Corporate Transparency Act – What You Need to Know

Beginning on January 1, 2024, the Corporate Transparency Act (the “Act”) will impose new beneficial ownership reporting obligations upon millions of companies doing business in the United States. Taxpayers, attorneys, accountants, and other service providers will need to comply and properly advise on the application of the reporting requirements, which are further summarized below.

What is the Corporate Transparency Act?

Congress enacted the Act as part of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal year 2021, Pub. L. No. 116-283, which added 31 U.S.C. § 5336 to the Bank Secrecy Act titled “Beneficial ownership information reporting requirements.” Intended by Congress to prevent the use of legal entities, particularly shell companies, to commit crimes ranging from tax fraud to money laundering, the Act requires “reporting companies” to disclose personal identifying information pertaining to certain individuals, known as “beneficial owners,” to the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Congress delegated implementation, enforcement, and promulgation of additional rules pertaining to the Act to FinCEN.

What is a reporting company?

The broad definition of “reporting companies” subjects most domestic and certain foreign companies to FinCEN’s reporting requirements unless they qualify for a specific exemption under the Act. Such domestic reporting companies include corporations, limited liability companies, non-profit corporations, and any other entity created by filing a document with a secretary of state or any similar office. Sole proprietorships and general partnerships generally do not require filing with a state secretary of state and are not included in the reporting company definition. Foreign reporting companies include corporations, limited liability companies, and other entities formed under foreign law and registered to do business in the United States by filing a document with a secretary of state or any similar office.

The Act provides for 23 exemptions from reporting to certain entities, such as domestic governmental authorities, banks, credit unions, securities brokers and dealers, tax-exempt entities, and others. Generally, entities that are already governed by another U.S. regulatory agency are exempt from reporting under the Act due to their ongoing public disclosure obligations. Another significant exemption that may apply to a large number of companies is for “large operating companies.” The Act defines a “large operating company,” which includes a company (i) that employs more than 20 employees on a full-time basis, (ii) reported more than $5 million or more in gross receipts on its federal income tax return or information return for the previous year, and (iii) has an operating presence at a physical office within the United States. Whether or not an exemption applies is an ongoing determination, and a company may not always qualify as an exempt entity. Entities should frequently revisit whether they qualify for any of the listed exemptions.

What information must be reported?

A reporting company must disclose the company’s legal name, “doing business as” or trade names, the current business address, the jurisdiction the entity is formed or registered in, and a unique identification number, such as an employer identification number or tax identification number.

In addition to the reporting company information, the report must also provide beneficial ownership information (“BOI”) for each beneficial owner, including their full legal name, birth date, current residential or business address, a unique identifying number from an approved government issued document, and an image of the document with the unique identification number. For entities formed or registered after January 1, 2024, each BOI report must also include the same information for at least one “company applicant.” Beneficial owners and company applicants may apply for a FinCEN identifier, which can be used as a substitute for the information required above.

Who are beneficial owners and company applicants?

Beneficial Owners

A beneficial owner is an individual who directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, (1) exercises substantial control over the entity (senior officers, managers, etc.); or (2) owns or controls 25% or more of the entity’s ownership interests.

A reporting company can have more than one beneficial owner and will always have at least one beneficial owner. As with reporting companies, the definition of beneficial owner contains numerous exceptions, including minor children, nominees, individuals solely acting as an employee, individuals whose interest is through an inheritance they have not received yet, and creditors.

Determining “substantial control” and ownership or control of ownership can be a daunting task for complex structures, and each requirement casts a wide net to capture a number of potential individuals. Individuals can exercise substantial control in four different ways and will include individuals such as board members, directors, managers, managing members, executive officers, or any other individual who has substantial influence over important company decisions. To further muddy the waters, ownership or control of ownership is any arrangement that can establish ownership rights and requires considering all classes of stock, profits interests, capital interests, convertible instruments, warrants, rights, and privileges to acquire or sell equity.

Company Applicants

Company applicants include a maximum of two individuals; (1) the individual who directly filed the document(s) that created the domestic entity or registered the foreign entity and (2) the individual who directed or controlled the individual who filed the documents. This may be the same individual in some instances. Entities formed before January 1, 2024, do not have to provide BOI with respect to company applicants.

When must a BOI report be filed?

Companies formed or registered before January 1, 2024, have until January 1, 2025, to file the initial BOI report. For companies formed or registered after January 1, 2024, the initial BOI report must be filed within 90 days of formation or registration. This reporting deadline was extended from the original 30-day window by the FinCEN final regulations, 31 C.F.R. 1010. Companies formed or registered after January 1, 2025, are required to file their BOI report within the original 30-day window.

Reporting companies also have to continue reporting obligations if a beneficial owner’s or reporting company’s reported information changes on a previously filed BOI report. In these instances, an updated BOI report must be filed within 30 days of the change taking place. Additionally, if an individual no longer qualifies for a beneficial owner exception, or an otherwise exempt company is no longer exempt, an updated report must be filed within 30 days of the change.

Are there penalties for noncompliance?

The Act imposes steep criminal and civil penalties, and possibly imprisonment. Companies that fail to report BOI or correct incomplete or incorrect information may be subject to a daily $500 fine until the violation is corrected. In the case of a willful failure to file, to provide complete or updated information, or fraudulent conveyance of false information, companies may be subject to a penalty of up to $10,000 and two-year imprisonment.

What can you do?

Companies should determine whether they will be subject to the Act prior to the January 1, 2024, effective date by reviewing corporate structures and updating organizational flow charts, creating beneficial ownership registers, reviewing and updating existing privacy policies and procedures, developing an internal compliance program, implementing and maintaining technical, administrative and physical security measures to ensure the information and identifying documents are protected from unauthorized access, and ensuring that information used for reporting does not violate other privacy laws under state and federal laws.

The Act’s regulations, particularly the substantial control and ownership requirements, are complex, a full analysis of which is beyond the scope of this article. For additional assistance, FinCEN provided a frequently asked questions list, which can be found here, as well as a small entity compliance guide, which can be found here.

For more information regarding the Act or how the Act may impact your business, please contact your local Dykema relationship attorney.