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Corporate Transparency Act Requirements

HORNTHAL, RILEY, ELLIS & MALAND, L.L.P.

Attorneys at Law

301 East Main Street

Elizabeth City, North Carolina 27909

Telephone (252) 335-0871      Telefax (252) 335-4223

 

TO:                  HREM Corporate Clients

FROM:           Andrew Howle

DATE:            January 6, 2024

SUBJECT:    Corporate Transparency Act Requirements

 

MEMORANDUM

                This memorandum provides specific details regarding reporting requirements that most small businesses will have to comply with as a result of the newly enacted Corporate Transparency Act (the “CTA”).

 

I. Corporate Transparency Act Purpose

                The CTA was created in an effort to curtail money laundering and fraud through entities such as corporations and LLCs (referred to as reporting companies). The CTA will require that most non-public entities report information regarding their respective “beneficial owners” and “company applicants” to the Financial Crimes Enforcement Network (“FinCEN”).  As explored in more detail below, beneficial owners are those who own or control not less than 25% of the ownership in the reporting company, or who otherwise exercise substantial control over the reporting company.[1]  Also as explored below, company applicants are those who assist in filing documents to form the reporting company.

For additional information and to file reports, please refer to the following sources on FinCEN’s own Website:

  1. Small Entity Compliance Guide, Beneficial Owner Information, Reporting Requirements: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf.
  2. Beneficial Owner Information Reporting, Frequently Asked Questions, https://www.fincen.gov/boi-faqs#M_3.
  3. Filing reports: https://www.fincen.gov/boi.

The information reported to FinCEN will not be publicly accessible, but will be available to: (i) Federal agencies engaged in national security, intelligence, or law enforcement activities; (ii) a state or local law enforcement agency who has obtained a court order to access the data; and (iii) a financial institution doing due diligence on its customer and who has obtained the consent of the applicable reporting company.[2]

 

II. Penalties for Non-Compliance

                Under the CTA, there are civil and criminal penalties for willfully: (1) failing to report complete or updated beneficial owner information; and (2) providing false or fraudulent information.  Any person violating the CTA reporting requirements may be subject to civil penalties of up to $500 per day per violation. Criminal violations may result in a fine of up to $10,000, imprisonment for up to two years, or both, for willful failure to report or providing false beneficial owner information.  Safe harbors from each of these penalties (considered below) are provided to allow for correcting or updating reported information.[3]

 

III. Who is a Beneficial Owner?

                A “beneficial owner” is an individual who, directly or indirectly, owns or controls not less than 25% of the ownership in the entity, or who otherwise exercises substantial control over the entity.[4]  The CTA and related regulations provide detailed guidance to determine whether someone is a beneficial owner, particularly in cases where someone exercises ownership or control indirectly.  That guidance is set forth below.

Being a Beneficial Owner by Exercising Substantial Control

An individual may exercise substantial control, directly or indirectly, over a reporting company, and thus be considered a beneficial owner, through any of the following methods:[5]

  • Board representation.[6]
  • Ownership or control of a majority of the voting power or voting right.
  • Rights associated with any financing arrangement or interest in the reporting company.[7]
  • Control over one or more trusts or other entities that separately or collectively exercise substantial control over the reporting company. In these cases, the person who exercises indirect control, and not the trust or entity through which he or she exercises such control, must be reported as the beneficial owner. So in each case, you must drill through each successive level of ownership until you reach an individual or an exempt entity (considered below) who is the owner.
  • Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees.
  • Any other contract, arrangement, understanding, relationship, or otherwise.

A person may directly or indirectly own or control an interest in the reporting through any contract, understanding, or arrangement, including the following:[8]

  • Joint ownership of an undivided interest.
  • Through another person who acts as a nominee, custodian, or agent.
  • Through a trust or similar arrangement where the individual: (1) is a trustee with authority to dispose of trust assets; (2) is a beneficiary who is the sole permissible income and principal recipient or who has the right to remove substantially all of the trust assets; or (3) is a grantor who can revoke the trust or withdraw the trust assets.
  • Through ownership or control of another entity that owns or controls an interest in the reporting company. In these cases, the person who exercises indirect control, and not the trust or entity through which he or she exercises such control, must be reported as the beneficial owner. So in each case, you must drill through each successive level of ownership until you reach an individual or an exempt entity (considered below) who is the owner.

