To increase transparency into who owns, controls, benefits from and helps create closely held business entities for the purposes of combating money laundering, tax evasion and other illegal activities, Congress enacted the Corporate Transparency Act of 2021 (31 U.S.C. Section 5336 or hereinafter “CTA”). The CTA creates a limited access, national database of basic information about certain types of business entities (“Reporting Companies”) and the individuals who, directly or indirectly, own or have substantial control over them (“Beneficial Owners”) and those that helped create them (“Applicants”). The federal agency charged with enforcing the CTA is the Financial Crimes Enforcement Network (“FinCen”).
Compliance with the terms of the CTA was postponed until 1.1.2024, so here we are, and it is a big deal!
Important Update: On 3.1.2024, the U.S. District Court for the Northern District of Alabama held that the CTA is unconstitutional in the matter of National Small Business United, d/b/a the National Small Business Association (NSBA) vs Janet Yellen. This court provided an injunction which prevents the enforcement of the CTA against the plaintiffs in this lawsuit, which essentially includes the NSBA and its members as of 3.1.2024.
What does this mean for those who were not plaintiffs in this lawsuit? While this is positive news and may ultimately end up causing the elimination or modification of the reporting requirements mandated by the CTA, the CTA and its reporting requirements remain the law of the land. In practical terms, you should still comply with the CTA’s strict timing requirements, but for those still needing to file reports for Reporting Companies created before 2024, you have until 1.1.2025 to report. In this case, you should compile all the necessary information needed to comply with the CTA, but you may wish to hold off on actually filing the necessary report(s) until later in 2024 when more information may be known from higher level federal courts. We do not recommend putting off any required reports beyond their due dates under the CTA, since the penalties for failure to properly and timely comply are significant.
The CTA requires satisfying strict time deadlines in the proper filing of initial and updated Beneficial Ownership Information Reports (BOI reports), with such filings to be completed directly on the FinCen website. The BOI reports are to include basic (but to some extent, normally private) information as to the Reporting Company itself, its Beneficial Owners and its Applicants. A previously filed BOI report must be corrected if it contained any incorrect information. Further, BOI reports must be filed thereafter to report any changes to the previously provided information, which could be as simple as a change in contact information.
Penalties for willful non-compliance with the CTA filing requirements for each Reporting Company include civil penalties of up to $591 per day as of 2024 ($500 per day indexed for inflation) and criminal penalties of up to $10,000 and up to two (2) years in jail!
FinCen may later provide an opportunity to request a waiver of penalties for non-compliance, as is common with other types of government penalties, but this is not a sure thing and the approval of any such penalty waiver request is not a forgone conclusion. For example, to obtain such penalty waiver requests from the Internal Revenue Service (IRS), you normally need to prove reasonable cause for your failure to comply with your obligations and that you acted in good faith and with due diligence to comply after such failure was discovered. In other words, anyone who, directly or indirectly, owns or controls a closely held business (or a significant interest in one) needs to strongly consider if they have any reporting obligations under the CTA; if yes, they need to act within the strict time deadlines to avoid serious potential penalties. Hoping to avoid penalties after the fact could prove to be a very costly mistake. Further, while the penalties only apply to the “willful” failure to comply, relying on this limitation may be another costly mistake. The definition of this term is yet unknown, but it gives FinCen flexibility in whom they go after. You do not want to find out after the fact that you were on the wrong side of their definition. Finally, while not all Beneficial Owners (see definition below) are necessarily subject to possible FinCen penalties, the reality is that the definition of who is at risk is broad and fact based. Therefore, from a practical perspective, all Beneficial Owners are at risk of personal liability for FinCen penalties if it later turns out that the FinCen reporting requirements were not met.
The purpose of this News Alert is to both alert you to these new legal requirements and to provide you with the basics of these requirements. However, as you are already likely aware, the information in this News Alert should not be considered as legal advice, and you should seek the advice of your own independent legal counsel to advise as to your potential CTA reporting obligations.
