Feds Mandate Legal Entity Reporting

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As of Jan. 1, 2024, the Corporate Transparency Act goes live. The CTA creates a national database of information concerning individuals who, directly or indirectly, own a substantial interest in, or hold substantial control over, certain types of domestic and foreign legal entities.

The reported information is referred to as Beneficial Ownership Information or BOI. The non-public database will be maintained by the U.S. Treasury Department’s Financial Crimes Enforcement Network, often referred to as FinCEN.

What are Reporting Companies?

There are two types of entities, known as “Reporting Companies,” required to report BOI – domestic Reporting Companies and foreign Reporting Companies:

The CTA defines a domestic Reporting Company as a corporation, a limited liability company, or any other entity formed by filing a document with a State, usually with the Secretary of State. A domestic Reporting Company includes entities formed or organized in the District of Columbia and any U.S. commonwealth, territory, or possession. Domestic Reporting Companies generally include limited partnerships and limited liability partnerships, but not general partnerships or most trusts.

The Act defines a foreign Reporting Company as a corporation, limited liability corporation, or other entity formed under the laws of a foreign country and registered to do business in the U.S. by filing a document with a State – again, usually through the Secretary of State.

What Entities are Exempt from Reporting Requirements?

There are 23 types of entities exempted from the beneficial ownership reporting requirements. A partial list of exempt entities includes:

Certain entities already subject to substantial federal and/or state regulation or that are already required to provide their beneficial ownership information to a governmental authority. Examples include public accounting firms registered under the Sarbanes-Oxley Act, companies registered under federal security laws, banks, most insurance companies, and public utilities.
Certain tax-exempt entities.
Large operating companies that meet certain requirements.
Certain subsidiaries of CTA-exempt entities.
Certain inactive entities that were in existence on or before Jan. 1, 2020, and meet certain other requirements.

What are the Types of Filings Required by the CTA and When are the Filings Due?

Reporting Companies, as defined below, will be required to make the following filings:

An initial filing (see initial filing due dates, below).
Updated filings (to report any changes to previously reported BOI). Updated filings are due within 30 calendar days after the change occurs; and
Corrected filings (to correct any inaccuracies in previously reported information). Corrected filings are due within 30 calendar days after the Reporting Company becomes aware an inaccuracy.
There is no annual filing requirement.

When are Initial Filings Due?

For entities formed or registered on or after Jan. 1, 2024, an initial filing is required within 30 calendar days of formation/registration. Proposed rules would give Reporting Companies formed or registered in 2024 a 90-day period for initial filing.
For entities formed or registered before Jan. 1, 2024, the initial filing is required by Jan. 1, 2025.

FinCEN will not accept BOI Reports before Jan. 1, 2024.

Who are the Beneficial Owners of a Reporting Company?

In general, the beneficial owner is any individual who, directly or indirectly, owns a substantial interest in, or holds substantial control over, a Reporting Company.

Who is a Beneficial Owner by Virtue of Having Substantial Control?

An individual can have “substantial control” over a Reporting Company based upon a variety of facts and circumstances – no ownership is necessary – including:

Serving as a “Senior Officer” of the reporting company, defined as holding the position of, or exercising the authority as, CEO, CFO, COO or general counsel.
Having the power to direct or control important decisions of a reporting company, for example, amendments to governing documents, selection or termination of business lines, reorganizations, mergers, sales or dissolution of the Reporting Company, sales or mortgaging of principal assets of the business, major expenditures, issuances of equity, decisions involving Senior Officer compensation.
Exercise of control is not required; the right and ability to control is enough to establish substantial control over a Reporting Company.

Who is a Beneficial Owner by Virtue of having Ownership?

An individual owning 25 percent or more of the ownership interests of the Reporting Company.

Ownership interests include equity interests, both voting and non-voting; they also include capital or profits interests and interests that are convertible into ownership interests.
Ownership interests are measured as if all options to purchase ownership interests have been exercised.
In certain instances, ownership is measured by either the voting power associated with the interest or the value of the interest.
Depending upon the circumstances, with respect to trusts that own a direct or indirect ownership interest in a Reporting Company, the ownership interest may be considered to be held by the trustee, the grantor, or the like.
Certain individuals are excluded from the definition of a Beneficial Owner, including minors. If a minor’s ownership interest is not reported, reporting may be required by a parent or guardian, and when the minor reaches the age of majority, an updated filing may be required to reflect a “change” in ownership from the parent or guardian.

Who are Company Applicants?

A Reporting Company can have up to two company applicants. An individual will be treated as a company applicant if she files the incorporation, formation, or other creation or registration document. If more than one person is involved in the filing, the individual who is primarily responsible for directing and controlling the filing will also be treated as a company applicant.
Attorneys and Paralegals can be company applicants under the definition.

What Information must be Reported for a Reporting Company?

Information about the Reporting Company:

Legal name.
Any trade names and fictitious business names.
Street address of its principal place of business (or the US headquarters of a foreign Reporting Company).
Jurisdiction of formation (or the first state of registration of a foreign Reporting Company).
Employer identification number.

Information about the beneficial owners and company applicants:

Individual’s name, date of birth, and residential address (for certain company applicants, business address is acceptable).
A unique identifying number from an acceptable government issued identification document such as a non-expired US passport, a non-expired driver’s license or (in certain cases) a non-expired foreign passport.
The name of the jurisdiction issuing the acceptable identification document.
An image of the acceptable identification document.

Who will Have Access to Reported Information?

The BOI reported to FinCEN will not be part of any publicly accessible database. FinCEN may disclose BOI in certain circumstances to the following types of information requesters:

U.S. Federal agencies engaged in national security, intelligence, and law enforcement activities or tax administration activities.
State, local, and Tribal law enforcement agencies, but only with court authorization.
Financial institutions using beneficial ownership information to conduct legally required due diligence, but only with customer consent.
Federal and state regulators assessing financial institutions for compliance with legally required customer due diligence obligations.
Certain foreign law enforcement agencies and certain other foreign authorities who submit qualifying requests for the information through a U.S. Federal agency.

What Penalties can Apply for Violations to the CTA Rules?

Non-compliance: Civil and criminal penalties may apply to willful filing failures, including failures to report complete or updated BOI or willful reporting of false or fraudulent information. Penalties may apply to both Reporting Companies, Senior Officers, and other persons who are responsible for failures to file or filing inaccurate or incomplete information.

Unauthorized use or disclosure of BOI: Civil and criminal penalties may also apply for unauthorized use or disclosure of reported BOI.