An individual shall be deemed to exercise substantial control over a reporting company, and thus be deemed to be a beneficial owner, if the individual:[9]

  • Serves as a senior officer of the reporting company, including without limitation, a president, CFO, general counsel, CEO, COO, or any other officer who performs similar functions.[10]
  • Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body).
  • Directs, determines, or has substantial influence over important decisions, such as: (1) the transfer of any principal assets; (2) reorganization, dissolution, or merger; (3) major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget; (4) the selection or termination of business lines or ventures, or geographic focus; (5) compensation schemes and incentive programs for senior officers; (6) entry into or termination, or the fulfillment or non-fulfillment, of significant contracts; (7) amendments of any substantial governing documents.
  • Has any other form of substantial control over the reporting company.

Being a Beneficial Owner through Direct or Indirect Ownership

When determining whether someone owns an interest in a reporting company, all of the following are included:[11]

  • Any equity, stock, or similar interest.
  • Any capital or profit interest.
  • Any instrument that is convertible into one of the interests indicated in i. or ii., above.
  • Any put call, or other option to buy or sell an interest indicated in i., ii., or iii., above.
  • Any other instrument, contract, or other mechanism used to establish ownership.

When calculating whether someone’s ownership interest in the reporting company is sufficiently large to make that individual a beneficial owner, the following rules apply:[12]

  • The ownership interests shall be calculated at the present time, and any options or similar interest shall be treated as exercised. In that rights to both buy and sell ownership are considered, presumably the ownership interests should be considered as if options were exercised to give maximum ownership, but that is not clear from the regulations.
  • Where capital and profit interests are considered, ownership shall be considered as a percentage of the total outstanding capital and profit interests.
  • Where stock is considered and the reporting company has issued multiple classes of stock, the greater of the following shall be used: (1) the total voting power owned as a percentage of all voting power; or (2) the total value owned as a percentage of all ownership.
  • Where the facts and circumstances do not permit calculations to be made with reasonable certainty as suggested in ii. or iii, above, then any individual who owns or controls 25 or more of any class or type of interest shall be deemed to own or control 25 percent or more of the entity.

Special Rules related to Reporting data regarding Beneficial Owners

The following special rules or exceptions apply with regard to reporting beneficial owners:

  • If a beneficial owner is an entity that is exempt from reporting under these rules (exempt entities are considered in more detail below), the report may include the name of the exempt entity in lieu of providing all the other required data for that beneficial owner, as set forth below.[13]
  • If a beneficial owner is a minor, the reporting company can provide the data for the minor’s parent or guardian and indicate that the information relates to a parent or guardian.[14]
  • A person who exercises control over a reporting company solely as an employee is not considered a beneficial owner unless that person is a senior officer.[15] Senior officers include, without limitation, a president, CFO, general counsel, CEO, COO, or any other officer who performs similar functions.[16]

 

IV. Who are Company Applicants?

             A Established Reporting Company (those created before January 1, 2024) must report if it used any “company applicant” but does not have to report specific information about the company applicant.[17]  A New Reporting Company (those created on or after January 1, 2024) will have to report information regarding any company applicants it uses to form the reporting company.  Company applicants are individuals: (1) who directly file the documents that create the reporting company; and (2) who are primarily responsible for directing or controlling the filing of the document that creates the reporting company.[18]   If you had a law firm form your reporting company, the attorney who was in charge of the formation and the attorney’s assistant, if any, who actually filed the formation document with the secretary of state would both be considered company applicants.

 

V. Which Entities Must Report Data to FinCEN?

                The CTA’s reporting requirements generally apply to smaller, more lightly regulated entities that are less likely to already be subject to any other beneficial owner information reporting requirements. There are two types of reporting companies: domestic reporting companies and foreign reporting companies.[19] A domestic reporting company includes a corporation, a limited liability company, or any other entity created by the filing of a document with a secretary of state or any similar office.[20]

Entities Exempt from Reporting

                Some entities are created by filing documents with the secretary of state but are nonetheless exempt from the CTA reporting requirements.  These exempt entities are generally entities that are already regulated by federal and/or state government, so they often already disclose beneficial owner information. These exempt entities include the following:[21]

  • Section 501(c) entities that are exempt from taxation under IRC Section 501(a).[22]
  • Certain entities that operate exclusively to provide financial assistance to or hold government rights over Section 501(c) entities that are exempt from taxation under section 501(a).[23]
  • Large operating companies that have: (a) at least 20 full-time employees; (b) more than $5,000,000 in gross receipts or sales; and (c) an operating presence at a physical office in the United States.[24]
  • Subsidiaries of most exempt entities, including those identified in items i and iii, immediately above.[25]
  • Certain kinds of inactive entities that, among other requirements: (1) were in existence on or before January 1, 2020; (2) are not engaged in an active business; (3) have not experienced a change in ownership in the past 12 months; (4) have not sent or received more than $1,000 through a financial account in the past 12 months; and (5) do not own any assets.[26]

 

VI. When Should Data be Reported? and What Data Must be Reported?

                The CTA reporting requirements differ depending on whether a reporting company was created before January 1, 2024 (referred to as “Established Reporting Companies”) or created on or after January 1, 2024 (referred to as “New Reporting Companies”).