Table of Contents
B. What are Reporting Companies?
C. Who are the Beneficial Owners for which information must be reported?
D. Who are Applicants for whom information must be reported?
E. What information is included in Beneficial Ownership Information Reports?
F. What is a FinCen Identifier and who should get one?
G. What are the due dates for filing BOI reports?
H. Will your private information disclosed on BOI reports be kept confidential?
I. Where do you go to learn more about the CTA and filing the required BOI reports?
A. Who is subject to penalty for failure to properly and timely report initial and updated information to FinCen?
The CTA requires Reporting Companies to initially report, and later update, certain information (“Beneficial Ownership Information” or “BOI”) on a complete and accurate basis to FinCen within certain strict timing requirements. However, because individuals are the ones who comply with these requirements, penalties apply to a broader group to help ensure proper and timely compliance. Therefore, the CTA penalties apply to one or more of the following: (i) the Reporting Company; (ii) one or more of its senior officers, including its president, chief executive officer (CEO), chief financial officer (CFO), general (legal) counsel (GC), and any other officer who performs a similar function (which, for example, could presumably include one or more managers of a manager-managed LLC, and the members of a member-managed LLC); and (iii) those individuals who otherwise cause the Reporting Company to fail to timely file or timely update accurate and complete BOI to FinCen. This bears repeating. While these rules are not currently fully clear, these huge CTA related penalties for willful non-compliance could end up applying separately to the company itself and to multiple other individuals, and/or such penalties may end up applying on a joint and several liability basis to multiple parties.
B. What are Reporting Companies?
Reporting companies are those having to report BOI to FinCen and include corporations, Limited Liability Companies (LLCs) and other similar entities that are created by filing with the Secretary of State or similar state or local government agency, and foreign entities registered to do business in the United States. The key to this definition is that the entity had to file or register with the Secretary of State or other similar state or local agency to be created or to do business in the state or other municipality.
These requirements are primarily directed at smaller companies which are not normally subject to reporting requirements from government entities or other third parties, and therefore a significant list of exempt entities is provided. Exempt entities include those that will typically already be subject to other reporting requirements, including for example, banks and other government regulated entities, charitable organizations and those deemed to be large.
Those deemed to be large enough to be exempt must have (i) more than 20 employees (all in the single entity and not including any related entities), (ii) annual gross receipts exceeding $5 million (as shown on their last year’s income tax return); and (iii) have a physical operating presence in the U.S.
An exemption also exists for inactive entities, but you must meet a strict test to qualify for this exemption. To be considered an inactive entity for this purpose, the entity (a) had to be in existence before 1.1.2020, (b) not be engaged in an active business, (c) not be owned, directly or indirectly, by a foreign person (non-US citizen or resident), (d) not have any change in ownership in the preceding 12 months, (e) not have sent or received any funds, directly or indirectly, greater than $1,000 in the preceding 12 months, and (f) not hold any kind or type of assets in the U.S. or abroad, including any ownership interest in any other entity.
C. Who are the Beneficial Owners for which information must be reported?
Beneficial Owners (BOs) include any individual who, directly or indirectly, (i) exercises substantial control over a Reporting Company or (ii) owns or controls at least 25% of the Reporting Company.
Substantial control means (i) a senior officer in the company (president, CEO, CFO, GC and any other officer who performs a similar function), (ii) someone having appointment or removal powers over any senior officer, (iii) decision authority or substantial influence over important matters, or (iv) catch all of any other form of substantial control. Control for purposes of determining BOs is extremely broad and can include control via contract, arrangement, understanding, relationship or otherwise.
FinCen provided a virtual presentation on 12.13.2023 to provide some additional guidance. In this presentation, FinCen stated that no upper limit exists on the number of BOs that a Reporting Company may have, but it must have at least one BO even if no one owns or controls at least 25% of the ownership interests, since at least one person should have substantial control.
If a trust would satisfy the definition of a BO, then the regulations look through the trust entity to certain individuals related to the trust as the actual BOs for whom information must be reported to FinCen. The BOs in this case would include: (i) any trustee, or other individual, with the authority to dispose of trust assets; (ii) any trust beneficiaries who are the sole permissible recipients of trust income and/or principal or who can demand distributions or withdrawals of substantially all of the trust’s assets; and (iii) the trust’s creator (grantor, settlor, donor or trustor) who has the right to revoke or otherwise withdraw all of the assets from the trust. 31 C.F.R Section 1010.380(d)(2)(ii)(C).
D. Who are Applicants for whom information must be reported?
Applicants are the individuals who help create or register the Reporting Company with the Secretary of State or similar agency. Applicants include up to two individuals for each Reporting Company. The first is the individual who files the document(s) with the Secretary of State or similar agency to create or register the Reporting Company. The second is the individual primarily responsible for directing or controlling such filing if more than one individual is involved with the filing. For example, this could include the attorney, who is the ultimate individual responsible for the filing, and their paralegal, who actually files with the Secretary of State or similar agency to create or register the entity (Reporting Company).
Three (3) differences exist between the reporting for BOs and Applicants. First, Applicant information only needs to be reported for Reporting Companies created or registered on or after 1.1.2024. Second, an Applicant’s initially reported information does not need to be updated if it was correct when initially reported but later changes. Third, some types of Applicants can use their business address rather than their personal address.
