The Corporate Transparency Act and its Beneficial Ownership Information Reporting Final Regulation
Last year (August 2022), we published an article entitled “No More Anonymous Companies: The Corporate Transparency Act and its Beneficial Information Reporting.” As of September 20, 2022, Financial Crimes Enforcement Network (“FinCEN”) bureau of the United States Department of Treasury, issued final regulations, codified at 31 CFR § 1010.380 (“Final Regulation”), interpreting the Corporate Transparency Act. In September 2023, FinCEN also published a Small Entity Compliance Guide for beneficial owner reporting requirements (“Compliance Guide”), available here: BOI Small Compliance Guide (fincen.gov), which although not binding, provides context for how FinCEN is likely to interpret and enforce the statute and regulations. We are now updating our article to include the impact of the 31 CFR § 1010.380 and the additional guidance from the Compliance Guide.
The Corporate Transparency Act (“CTA”) became effective on January 1, 2021 as part of the broader Anti-Money Laundering Act of 2020. One portion of the CTA affecting many privately held corporations, limited liability companies, and limited liability partnerships is the beneficial ownership information (“BOI”) reporting requirements, codified at 31 U.S.C.A. § 5336.
Which Companies Must Report?
The BOI reporting requirements apply to “reporting companies” as defined in 31 U.S.C.A. 5336(11). “Reporting companies” are any entities that are formed by filing a document with the secretary of state or equivalent office of any United States state or Indian tribe, including foreign companies that are registered to do business in the United States. This includes corporations, limited liability companies, and most other forms of entity, unless the entity is excepted from the definition of “reporting company.”
There are 23 exemptions that exempt certain types of companies from the reporting requirements. The exempted companies are already subject to significant oversight and therefore are presumed not to be commonly used to facilitate crime. Some examples of the entities that are enumerated in the exceptions to the definition of “reporting companies” are certain banks, accounting firms, venture capital fund advisors, public utilities, insurers, investment advisers, governmental agencies, non-profit entities, or other companies registered under SEC rules.
The biggest exemption to reporting requirements under the CTA is for large companies, specifically companies that (i) employ more than 20 employees on a full-time basis in the United States, (ii) reported more than $5,000,000 in gross receipts or sales in the previous year’s federal income tax returns, and (iii) have an operating presence at a physical office within the United States. This effectively means that smaller companies are generally required to report, but larger companies are not required to report.
Wholly owned subsidiaries of exempt entities are also exempt from reporting.
What Must be Disclosed?
A reporting company must report its name, any alternative names through which the company is engaging in business (i.e. d/b/a names), the street address of its principal place of business in the United States, the jurisdiction of its formation or registration, as well as its taxpayer identification number (TIN) or Employer Identification Number (EIN). 31 CFR § 1010.380(b)(1)(i).
The report must identify each “beneficial owner” as well as “company applicants” by full legal name, date of birth, street address, and a unique identifying number from a passport, driver’s license or government identification document along with a scanned image of such document. 31 U.S.C.A. 5336(b)(2)(A); 31 CFR § 1010.380(b)(1)(ii).
1. Beneficial Owners
“Beneficial owners” are individuals who exercise substantial control over the entity or who own or control at least 25% of the ownership interest of the entity. Properly identifying all beneficial owners of a reporting company requires careful analysis. The Compliance Guide provides examples to help inform the determination of who is a beneficial owner.
An individual has “substantial control” if the individual is a senior officer of the reporting company, has authority to appoint or remove senior officers, has substantial influence over important decisions such as major expenditures or transfer of principal assets of the reporting company, selection of business lines or geographic focus of the reporting company, entering into and terminating significant contracts of the reporting company, setting compensation for senior officers, or any other form of substantial control. 31 CFR § 1010.380(d)(1). While there is an exception for individuals whose substantial control derives only from at-will employment, the exception does not apply to senior officers such as president, CEO, CFO, COO, or general counsel. 31 CFR § 1010.380(d)(3)(iii). This means individuals who are senior officers need to be reported as beneficial owners even if they have no equity ownership interest in the reporting company.
“Ownership interest” means any equity, stock, membership interest, profits interest, as well as any instrument convertible into an ownership interest without additional consideration such as warrant or right to purchase. 31 CFR § 1010.380(d)(2). An individual can have an ownership interest indirectly, such as through intermediary companies that have partial ownership in a reporting company or as trustee of a trust. 31 CFR § 1010.380(d)(2)(ii). To determine whether an individual owns 25% of the ownership interests of a reporting company, one must determine the current ownership interest of the individual treating any convertible instruments as if they had already converted. Then one must compare that percentage to the total outstanding capital and profit interests of the reporting company. If the reporting company issues more than one class of stock, such as voting and nonvoting stock, one must compare the individual’s ownership percentage of voting stock to the total of the outstanding voting stock and compare the individual’s total value of ownership to the total value of outstanding stock regardless of class. If either of those comparisons results in 25% or more, the individual is a beneficial owner. 31 CFR § 1010.380(d)(2).
