A Roadmap to the CTA’s Game-Changing Reporting Requirements

Beginning on January 1, 2024, many U.S. legal entities and foreign entities registered to do business in the U.S. will be required to report information about themselves, their beneficial owners, and their company applicants pursuant to the Corporate Transparency Act (CTA).

Reporting companies created before January 1, 2024, will have until January 1, 2025, to file their initial beneficial ownership information (BOI) reports with the U.S. Treasury’s Financial Crimes and Enforcement Network (FinCEN). Reporting companies created after December 31, 2023 will have 30 days after creation (or 90 days after creation for entities formed in 2024) to file their initial BOI reports with FinCEN.

BOI reports will be filed with FinCEN’s new Beneficial Ownership Secure System, which is still under development by FinCEN and not yet available for access. FinCEN recently published a Small Entity Compliance Guide to assist businesses in complying with the CTA reporting requirements.

This briefing discusses the new reporting landscape that companies will face.

Which Entities Are Reporting Companies?

Only “reporting companies” are required to file BOI reports with FinCEN. “Reporting companies” are divided into two categories:

• Domestic Reporting Companies—All entities that are formed by the filing of a document with a secretary of state or similar state office (e.g., corporations, LLCs, trusts, and LLPs); and
• Foreign Reporting Companies—All entities that are formed under the laws of a foreign jurisdiction and are registered to do business in any U.S. state by the filing of a document with a secretary of state or similar office.

Any entities that do not fall into one of these two categories (e.g., general partnerships, sole proprietorships, and common law trusts) are exempt from the CTA reporting requirements. See Exemptions from CTA below.

Exemptions From the CTA

The CTA includes 23 categories of entities that are exempt from reporting requirements. The following list is a summary of certain of the exemptions:

• Securities Reporting Issuer—Entities that are (a) an issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934 (Exchange Act) or (b) subject to reporting requirements under section 15(d) of the Exchange Act.
• Large Operating Company—Entities that meet all three of the following: (a) employ more than 20 employees on a full-time basis in the U.S., (b) have an operating presence at a physical office within the U.S. and (c) have previously filed U.S. federal income tax returns demonstrating more than $5 million in gross receipts or sales from U.S. sources on a consolidated basis.
• Subsidiaries of Certain Exempt Entities—Entities whose ownership is controlled or wholly owned, directly or indirectly, by certain exempt entities. This exemption does not apply to subsidiaries of money services businesses, pooled investment vehicles, or entities that assist tax-exempt entities.
• Other Regulated Entities—Entities that are subject to existing regulatory reporting requirements (e.g., banks, credit unions, bank holding companies, registered securities brokers or dealers, registered investment companies, registered investment advisers, insurance companies, and public accounting firms).
• Tax-Exempt Entities—Certain tax-exempt entities.
• Governmental Entities—Entities that exercise governmental authority on behalf of the U.S. or any state or political subdivision.

Companies should review the full list of exempt entities to confirm whether they fall within any of the exemptions.

Who Is a Beneficial Owner?

The CTA defines a “beneficial owner” as any individual who, directly or indirectly, either (a) exercises “substantial control” over a reporting company or (b) owns or controls at least 25 percent of the “ownership interests” of a reporting company.

An individual exercises substantial control over a reporting company if they meet any of following criteria: (a) the individual is a senior officer (i.e., a president, chief financial officer, general counsel, chief executive officer, chief operating officer), (b) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company, (c) the individual is an important decision-maker (i.e., makes decisions on reorganizations, acquisitions, compensation, and entry or termination of significant contracts) or (d) the individual has any other form of substantial control over the reporting company. All individuals who exercise substantial control over a reporting company must be reported as beneficial owners.

Ownership interests of a reporting company is broadly defined and may be held by way of equity, stock or voting rights; capital or profit interest; convertible instruments; options; or any other instrument, contract, or mechanism used to establish ownership.