E. What information is included in Beneficial Ownership Information Reports?
Beneficial Ownership Information Reports (BOI reports) are to include the following information:
- Information for Reporting Company.
b. Any trade names or “doing business as” names.
c. Current street address of its principal place of business within the U.S.
d. Jurisdiction of formation or registration.
e. Taxpayer Identification Number (TIN).
f. Indicate if this filing is an initial report or a correction or update of a prior report.
- Information for each Beneficial Owner (BO) and company Applicant.
b. Date of birth (DOB).
c. Residential (home) address. However, only for Applicants who work in corporate formation (i.e., attorney or corporate formation agent), provide Applicant’s business street address.
d. Identifying number from an acceptable identification document along with the name of the issuing state or jurisdiction of the chosen identification document.
e. Provide an image of the chosen identification document.
f. Acceptable identification documents include: (i) non-expired U.S. driver’s license; (ii) non-expired identification document issued by a U.S. state or local government or Indian Tribe; (iii) non-expired passport issued by U.S. government; or (iv) non-expired passport issued by a foreign government, but only acceptable if none of the other 3 options exist.
F. What is a FinCen Identifier and who should get one?
A FinCen Identifier is a unique identifying number that FinCen issues to an individual or Reporting Company upon request after providing FinCen with the same type of information that would be required to be disclosed on a BOI report. This FinCen Identifier number can then be used on any BOI report where the individual’s or Reporting Company’s information needs to be disclosed in lieu of listing it all out on each BOI report. The responsibility to properly and timely correct and update this information is then on the individual or Reporting Company with the FinCen Identifier.
If you are involved with multiple Reporting Companies where your information will need to be disclosed on multiple BOI reports, you will likely want to request a FinCen Identifier to keep your hassle to a minimum. However, you do need to be sure to properly and timely update any future changes to information previously provided to FinCen to obtain the FinCen Identifier.
You may also find that a Reporting Company (or its Applicants) for which you are a BO will strongly request or require that you obtain a FinCen Identifier so that you are the one responsible for updating FinCen with any changed information.
G. What are the due dates for filing BOI reports?
- Due date for filing the initial BOI report for Reporting Companies created before 1.1.2024? Must be filed by 1.1.2025.
- Due date for filing the initial BOI report for Reporting Companies created on or after 1.1.2024 and before 1.1.2025? Must be filed within 90 calendar days after receiving actual or public notice that their company’s creation or registration is effective.
- Due date for filing the initial BOI report for Reporting Companies created on or after 1.1.2025? Must be filed within 30 calendar days after receiving actual or public notice that their company’s creation or registration is effective.
- Due date for filing an updated BOI report where previously reported information changes? If there is ANY CHANGE to the required information in a previously filed BOI report, the Reporting Company must file an updated BOI report within 30 days after the date of the change. However, changes in Applicant information do not need to be reported if this information was accurate at the time it was originally reported.
- Due date for filing an updated BOI report to correct an inaccuracy in a previously filed BOI report? When information reported in a prior BOI report was inaccurate and remains inaccurate, then an updated BOI report must be filed within 30 days of becoming aware of the inaccuracy or having a reason to know about the inaccuracy.
H. Will your private information disclosed on BOI reports be kept confidential?
The CTA provides that access to the FinCen database of all the information disclosed in BOI reports is limited to certain government related organizations that need it for criminal investigative purposes. However, considering what we can all see in our modern, internet connected world, it is highly likely that criminals will hack their way into this database at some point in the future. Hence, you should assume that this information will not be fully protected.
I. Where do you go to learn more about the CTA and filing the required BOI reports?
Corporate Transparency Act (CTA) statutes: https://www.fincen.gov/sites/default/files/shared/Corporate_Transparency_Act.pdf.
FinCen Small Entity Compliance Guide: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf.
FinCen Beneficial Ownership Information Reporting Frequently Asked Questions: https://www.fincen.gov/boi-faqs.
FinCen web location: https://www.fincen.gov/.
FinCen web location to file BOI reports: https://boiefiling.fincen.gov/.
Application for FinCen Identifier: https://fincenid.fincen.gov/landing.
J. What changes may be happening in the future?
One thing is clear, the CTA is only the most recent phase in the U.S. federal and state governments working to increase mandated transparency to reduce various types of criminal activity. More reporting requirements are likely coming. On 2.16.2024, FinCen published proposed regulations requiring reporting of certain non-financed real estate transactions. It is our understanding that FinCen may also be considering further disclosure requirements as to various types of trusts. On the state level, it is our understanding that at least two states are contemplating their own additional BOI type reporting requirements.
The attorneys at Morgan & DiSalvo are always pleased to share important and timely information pertaining to those who have interests in closely held businesses. Because of the complexity of these new requirements, we strongly recommend seeking the advice of your own independent legal counsel regarding your potential CTA reporting obligations.
