Disclosure Requirements for Corporate Entities – Are You Ready?
On January 1, 2021 Congress passed the Corporate Transparency Act (“CTA”). The purpose of the CTA is to create a clear standard for incorporation practices throughout the United States for both domestic entities and foreign entities registered to conduct business in the United States, and address the issue of anonymous companies (which have been used in some cases as vehicles for money laundering, to evade sanctions, and to move and hide illicit wealth) by requiring filing of a beneficial ownership interest report (“BOI Report”) which discloses to the U.S. Treasury’s Financial Crimes and Enforcement Network (“FinCEN”) certain information regarding the individuals who own or control a Reporting Entity.
WHEN AND HOW DO I FILE?
While the Act has been passed in 2021, it became effective on January 1, 2024 requiring filings from all “Reporting Entities” as follows:
(I) 2024 & later Reporting Entities: all entities being formed from January 1, 2024 will need to file a BOI Report within 90 days from formation/incorporation.
(II) Pre-2024 Reporting Entities: all existing entities will be required to file the BOI Report within a year from effectiveness – so by January 1, 2025.
(III) Changes to the BOI after the initial BOI Report: if there is any change in the information reported regarding the Reporting Entity or the Beneficial Owners, an amendment needs to be filed within 30 days from the date the change occurred.
The BOI Reports will be filed through an electronic interface with the online Beneficial Ownership Secure System (“BOSS”) on the FinCEN website. There will be no fee for filings.
WHICH ENTITIES ARE CONSIDERED REPORTING ENTITIES?
Unless exempted:
(I) Domestic Reporting Companies: Any corporation, limited liability company (LLC), limited partnerships, and other “similar entities” that are created or registered by the filing of a document with a secretary of state or a similar Indian tribal office.
(II) Foreign Reporting Companies: Any legal entity formed under the laws of a foreign country that is registered to do business in any state within the United States.
WHICH ENTITIES ARE EXEMPTED?
There are 23 exemptions, including the following:
- Large operating companies = any entity that: (1) has an operating presence at a physical office within the United States; (2) employs more than 20 employees on a full-time basis (at least 30 service hours/week) in the US; and (3) filed in the previous year U.S. federal income tax returns demonstrating more than $5,000,000 in gross receipts or sales in the aggregate in the United States (whether individually or on a group consolidated basis);
- Issuers of a class of securities registered under section 12 of the Securities Exchange Act of 1934;
- Certain entities already required to disclose beneficial ownership information either publicly or to federal regulators. For example: national and state-chartered banks, federal and state credit unions, depository institution holding companies, insurance companies, money services businesses registered with FinCEN, registered broker-dealers, SEC-registered investment companies, SEC-registered investment advisers, and registered exchanges or clearing agencies.
- Pooled investment vehicles operated or advised by a national or state-chartered bank, federal or state credit union, registered broker-dealer, SEC-registered investment company or SEC-registered investment adviser, or an exempt venture fund adviser;
- certain inactive/dormant entities with no assets and limited transaction activity;
- any entity whose ownership is controlled or wholly owned, directly or indirectly, by an Exempt Entity.
WHAT INFORMATION WILL BE REQUIRED FOR THE BOI REPORT?
- Reporting Entity Information:
- full legal name and any trade name or “doing business as” name;
- current address;
- jurisdiction of formation/registration; and
- Internal Revenue Service Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) or, for foreign reporting companies that have not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.
- Beneficial Owners and Company Applicants. Both the Beneficial Owners and the Company Applicants must provide:
- for individuals: full legal name and date of birth;
- a complete current address consisting of (a) for individuals, their residential street address; and (b) business street address for company applicants;
- image of, and an identifying number and issuing jurisdiction, from one of the following unexpired documents: (a) passport; (b) state driver’s license; (c) identification document issued by a state, local government, or tribe; or (d) if an individual does not have any of the previous documents, a foreign passport.
WHO IS A BENEFICIAL OWNER AND WHO IS A COMPANY APPLICANT?
- Beneficial Owners: All of the “individual[s] who, directly or indirectly exercises substantial control or owns or controls at least 25% of the ownership interest” over/on the Reporting Company.
- “substantial control” means generally individuals who have important decision-making authority. For simplicity, consider the following are generally deemed to have such control:
- Senior Officers: a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer regardless of official title, who performs similar functions.
- individuals who have authority to appoint or remove any senior officer or a majority of the board of directors or similar.
- individuals who make decisions on major expenditures, reorganizations, and entry or termination of significant contracts.
- “ownership interest” means interest that may be held by way of equity, stock, or voting rights; capital or profit interest; convertible instruments; option or privilege; or any other instrument, contract, arrangement, understanding, relationship, or mechanism.
- “Directly or indirectly” – individuals may exercise control either directly or indirectly, so for example:
- Directly: by board representation, ownership or control over majority of voting powers/rights, because of rights associated with financing or interest
- Indirectly: by controlling one or more intermediary entities that separately or collectively exercise substantial control over the Reporting Company; or through arrangements or financial or business relationships with other individuals or entities acting as nominees
- There are five exemptions including minor children; individuals acting solely as employees of a Reporting Company (excluding senior officers) or as agents, and creditors.
- “substantial control” means generally individuals who have important decision-making authority. For simplicity, consider the following are generally deemed to have such control:
- Company Applicants: max two individuals: (i) the person who directly files the formation or registration document of the Reporting Entity and (ii) the person who was primarily responsible for directing such filing.
(However, entities formed prior to Jan. 1, 2024, will not need to provide information regarding their Company Applicants)
WHAT ARE THE PENALTIES?
- escalating fines ($500 per day up to $10,000 per violation);
- possible jail time (up to two years)
(Remember that failure to file an amendment when a subsequent event would necessitate an amendment also causes penalties)
WHO WILL HAVE ACCESS TO THE BOI REPORTS?
Once the Beneficial Owner Statement is provided to FinCEN, the data contained in the statement will not be publicly available. However, the Act allows certain use of the data when it is for law enforcement purposes or to facilitate compliance with anti-money laundering laws.
WHAT IS THE FINCEN ID?
Individuals and entities whose information will be included in a BOI Report may (but are not required to) electronically apply for a FinCEN Identifier, a unique identifier that individuals and companies may request from FinCEN to streamline the submission of BOI Reports.