, then a non-expired foreign passport can be used. An image of the document showing the unique ID number must also be included with the report.
Who is a Beneficial Owner?
There are two groups of individuals that are considered to be Beneficial Owners of a Reporting Company: (1) any individual who directly or indirectly owns or controls at least 25% of the ownership interests of the reporting company; or (2) any individual who exercises substantial control over the reporting company.
Substantial control includes those who have substantial influence over important business decisions of a Reporting Company. The senior officers of a Reporting Company are automatically deemed to have substantial control, and this list generally includes, but may not be limited to, all C- level officers (CEO, CFO, COO), the president, the general counsel, and any other officer who performs a similar function. In addition, individuals with the authority to appoint or remove senior officers and board members are also automatically deemed to have substantial control.
Who is a Company Applicant?
A Company Applicant is defined as the person who actually files the document that creates or registers the reporting company (e.g., an attorney, paralegal, accountant, etc.).
What is a FinCEN ID?
Individuals and Reporting Companies can request a FinCEN Identifier (“FinCEN ID”) to use in place of supplying detailed information on the report. A FinCEN ID is a unique number assigned by FinCEN which is obtained by submitting the same information as is required of a beneficial owner or reporting company. A FinCEN ID may be useful to individuals that prefer to send their personal information directly to FinCEN rather through a reporting company, or to individuals that may be required to supply information as a beneficial owner or company applicant of multiple Reporting Companies.
It is important to note that once a FinCEN ID is obtained, the holder of the FinCEN ID is required to update the information associated with the FinCEN ID within 30 days of any change to such information.
When are the Filing Dates?
For existing Reporting Companies created or registered before 2024, the initial report is due by January 1, 2025.
For Reporting Companies created or registered in 2024, the initial report is due 90 days after the entity’s creation or registration.
For Reporting Companies created or registered after 2024, the initial report is due 30 days after the entity’s creation or registration.
What if the Information Changes?
If there is a change to previously reported information about the Reporting Company or its Beneficial Owners, an updated report must be filed within 30 days of the change. If the Reporting Company or Beneficial Owners use a FinCEN ID, then the FinCEN ID information must be updated in lieu of updating the Reporting Company information. In any event, it is crucial for Reporting Companies to have a system to identify reportable changes and file an updated report with FinCEN in a timely manner.
What Happens if I Don’t File?
The penalties for willfully failing to file both initial and updated reports are steep-$500 per day that the report is late, up to $10,000, and imprisonment for up to two years.
How Do I File?
BOI reports must be filed electronically. FinCEN’s e-filing portal, available at https://boiefiling.fincen.gov/, provides two methods to submit a report: (1) by filling out a web-based version of the form and submitting it online, or (2) by uploading a completed PDF version of the BOI report. Some third-party service providers may also offer the ability to file the BOI report through their software. The person who submits the BOI report will need to provide their name and email address to FinCEN. There is no fee for filing the report.
So What Do I Need to Do?
For Reporting Companies that are created in 2024, the clock is ticking as they only have 90 days to complete the filing requirements, so they need to act now.
For Reporting Companies in existence prior to 2024, it may be prudent to schedule some ticklers on your calendar for later in the year, maybe end of the summer or so, and be prepared to file. Since the deadline is not until December 31, 2024, and the CTA is relatively new and still has some developing law[2], there will likely be more and better information and filing options out there as the year goes on. That said, the penalties for not filing are steep as noted above, so do not fail to get this done by the end of the year.
[1] See Parker Durham’s article here: https://esapllc.com/cta-do-not-be-caught-unaware-2023/
[2] At the time of this writing (March 2024), the United States District Court for the Northern District of Alabama has ruled that the CTA is unconstitutional as it exceeds Congress’ enumerated powers, see National Small Business United v. Yellen, Case No. 5:22-cv-1448-LCB (ND AL 2024). For a discussion of this case, please see the following article from Parker Durham: https://esapllc.com/cta-nsbu-case-2024/. As noted in Parker’s article, the DOJ and FinCEN have appealed this decision to the 11th Circuit United States Appeals Court. In addition, the opinion can be found here: https://www.moneylaunderingnews.com/wp-content/uploads/sites/12/2024/03/CTA-Opinion.pdf The opinion itself is a great read whether you agree with its conclusion or not. While the opinion only enjoins any action against the actual plaintiffs, this is a landmark ruling that will set the stage for additional CTA legislation, with a very high chance this ultimately reaches the Supreme Court, so stay tuned on that front.