The CTA exempts several categories of beneficial owners from reporting requirements. See Beneficial Owner Exemptions below.

Beneficial Owner Exemptions

The following individuals are exempt from the definition of “beneficial owner”:

1. minor children;
2. individuals acting as a nominee, intermediary, custodian, or agent on behalf of another individual, however, the actual beneficial owner must still be reported;
3. individuals acting as an employee of a reporting company who are not senior officers:
4. individuals whose only interest in a reporting company is a future interest through a right of inheritance; and
5. creditors of a reporting company.

Who Is a Company Applicant?

In addition to information about the reporting company and BOI for its beneficial owners, reporting companies created on or after January 1, 2024, will be required to also report company applicant information.

Company applicants are (a) the individual who directly files the document that created the reporting company and/or (b) the individual who was primarily responsible for directing or controlling such filing. Two company applicants is the maximum number of company applicants that need to be reported.

Company applicant information is only required for entities formed after January 1, 2024.

What Are the Reporting Requirements for Reporting Companies?

Reporting companies created before January 1, 2024, will have until January 1, 2025, to file their initial BOI reports with the FinCEN, while reporting companies created on or after January 1, 2024, will have 30 days after creation to file their initial BOI reports. However, FinCEN recently proposed extending this deadline to 90 days for entities created in 2024.

After the initial report, reporting companies will have to make additional filings if there are any changes to their reported information; which must be filed within 30 days after each change.

The following information must be reported to FinCEN by each reporting company:

• Reporting Company—(a) full legal name and any trade name or “doing business as” name, (b) current U.S. address, (c) jurisdiction of formation or registration and (d) Taxpayer Identification Number (TIN) from the IRS, or, for foreign reporting companies without a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.
• Beneficial Owners—(a) full legal name, (b) date of birth, (c) current residential address, and (d) a unique identifying number from, and copy of, a U.S. passport, state driver’s license, other state or federal issued identification, or a foreign passport if the individual does not have any of the previous documents.

In lieu of the foregoing information, an individual beneficial owner can submit its BOI to FinCEN directly and obtain a “FinCEN identifier.” The reporting company can then provide the FinCEN identifier to FinCEN in its report instead of the foregoing information.

• Company Applicants—(a) full legal name, (b) date of birth, (c) current business address and (d) a unique identifying number from, and copy of, a U.S. passport, state driver’s license, other state or federal issued identification, or a foreign passport if the an individual does not have any of the previous documents. As with beneficial owners, company applicants can also obtain a FinCEN identifier.

Penalties for Noncompliance

The willful failure to report complete or updated BOI to FinCEN, or the willful provision of or attempt to provide false or fraudulent BOI may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, and/or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000 (which does not include potential state penalties as well). Senior officers of a reporting company that fail to file a report may be accountable for that failure.

Who Can Access the Information?

As currently proposed, federal, state, local and tribal officials, as well as certain foreign officials who submit a request through a U.S. federal government agency, will be permitted to obtain BOIs if they can demonstrate such requests relate to national security, intelligence, and law enforcement. Subject to the consent of the reporting company, financial institutions will also have access to BOIs under certain situations.

What Does This Mean for Me?

Many clients have complex corporate structures. Those contemplating creation of new subsidiaries in the coming year should carefully consider who will be the company applicants and the beneficial owners and ensure that obtaining that information will not needlessly delay their transaction. 

Company applicants will be certifying that the initial beneficial information report is true, correct, and accurate. Care should be given to ensure that those representations are fulfilled as the penalties for willful violation are substantial.

Corporate secretaries and other managers should consider the need to report changes to information previously reported. They should consider adding this item to recurring board meeting agendas or creating another procedure for ensuring ongoing compliance.

Financial institutions subject to the Customer Due Diligence (CDD) Final Rule under the Bank Secrecy Act should consider how access to a person’s BOI may affect their “know your client” and customer identification procedures. FinCEN is still scheduled to issue proposed regulations attempting to align the CDD Rule with the CTA.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.