Established Reporting Companies (those created before January 1, 2024)

An Established Reporting (a reporting company created before January 1, 2024) has until January 1, 2025 to file its initial beneficial owner information with FinCEN.[27]

In all cases, the reporting company must report:

  • Its legal name and any trade name or DBA;
  • The street address of its principal place of business;
  • The jurisdiction in which it was formed; and
  • Its Taxpayer Identification Number (TIN) or Employer Identification Number (EIN).[28]

In all cases, the reporting company must also provide certain information regarding each beneficial owner.  If the beneficial owner has obtained his or her own FinCEN identifier, then that FinCEN identifier may be reported by the reporting company in lieu of reporting the data listed below.[29]  If the beneficial owner has not obtained his or her own FinCEN identifier, then, subject to the exceptions listed below, the reporting company must report the following with regarding each beneficial owner:

  • Full legal name;
  • Date of birth;
  • Residential street address;
  • An identifying number from a(n): (a) current US passport; (b) state issued driver’s license; (c) identification document issued by a state or other government entity located in the US; or (d) if none of the foregoing are available, a passport issued by a foreign government; and
  • An image of the document used in item iv., immediately above.[30]

The Established Reporting Company must also report if it used any “company applicant” (defined in “Section IV.  Who are Company Applicants?” above) but does not have to report specific information about the company applicant.[31]

New Reporting Companies (those created on or after January 1, 2024)

A New Reporting Company (a reporting company created on or after January 1, 2024) that is created on or after January 1, 2024 but before January 1, 2025 will have 90 days after it is created to file its initial beneficial owner information with FinCEN.[32]   New Reporting Companies created on or after January 1, 2025, will have 30 days to file their beneficial owner information with FinCEN. This reporting deadline runs from the earlier of the date that: (i) the New Reporting Company receives actual notice of its creation; or (ii) the secretary of state or similar office first provides public notice of the creation, which public notice would include publishing the formation documents on a publicly accessibly registry.[33]

In all cases, the reporting company must report:

  • Its legal name and any trade name or DBA;
  • The street address of its principal place of business;
  • The jurisdiction in which it was formed; and
  • Its Taxpayer Identification Number (TIN) or Employer Identification Number (EIN).[34]

In all cases, the reporting company must also provide certain information regarding each beneficial owner.  If the beneficial owner has obtained his or her own FinCEN identifier, then that FinCEN identifier may be reported by the reporting company in lieu of reporting the data listed below.[35]  If the beneficial owner has not obtained his or her own FinCEN identifier, then, subject to the exceptions listed below, the reporting company must report the following with regarding each beneficial owner:

  • Full legal name;
  • Date of birth;
  • Residential street address;
  • An identifying number from a(n): (a) current US passport; (b) state issued driver’s license; (c) identification document issued by a state or other government entity located in the US; or (d) if none of the foregoing are available, a passport issued by a foreign government; and
  • An image of the document used in item iv., immediately above.[36]

Any New Reporting Company must also report data regarding its company applicants (defined in “Section IV.  Who are Company Applicants?” above).[37]  New Reporting Companies must either provided the FinCEN identifier for each company applicant, or if the company applicant has not obtained a FinCEN identifier,[38] must provide the following data for each company applicant:

  • Full legal name;
  • Date of birth;
  • The company applicant’s (a) business address, if the formation is done through a business, or (b) street address in all other cases;
  • A identifying number from a: (a) current US passport; (b) state issued driver’s license; (c) identification document issued by a state or other government entity located in the US; or, (e) if none of the foregoing are available, a passport issued by a foreign government; and
  • An image of the document used in item iv, immediately above.[39]

 

VII. Additional Data and Filing a Report

                 For additional data and to file a FinCEN report required by the CTA, please refer to the following sources on FinCEN’s own website:

  1. Small Entity Compliance Guide, Beneficial Owner Information, Reporting Requirements: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf
  2. Beneficial Owner Information Reporting, Frequently Asked Questions: https://www.fincen.gov/boi-faqs#M_3.
  3. Filing reports: https://www.fincen.gov/boi.

