Navigating the Implications of the New Beneficial Ownership Disclosure Requirement in The United States

In a paradigm shift towards corporate transparency, the clock struck January 1, 2024, ushering in the era of the Corporate Transparency Act (“CTA”). The CTA is federal legislation, originally passed in 2021, with a primary objective of proactively addressing and counteracting money laundering, terrorist financing, corruption, tax fraud and other illicit activities. This objective is achieved by requiring business entities defined as “Reporting Companies” to provide details about their Beneficial Owners—namely the individuals with ultimate ownership or control of the company—to the Financial Crimes Enforcement Network (“FinCEN”) of the Treasury Department. The law aims to achieve these objectives while minimizing the administrative burden on entities engaged in business activities within the United States. This article will explore the important facets of the CTA, as well as explain the obligations of business owners in this new era.

What is a Reporting Company?

The CTA applies to all Reporting Companies. Unless there is a relevant exemption in place, a “reporting company” is any company established within the United States or any foreign company that opts to conduct business within the US by submitting documentation to a secretary of state or equivalent authority. As further defined by FinCEN, a “reporting company” can include “(1) any corporation, LLC, limited partnership or similar entity created by filing a document with any U.S. state, territory, or Indian tribe (domestic reporting companies), and (2) any non-U.S. entity that registers to do business with any U.S. state, territory, or Indian tribe (“foreign reporting companies”). Domestic reporting companies encompass the entities listed above, established through the submission of documentation to a secretary of state or a comparable office within the United States. Foreign reporting companies include entities like corporations and limited liability companies formed under foreign laws but registered to operate in the United States by the filing of relevant documents with a secretary of state or a similar office. It is crucial to note that there are 23 specific types of entities exempt from these reporting requirements, and a thorough examination of the qualifying criteria is advised to determine whether a company falls under the exempt category. Examples of exempt entities not considered reporting companies include banks, credit unions, SEC-reporting companies, insurance companies, and public accounting firms.

Who is a Beneficial Owner?

The CTA defines a Beneficial Owner as an individual who directly or indirectly possesses significant authority over the Reporting Company through various means such as contracts, arrangements, understandings, relationships, or any other relevant method. This can manifest by exercising substantial control over the entity or owning a minimum of 25% of the equity interests in the entity.

The term “substantial control” encompasses Individuals who do one or more of the following:

• hold a senior officer position within the reporting company,
• possess authority to appoint or remove senior officers and members of the board of directors,
• can influence important decisions within the company, or
• exhibit any other form of substantial control over the company.

It should be noted that there is no specific limit on the maximum number of beneficial owners to be reported, but the definition excludes five categories of individuals. These five exempted types of individuals are (1) a minor child, as defined under the law of the State or Indian tribe in which a domestic reporting company is created or a foreign reporting company is first registered, provided the reporting company reports the required information of a parent or legal guardian of the minor; (2) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (3) an employee of a reporting company acting solely as an employee, whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee; (4) an individual whose only interest in a reporting company is a future interest through a right of inheritance; and (5) a creditor of a reporting company.

What Must be Reported?

Reporting Companies under the CTA must provide the following specific details:

1. The full name of the Reporting Company,
2. Trade names, such as any “doing business as” or assumed names,
3. The physical address of the Reporting Company,
4. Jurisdiction of Formation of the Reporting Company,
5. The Reporting Company’s EIN or TIN
6. Full legal name of each Beneficial Owner,
7. Birthdate of each Beneficial Owner,
8. Current residential or business street address of each Beneficial Owner, and
9. An acceptable, non-expired identification document number of each Beneficial Owner, such as a US passport, driver’s license, Indian tribal identification document, other state or local government issued identification, or a foreign government issued passport if the Beneficial Owner does not have any of the previously listed documents. A copy of said identification document must be attached in one of the following formats: JPG/JPEG, PNG, or PDF.

Alternatively, individuals can obtain a FinCEN identifier number for use in subsequent filings or if said individual owns multiple entities. Furthermore, if there are alterations in the details provided by an individual or a reporting entity to FinCEN for acquiring a FinCEN identifier, the concerned individual or entity is required to promptly update or rectify the submitted information directly with FinCEN. Such alterations may include the expiration of a driver’s license, changes in address, or modifications in name. It is mandatory to report such changes within a 30-day timeframe, with the reporting entity obligated to submit an updated Beneficial Ownership Information (BOI) report within the same period. Recognizing the novelty of this requirement, FinCEN allows up to 90 days from the initial reporting deadline to rectify any errors or omissions without incurring penalties for the subsequent reporting year. FinCEN is currently exploring. without incurring penalties for the subsequent reporting year. FinCEN is currently exploring solutions to enable individuals to deactivate a FinCEN identifier, thus eliminating the need for continuous updates to the associated personal information.

For Reporting Companies established on or after January 1, 2024, information about the Company Applicant is also required. A Company Applicant is the “individual who directly files the document that creates or registers the company,” as well as “the individual who is primarily responsible for directing or controlling the filing” if more than one person was involved. Note that a Company Applicant does not need to be a Beneficial Owner of the Reporting Company. The Company Applicant should also provide the same information as required of a Beneficial Owner.

Information reported will not be available to the public, therefore preserving anonymity. As with any law, this may be subject to change.

Reporting Deadlines Under the Corporate Transparency Act

There are three important filing deadlines to note:

• Reporting companies in existence prior to January 1, 2024, must file their initial report to FinCEN by January 1, 2025.
• Reporting companies formed or registered in 2024 must file their initial report to FinCEN within 90 calendar days from the date they receive actual or public notice of their creation or registration.
• For companies established on or after January 1, 2025, initial reports to FinCEN must be submitted within 30 calendar days from the date they receive actual or public notice of their creation or registration.

Following the initial filing, there is no recurring annual or quarterly requirement. However, there is an on-going duty to keep reports up to date. Reporting Companies have a 30-day window to amend their reports with any information that has changed since a previous report. Any inaccuracies in filed reports must be amended within 30 days of discovery.

How do I Submit a Report?

Reporting Companies may submit their reports to FinCEN electronically through the FinCEN BOI E-Filing System, accessible on their direct website.

Must I Comply?

Compliance with the CTA is not optional if you wish to conduct business within the United States. Individuals who furnish inaccurate information or willfully fail to adhere to reporting obligations may face civil penalties, with a maximum of $500 per day for the violation. Offenders may also be exposed to criminal penalties, including imprisonment for up to two years and fines reaching $10,000.

Congress introduced the CTA with the aim of combating money laundering, financing terrorist activities, and addressing other criminal concerns. Businesses should assess whether they fall under the classification of a reporting company and, if so, understand the necessary steps for compliance with the CTA. Navigating the requirements of the CTA is essential for businesses to ensure compliance and contribute to the broader efforts against financial crimes. While critics have voiced concerns about the impact on small businesses, a proactive approach in understanding reporting obligations and staying informed about updates will be key. By embracing transparency and timely compliance, businesses can play a crucial role in fostering a more secure financial environment.

Kuiper Law Firm, PLLC specializes in Business Law and Corporate Transactions. We will continue to monitor any updates regarding the Corporate Transparency Act. If you have any questions about the information in this article, please do not hesitate to contact us.