The Corporate Transparency Act is Coming, Get Prepared

The Corporate Transparency Act, adopted as Title LXIV of the 2021 National Defense Authorization Act, codified as 31 U.S.C. §5336, together with its implementing regulations (collectively, the CTA), is a new federal law scheduled to go into effect on January 1, 2024.

This new law will require certain businesses to report Beneficial Ownership Information (BOI) to a national, secure database maintained by the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury. The CTA is intended to provide law enforcement with the tools and information to detect, prevent and punish terrorism, money laundering, and other financial misconduct via business entities.

It is a broadly sweeping and complex federal statute representing a significant and fundamental shift in privacy and disclosure law in the United States. As such, it is important for all business owners, real estate investors, and those with assets held by limited liability companies (LLCs), to have a general understanding of the key terms, reporting requirements, and deadlines, to ensure compliance with the CTA.

Reporting Companies subject to the CTA are domestic corporations, limited liability companies, or other entities created by the filing of a document with a secretary of state or any similar office in the US. Reporting Companies also include foreign entities that have registered to do business in the US by filing of a document with a secretary of state or any similar office. There are 23 categories of entities that are exempt from the reporting requirements of the CTA. Generally, exempt entities will be those entities which are subject to regulation by another authority. Most notably, the large operating company exemption exempts companies that meet each of the following requirements:

1. More than 20 full-time employees,
2. At least $5 million in gross receipts from the prior year’s tax return, and 
3. An operating presence at a physical office in the US.

These exemptions will result in the CTA’s disproportionate impact on small businesses, with 32 million such entities estimated to be deemed Reporting Companies in 2024 alone.

A Beneficial Owner is any individual who has, directly or indirectly, 25% or more of the ownership interests of the Reporting Company or exercises substantial control over the Reporting Company. Substantial control is a gray area, excludes certain employees, but not senior officers, and will often require significant factual and legal analysis to determine Beneficial Owner status.

A Company Applicant is the individual who files a document to form or register a company and the person that directed the filing.

The Reporting Company has an obligation to report information, including Beneficial Owner and Company Applicant information, to FinCEN’s Beneficial Ownership Secure System (BOSS). FinCEN advises that the information stored in BOSS will not be available to the public; however, FinCEN will permit federal, state, local and tribal officials, as well as certain foreign officials who submit a proper request, to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will have access to information in certain circumstances, with the consent of the Reporting Company. The Reporting Company will have to report its legal name, trade names, dba names, current address of its principal place of business, its jurisdiction of formation or registration, and its Taxpayer Identification Number.

For each Beneficial Owner, the Reporting Company will have to provide each individual name, date of birth, residential address, an identifying number from an acceptable identification document (such as a passport or a US driver’s license), and an image of such document. Reporting Companies formed or incorporated, or first qualified in a US jurisdiction, after 2023 must include the same information for up to two Company Applicants. However, a business address may be used in lieu of a residential address for a Company Applicant connected to the Reporting Company through their work in entity formation.

For the Reporting Company and Beneficial Ownership Information, there is an ongoing duty to update FinCEN with any changes to the provided information within 30 days of such change. Beneficial Owners, Company Applicants, and, in certain limited cases, a Reporting Company may apply for and obtain a FinCEN Identifier, a unique number, to simplify reporting across multiple entities and limit the number of times personally identifiable information (PII) is transmitted.

Key Dates for Non-Exempt Entities

1/1/2024

This is the effective date of the CTA. Domestic Reporting Companies formed and foreign Reporting Companies registered on or after January 1, 2024 in calendar year 2024 will have 90 days to report Beneficial Ownership and Company Applicant information to FinCEN.

1/1/2025

Reporting Companies that existed before January 1, 2024 will be required to make their initial report containing Beneficial Ownership Information (but not Company Applicant information) by January 1, 2025. Domestic Reporting Companies created or foreign Reporting Companies registered on or after January 1, 2025 are required to report Beneficial Ownership Information and Company Applicant information within 30 days.

The deadline to update filed BOI and correct erroneous BOI is 30 days.

The willful providing of or attempt to provide false or fraudulent information, or the willful failure to report complete or to update information to FinCEN can result in civil penalties of up to $500 per day, and criminal penalties of imprisonment of up to 2 years and fines of up to $10,000.

This general overview is provided for informational purposes only, and does not constitute, and may not be relied upon, as legal advice.

As the CTA is a new federal statute, we anticipate future guidance to be provided by FinCEN to address current uncertainties and unanswered questions.

Please contact Shannon Frazier (sfrazier@morrisjames.com; 302.888.6916), Michael Dingerdissen (mdingerdissen@morrisjames.com; 302.888.6870), or another Morris James attorney with any questions regarding assistance in determining a specific entity’s reporting obligations under the CTA.