The Corporate Transparency Act beneficial ownership information report

Starting Jan. 1, 2024, the Corporate Transparency Act (CTA) will go into effect.

All entities formed or registered to do business in the United States will need to either (i) confirm they qualify for an exemption from the CTA’s reporting requirements or (ii) timely submit a beneficial ownership information (BOI) report to the U.S. Treasury’s Financial Crimes and Enforcement Network (FinCEN). All entities means ALL entities.

Entities formed prior to Jan. 1, 2024, do not have to report until Jan. 1, 2025.

Entities formed on or after Jan. 1, 2024, must file the BOI report within 90 days of the entity’s formation.

There are 23 types of entities exempt from reporting, the most common exemption being large operating companies defined as entities with more than 20 full-time employees (no aggregation with affiliated entities), more than $5 million in gross revenue from US sources in the prior year and an operating facility in the US. Other exempt entities include publicly traded companies, banks, insurance companies and other financial institutions, nonprofit entities and certain tax-exempt trusts, i.e., entities already subject to ownership identification reporting requirements.

Assuming that an entity is not exempt from reporting, who does the entity identify on the BOI report? The entity identifies itself and then identifies any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interests of such reporting company. The definition of substantial control is broad and covers a range of activities, including:

• Being a senior officer in the reporting company
• Having authority over the appointment or removal of senior officers or a majority of the board
• Having “substantial influence over important decisions” of the reporting company
• Having any other form of substantial control over a reporting company

There are limited exceptions as to who qualifies as a beneficial owner: minor children (provided a parent or legal guardian is reported as a beneficial owner); nominees; employees (excluding senior officers); and creditors (but convertible debt is considered in the determination of beneficial ownership).

What beneficial owner identification information is reported? The BOI report provides four pieces of information about each beneficial owner:

• Name
• Birthdate
• Residential address
• A unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such document – usually a driver’s license or passport)

For reporting companies created or registered on or after Jan. 1, 2024, the same information for beneficial owners must be provided for the entity’s applicants. An applicant is any individual who files the document with the state Secretary of State or other governing body that creates the entity, as well as any individual who is primarily responsible for directing or controlling the filing of the BOI report. The applicant or applicants will usually be a lawyer or professionals in a law firm.

Once an entity files its initial report, entities must report changes in beneficial ownership within 30 days of the change.

BOI reports are filed by accessing and entering data on FinCEN’s website. The website is not currently open for use. There are penalties for failure to file: civil—$500/day up to a maximum of $10,000; criminal—fines up to $10,000 and prison up to two years. There are a lot of resources on the FinCEN website that provide further information on CTA BOI reporting.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.