VIII. Duty to Keep Data Current

If there are any changes to or inaccuracies in reported information, the reporting company will have 30 days to report the changes or correct the inaccuracies.[40]

For corrections, the 30 days start after you become aware of, or have reason to know of, an inaccuracy in a prior report.[41]  However, if you actually get the corrected report filed after 30 days but within 90 calendar days after you have reason to believe that the report being corrected was inaccurate, then the corrected report will be deemed to satisfy the 30 day reporting requirement.[42]

For updates, the 30 days start from when the relevant change occurs.[43]

 

[1]              31 USC § 5336(a)(3), 31 CFR § 1010.380(d).

[2]              31 USC § 5336(c)(2)(B).

[3]              31 USC § 5336(h).

[4]              31 USC § 5336(a)(3), 31 CFR § 1010.380(d).

[5]              31 CFR § 1010.380(d)(1)(ii).

[6]              It is not clear whether simply being a director is sufficient by itself to make someone a beneficial owner when there is large board of directors and no individual director has the power, alone or with a small number of people, to unilaterally make or veto decisions.  However, without additional guidance, the safest approach appears to be listing all directors as beneficial owners.

[7]              31 CFR § 1010.380(d)(1)(ii)(C).

[8]              31 CFR § 1010.380(d)(2)(ii).

[9]              31 CFR § 1010.380(d)(1)(i).

[10]             31 CFR § 1010.380(f)(8).

[11]             31 CFR § 1010.380(d)(2)(i).

[12]             31 CFR § 1010.380(d)(2)(iii).

[13]             31 CFR § 1010.380(b)(2)(i); 31 CFR § 1010.380(d)(3)(i).

[14]             31 CFR § 1010.380(b)(2)(ii); 31 CFR § 1010.380(d)(3)(i).

[15]             31 CFR § 1010.380(d)(3)(iii).

[16]             31 CFR § 1010.380(f)(8).

[17]             31 CFR § 1010.380(b)(2)(iv).

[18]             31 CFR § 1010.380(b)(1)(ii), (b)(2)(iv).

[19]             A foreign reporting company is any entity formed under the laws of a foreign jurisdiction and registered to do business in any US state by the filing of a document with a secretary of state.  While the reporting requirements are similar as between domestic and foreign reporting entities, only domestic reporting entities are addressed in this memorandum.

[20]             31 CFR § 1010.380(c)(1)(i).

[21]             Omitted from the above list are: entities regulated by and providing periodic reports to the SEC; government entities; banks; credit unions; depository institution holding companies; money services businesses; securities broker dealers; securities clearing entities; entities registered with the SEC under the Securities Exchange Act of 1934; investment companies and investment advisors that are registered with the SEC; venture capital funds that have filed documents with the SEC; insurance companies; insurance producers; certain entities engaged in providing or trading in commodities; public accounting firms; public utilities; financial market utilities; certain pooled investment vehicles; tax exempt political organizations; certain tax exempt trusts.  31 CFR § 1010.380(c)(2).

[22]             31 CFR § 1010.380(c)(2)(xix).

[23]             31 CFR § 1010.380(c)(2)(xx).

[24]             31 CFR § 1010.380(c)(2)(xxi).

[25]             See 30 CFR § 1010.380(c)(2)(xxii) for a complete listing.

[26]             30 CFR § 1010.380(c)(2)(xxiii).

[27]             31 CFR § 1010.380(a)(1)(iii).

[28]             31 CFR § 1010.380(b)(i).

[29]             31 CFR § 1010.380(b)(4)(ii)(A).

[30]             31 CFR § 1010.380(b)(1)(i)-(ii).

[31]             31 CFR § 1010.380(b)(2)(iv).

[32]             88 FR 66730, as summarized on the FinCEN website.

[33]             31 CFR § 1010.380(a)(1)(i).

[34]             31 CFR § 1010.380(b)(i).

[35]             31 CFR § 1010.380(b)(4)(ii)(A).

[36]             31 CFR § 1010.380(b)(1)(i)-(ii).

[37]             31 CFR § 1010.380(b)(1)(ii), (b)(2)(iv).

[38]             31 CFR § 1010.380(b)(4)(ii).

[39]             31 CFR § 1010.380(b)(ii).

[40]             31 CFR § 1010.380(a)(2).

[41]             31 CFR § 1010.380(a)(3).

[42]             31 USC § 5336(h)(3)(C)(i)(bb), 31 CFR § 1010.380(a)(3).

[43]             31 CFR § 1010.380(a)(2).