Prepare Now for the New Corporate Transparency Act

Starting January 1, 2024, many entities created in or registered to do business in the U.S. will need to report information about certain beneficial owners. This beneficial ownership information (BOI) will need to be filed with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). Smaller companies (those with under $5 million in reported U.S. revenue or under 20 full-time employees) will be particularly impacted, while larger companies are generally exempt. The BOI reporting requirements take effect on January 1, 2024.

Background
The U.S. Corporate Transparency Act (CTA) was enacted in January 2021 to combat money laundering and other illegal activities. In an effort to provide transparency, the CTA established BOI reporting requirements for entities created in or registered to do business in the US. 

What is a Reporting Company?
The CTA defines a “reporting company” as any entity that meets the definition of a “reporting company” and does not qualify for an exemption. The definition is broad, so most U.S. business entities that do not qualify for an exemption will be considered reporting companies. 

Under the CTA, there are two categories of reporting companies, domestic and foreign.  A domestic reporting company is any entity that is (i) a corporation, (ii) a limited liability company (LLC), or (iii) created by the filing of a document with a secretary of state or any similar office.  A foreign reporting company is any entity that is: (i) a corporation, LLC, or other entity, (ii) formed under the law of a foreign country, and (iii) registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.

What entities are exempt?
The CTA provides 23 exemptions, which include:

• Public companies
• “Large operating companies” – companies that have over $5 million in U.S. revenue, more than 20 full-time U.S. employees, and an operating presence at a physical location in the United States
• Tax-exempt entities and governmental authorities
• Accounting firms, insurance companies, banks, credit unions, registered investment companies, certain investment advisors, and certain other entities that are subject to regulatory oversight
• Subsidiaries that are wholly owned, directly or indirectly, by exempt entities

What BOI must be reported?
The CTA requires that BOI reports contain information about the reporting company itself and two categories of associated individuals:  “beneficial owners” and “company applicants.” 

In general, a “beneficial owner” of a company is defined as an individual who (i) owns or controls at least 25% of a company (including options and convertible instruments) or (ii) has “substantial control” over the company; while “substantial control” includes each of the company’s “senior officers,” anyone who can appoint certain officers or a majority of the Board, and anyone who is an “important decision-maker” or has any other form of substantial control over the company.

A “company applicant” is defined as an individual who directly files or is primarily responsible for the filing of the document that creates or registers the company, which will often be an attorney (and a paralegal if the paralegal did the filing as directed by the lawyer). 

What are the reporting requirements under the CTA?
A reporting company will need to submit BOI reports electronically through FinCEN’s secure online filing system. FinCEN will begin accepting BOI reports on January 1, 2024. 

If a reporting company existed before January 1, 2024, its initial BOI report must be filed with FinCEN by January 1, 2025. If a reporting company is created (or registered to do business) on or after January 1, 2024, then it must file its initial BOI report within 90 days after the date of the entity’s formation (i.e., the effective filing date of its Articles or Certificate).

If a company qualifies for an exemption but in the future no longer qualifies, the CTA requires that it file a BOI report within 30 days of the date on which the company no longer qualifies for the exemption. If a reporting company files a BOI report and later qualifies for an exemption, it should file an updated BOI report to indicate that it is newly exempt from the reporting requirements.

A BOI report must provide the following about the reporting company: 

• legal name,
• any DBAs,
• address,
• jurisdiction of formation, and
• taxpayer identification number. 

A BOI report must provide the following about its “beneficial owners” and “company applicants”: 

• full legal name,
• date of birth,
• current address, and
• passport or driver’s license number, with an image of that document. 

The CTA does not require reporting companies to report the basis on which an individual is a beneficial owner (i.e., ownership or substantial control). Also, a reporting company is not required to report its company applicants if it was created (or registered) before January 1, 2024.

Personal FinCEN Identifiers for Individuals
To protect the personal information of individuals who are beneficial owners or company applicants, FinCEN offers an alternative means for reporting an individual’s required personal information. In lieu of having the reporting company collect and report such information, individuals may apply online to obtain a personal FinCEN identifier (by providing the same information that a reporting company would submit). The personal FinCEN identifier can then be given to the reporting company, which will file the identifier in lieu of the otherwise required pieces of personal information about the individual. This option will be especially useful for lawyers and paralegals who may be company applicants for multiple reporting companies.

Who has access to the BOI?
BOI reports are not public. The CTA requires FinCEN to store BOI in a secure nonpublic database. U.S. agencies will have access to BOI for national security, intelligence, or law enforcement activity, while state, local, or tribal law enforcement agencies will only have access to BOI pursuant to court order.

What are the penalties for non-compliance with the CTA?
The willful failure to report, complete, or update BOI, or providing false or fraudulent BOI, may result in civil penalties of up to $500 per day or criminal penalties including imprisonment for up to two years and a fine of up to $10,000. Senior officers that fail to file a required BOI report may be held accountable for that failure. Additionally, a person may be subject to civil and/or criminal penalties for willfully causing a reporting company not to file a required BOI or to report incomplete or false beneficial ownership information to FinCEN. 

If you have any questions regarding the CTA and how it might impact your business, please contact Don Levy at [email protected].

Don Levy is a Partner on OGC’s California-based team. Don is a seasoned transactional and commercial attorney with deep experience in a wide range of technologies, including  Internet/e-commerce, communications (wireless and satellite), semiconductor, software, SaaS, mobile device, market research, and entertainment/media. As a former legal and business executive, Don helps technology companies efficiently and creatively navigate complex legal issues in dynamic environments.