The Corporate Transparency Act (CTA) is a piece of legislation passed by Congress in 2021 that requires all entities to file Beneficial Ownership Reports (BOI) with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) beginning January 2024. The CTA covers both US and non-US entities conducting business in the United States, and is intended to help law enforcement agencies prosecute and deter money laundering, tax fraud, and other fraudulent activities by requiring covered companies to file reports with FinCEN about the company itself, its beneficial owners, and its company applicants.
Who will be required to report beneficial ownership information to FinCEN?
Certain companies — referred to as “reporting companies” — will be required to report their beneficial ownership information to FinCEN. There are two types of reporting companies — domestic reporting companies and foreign reporting companies.
A domestic reporting company is defined as —
a limited liability company, or
any other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe
A foreign reporting company is any entity that is —
a corporation, limited liability company, or other entity formed under the law of a foreign country, AND
registered to do business in any U.S. state or in any Tribal jurisdiction, by the filing of a document with a secretary of state or any similar office under the law of a U.S. state or Indian tribe.
If you had to file a document with a state or Indian Tribal-level office such as a secretary of state to create your company, or to register it to do business if it is a foreign company, then your company is a reporting company, unless an exemption applies
For the definitions of both domestic and foreign reporting companies, a “state” means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, the U.S. Virgin Islands, and any other commonwealth, territory, or possession of the United States.
Who is considered a beneficial owner of a reporting company?
In general, a beneficial owner is any individual (1) who directly or indirectly exercises “substantial control” over the reporting company, or (2) who directly or indirectly owns or controls 25 percent or more of the “ownership interests” of the reporting company.
Whether an individual has “substantial control” over a reporting company depends on the power they may exercise over a reporting company. For example, an individual will have substantial control of a reporting company if they direct, determine, or exercise substantial influence over, important decisions the reporting company makes. In addition, any senior officer is deemed to have substantial control over a reporting company. *Other rights or responsibilities may also constitute substantial control. Additional information about the definition of substantial control and who qualifies as exercising substantial control can be found in the Beneficial Ownership Information Reporting Regulations at 31 CFR §1010.380(d)(1).
“Ownership interests” generally refer to arrangements that establish ownership rights in the reporting company, including simple shares of stock as well as more complex instruments. Additional information about ownership interests, including indirect ownership, can be found in the Beneficial Ownership Information Reporting Regulations at 31 CFR §1010.380(d)(2).
Example 1: The reporting company is a limited liability company (LLC). You are the sole owner and president of the company and make important decisions for the company. No one else owns or controls ownership interests in your company or exercises substantial control over your company.
You are a beneficial owner of the reporting company in two different ways, assuming no other facts. First, you exercise substantial control over the company because you are a senior officer of the company (the president) and because you make important decisions for the company. Second, you are also a beneficial owner because you own 25 percent or more of the reporting company’s ownership interests.
Because no one else owns or controls ownership interests in your LLC or exercises substantial control over it, and assuming there are no other facts to consider, you are the only beneficial owner of this reporting company, and your information must be reported to FinCEN.
Example 2: The reporting company is a corporation. The company’s total outstanding ownership interests are shares of stock. Three people (Individuals A, B, and C) own 50 percent, 40 percent, and 10 percent of the stock, respectively, and one other person (Individual D) acts as the President for the company, but does not own any stock.
Assuming there are no other facts, Individuals A, B, and D are all beneficial owners of the company and their information must be reported. Individual C is not a beneficial owner.
Individual A owns 50 percent of the company’s stock and therefore is a beneficial owner because they own 25 percent or more of the company’s ownership interests.
Individual B owns 40 percent of the company’s stock and therefore is a beneficial owner because they own 25 percent or more of the company’s ownership interests.
Individual C is not a company officer and does not directly or indirectly exercise any substantial control over the company.
Individual C also owns 10 percent of your company’s stock, which is less than the 25 percent or greater interest needed to qualify as a beneficial owner by virtue of ownership interests. Individual C is therefore not a beneficial owner of the company.
Individual D is president of the company and is therefore a beneficial owner. As a senior officer of the company, Individual D exercises substantial control, regardless of whether the individual owns or controls 25 percent or more of the company’s ownership interests.
What information will a reporting company have to report about itself to FinCEN?
A reporting company will have to report:
Its legal entity name;
Any trade names, “doing business as” (d/b/a), or “trading as” (t/a) names;
The current street address of its principal place of business if that address is in the United States (for example, a domestic reporting company’s headquarters), or, for reporting companies whose principal place of business is outside the United States, the current address from which the company conducts business in the United States (for example, a foreign reporting company’s U.S. headquarters);
Its jurisdiction of formation or registration; and
Its Taxpayer Identification Number.
A reporting company will also have to indicate the type of filing it is making (that is, whether it is filing an initial report, a correction of a prior report, or an update to a prior report).
What information will a reporting company have to report about its beneficial owners and company applicants to FinCEN?
For each individual who is a beneficial owner or a company applicant, a reporting company will have to report:
The individual’s name, date of birth, and address;
A unique identifying number from an acceptable identification document; and
The name of the state or jurisdiction that issued the identification document.
Address: For a beneficial owner, the reporting company must report the residential street address.
For a company applicant, the reporting company must report the individual’s residential street address. However, if an individual engages in the business of corporate formation (e.g., as an attorney or corporate formation agent) and files the formation or registration document in the course of that business, then the reporting company must report the current street address of the company applicant’s business. For example, if the company applicant is a paralegal who filed the document while working at a law firm, the reporting company must report the business address of the law firm where the paralegal worked when filing the document.
Identification Document: The list below sets out the forms of acceptable identification documents:
A non-expired driver’s license issued by a U.S. state. A “U.S. state” means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, the U.S. Virgin Islands, and any other commonwealth, territory, or possession of the United States.
A non-expired identification document issued by a U.S. state or local government, or Indian Tribe that is issued for the purpose of identifying the individual. For example, a non-driver identification card issued by a state Department of Motor Vehicles would qualify because it is issued for identification purposes.
A non-expired passport issued by the U.S. government; OR
If the individual does not have any of the three forms of identification document described above, the reporting company may provide the identifying number from a non-expired passport issued by a foreign government.
In addition, the reporting company must submit an image of the identification document associated with the unique identifying number reported to FinCEN.
When are companies required to file a BOI Report?
Companies that are established or officially registered prior to January 1, 2024 are required to submit a BOI report by January 1, 2025. Companies formed on or after January 1, 2024 are required to file a BOI report with FinCEN within 90 days of receiving their finalized documents from the state of formation.
What are the fees and penalties if a company doesn’t submit their BOI report?
Per FinCEN, the penalties are substantial – "As specified in the Corporate Transparency Act, a person who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. That person may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000."
Where can I get the most updated information on BOI Reports and where to file?
For the most updated information available, please visit FinCEN’s website directly at https://www.fincen.gov/boi – as any updates are made, their site will be the first to publish those and all information and steps on how to complete BOI reports will be fully accessible directly with them.