The Compliance Guide provides helpful examples to determine whether an individual meets the 25% threshold. For example, if a reporting company is owned 50% by another company (“Company Y”) and an induvial owns 30% of Company Y, that individual owns 15% of the reporting company (50% x 30% = 15%).
The following are not “beneficial owners” and so generally do not have to report: minors (as long as parent or legal guardians report), individuals acting as a custodian or agent on behalf of another individual, employees who do not have an ownership interest, individuals whose only interest in the company is through a future right of inheritance, and creditors.
2. Company Applicant
The “company applicant” is the person who actually files the document that forms the entity for domestic companies, and, for foreign reporting companies, the company applicant is the individual who files the document that first registers the entity to do business in the United States. A “company applicant” also “includes anyone who directs or controls the filing of the document by another.” 31 CFR § 1010.380(e). Reporting companies in existence as of January 1, 2024 will not have to report company applicants. 31 CFR § 1010.380(b)(2)(iv).
The Compliance Guide provides that a reporting company must report at least one but not more than two company applicants. Compliance Guide 3.2. The direct filer is the person who actually physically or electronically files the document with the secretary of state. Compliance Guide 3.2. The Compliance Guide provides an example that if Individual A is creating a company and prepares the relevant documents and then directs Individual B to file them. Individual A is the person who directs or controls the filing and Individual B is the direct filer. Compliance Guide 3.2. The Compliance Guide states that Individual B, the direct filer, might be the individual’s spouse, business partner, attorney, or accountant.
In a typical scenario, a client will come to our firm and together we may decide that the client needs an entity to achieve their objective. Our office will prepare the necessary paperwork and, if the formation is urgent, use a third-party provider to hand deliver the documents to the Secretary of State. The statute and regulation do not specifically address this situation, but based on the example from the Compliance Guide, and because the entity can list a maximum of two company applicants, the client would be the person who directs or controls the filing and the third-party service provider that hand delivered it to the Secretary of State would be the direct filer.
3. FinCEN Identifier
An individual or entity may obtain a FinCEN identifier by providing FinCEN with the information that the individual would otherwise have to provide to a reporting company if the individual were a beneficial owner or applicant of the reporting company. Once obtained, the FinCEN identifier can be reported in lieu of the detailed information. However, the information provided to obtain a FinCEN number is subject to the same updating requirements as regular reporting.
4. Confidentiality of BOI
The information reported to FinCEN will be confidential and disclosed only to the United States Department of the Treasury, to a governmental law enforcement or regulatory agency in response to an appropriate request (including foreign countries who are allowed to request such information pursuant to treaties with the United States), and financial institutions subject to due diligence requirements.
When does reporting occur?
The Final Regulation has increased the timeframe for reporting. Reporting companies formed after January 1, 2024 must report within 30 days of the earlier of (i) the date the reporting company has actual notice that the entity has been formed or, (ii) the date of public notice that the entity has been formed. 31 CFR § 1010.380(a)(1)(i), (ii).
As of September of 2023, FinCEN issued a Notice of Proposed Rulemaking to amend the Final Regulation to provide 90 days for reporting companies created or registered in 2024 to file their initial reports, instead of 30 days.
Reporting companies in existence as of January 1, 2024 must report by January 1, 2025. 31 CFR § 1010.380(a)(1)(iii).
An entity that was exempt but no longer qualifies for an exemption must report within 30 days of the date it no longer qualifies. 31 CFR § 1010.380(a)(1)(iv).
If any information reported changes, including a change of address on a driver’s license provided to FinCEN or a new dba for the reporting company, the reporting company must update its report within 30 days of the change. 31 CFR § 1010.380(a)(2)(i),(v); Compliance Guide 6.1.
A reporting company that becomes exempt from reporting requirements must report that the entity is now exempt within 30 days of becoming exempt. 31 CFR § 1010.380(a)(2)(ii).
Any inaccuracy must be corrected within 30 days of the date the reporting company becomes aware or has reason to know of the inaccuracy. 31 CFR § 1010.380(a)(3). If the correction is reported within 90 days from submission of the report, such correction will qualify for a safe harbor from penalties.
What are the penalties for failure to report?
A person that willfully fails to report the required BOI is liable for a penalty of up to $500 per day that the violation continues, to a maximum of $10,000 and/or up to two years in prison. There are also penalties for any person who knowingly discloses or uses BOI obtained by the person from FinCEN. The penalties are up to $500 per day that the violation continues, to a maximum of $250,000 and/or up to 5 years in prison. These penalties are increased if the violation is in conjunction with other illegal activity.
How is the report provided to FinCEN?
FinCEN is developing an online portal for reporting companies to file the report. The online portal is not available as of the date of this article, but FinCEN promises it will be available by January 1, 2024 and, in any case, FinCEN will not accept reports prior to January 1, 2024. There will be no fee for submitting the report.
This document is intended to provide you with general information regarding the subject. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Stokes Lawrence, P.S. attorney.