New Mandatory Disclosure Reporting effective January 1, 2024 - What Business Owners Need to Know About the Corporate Transparency Act

As you may or may not be aware, the Corporate Transparency Act (the “CTA”) was passed in 2021 as part of the National Defense Authorization Act to combat money laundering. Its rules were finalized in September of 2022 and will become effective on January 1, 2024. The CTA is a very broad law requiring business entities to disclose their “Beneficial Owners” to the Financial Crimes Enforcement Network (“FinCen”) unless they fall under certain limited exemptions.  This policy is being administered by the U.S. Treasury Department.

The stated purpose of the law is that, while a lot of fraud (domestic and offshore) occurs through disguised business entity ownership, the federal government lacks a mechanism to database, track, and share this information.  This article provides some basic information regarding the CTA. It is not a substitute for actual legal advice.  All of these rules are subject to change, and FinCen continues to release new FAQs addressing previously unanswered questions so it is critical to be aware of changes as the CTA comes into effect. Further, without any of the websites or laws going into effect at this point, there are bound to be additional changes once this rolls out. If after reviewing this, you have further questions, please reach out to your attorney or if you need counsel, feel free to contact us  for help.

What are the key deadlines?

Entities formed prior to January 1, 2024 will be required to file beneficial ownership information reports with FinCen no later than  January 1, 2025.  Entities formed after January 1, 2024 will be required to file within ninety (90) days after filing the formation documents for the entity with a secretary of state.  Starting in 2025, the filing period will be reduced to thirty (30) days from the date of filing of the entity.  In addition, any changes to the ownership of a business must be reported to FinCen within thirty (30) days of such change.

What will be required to be reported?

A beneficial ownership interest report will contain the name of the individual, a copy of  an identifying number from an unexpired government identification (driver’s license or passport), their social security number or EIN, physical address (cannot be a PO Box), phone number, and email.  That said, the FinCen website for reporting is not functional yet, so we have not seen exactly what will be included in the report. 

Which entities must report?

The short answer is, most small and midsize business entities. Under the CTA, a “Reporting Company” is any domestic or registered foreign entity (an LLC, corporation, or catch-all) or any other type of entity registered with a state. FinCEN has provided a 23-item list of entities exempted from the definition of “Reporting Company.” The most common exceptions include: 

·        Publicly traded companies

·        Banks

·        Credit unions

·        Governmental entities

·        Insurance companies operating in the U.S.

·        Securities brokers

·        Public utility companies

·        Certain investment advisers

·        Venture capital fund advisers

·        Accounting firms

·        Pooled investment vehicles

·        Inactive entities not owned by a foreign person

·        Tax-exempt entities (such as nonprofits, political organizations, and certain trusts) 

·        Subsidiaries of exempt entities

·        Entities that employ more than 20 employees, operate at a physical office in the United States, and filed federal tax returns demonstrating more than $5 million in gross receipts or sales

Which individuals need to report, and what will they have to report?

Beneficial Owners will be required to disclose their names, dates of birth, residential and business addresses, and copies of a driver’s license or passport. A “Beneficial Owner” is defined as any individual who exercises “substantial control” over the business or who owns and controls at least 25% of the company, whether it be via voting power, shares, membership interest, or value. In making the determination of 25% ownership, the company must consider individuals holding dilutive ownership such as option holders, holders of SAFE notes, convertible debt, and profit-interest equity. This can get complicated for businesses unless they have a well-organized cap table. The reporting requirements could also include beneficiaries of trusts that hold ownership interests even if a separate trustee has fiduciary control over the trust assets, including the subject ownership interest. An individual exercising substantial control does not need to be an officer, manager, or board member, although those are positions that most commonly are going to be considered persons with substantial control over the business. In FinCen responses to frequently asked questions, they have clarified that if an LLC operating agreement provides certain voting guidelines that make it such that practically speaking all of the members have substantial control, regardless of whether they own more than 25% of the membership interest, are Beneficial Owners and thus must file a report.  

Company applicants will also be required to submit reporting similar to the Beneficial Owners described above. Only reporting companies created or registered on or after January 1, 2024, will need to report their company applicants.

A company that must report its company applicants will have only up to two individuals who could qualify as company applicants, (1) The individual who directly files the document that creates or registers the company; and (2) If more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing.

Where and how do Beneficial Owners and Reporting Companies report?

All Reporting companies will have to report beneficial ownership information electronically through FinCEN’s website, the Beneficial Ownership Secure System (currently being referred to as “Boss”) at www.fincen.gov/boi. As noted, as of the date of this email, this system is not yet functional.  Beneficial owners may choose to submit the necessary information one time to FinCen to obtain a FinCen identification number, which can then be used in future filings or by other filers filing on behalf of a reporting company so that all of the individual’s information does not have to be resubmitted with each filing.

Once a BOI is filed, will my information be available to the public?

No. FinCen has thus far stated that only law enforcement, certain government agencies, and certain financial institutions (if requested by you for financial due diligence) will have access to this information.  The rules and procedures surrounding how and what data can be reviewed by such law enforcement and government agencies are still being developed.

What are the penalties for failing to comply with the CTA? 

The penalty for filing a fraudulent report is $500 per day and the penalty for failing to comply with the CTA is $10,000 and up to two years in jail. For this reason, businesses will need to put in place policies and procedures to ensure compliance with the CTA. Further, some businesses should consider amending their governing documents to include indemnification provisions to limit the liability exposure to the business from owners who fail to report or update their report after changes to their information.

After reporting for the first time, do I have to report again or update the reporting?

The report must be updated whenever there are certain changes to the entity including but not limited to a change in ownership interest or the beneficial owners or substantial controllers of the entity. Penalties accrue for failure to file such updates within thirty (30) days of becoming aware of a change that would require an update.  

Otherwise, the reports are one-time in nature, and will not require an annual (or other) regular filing.

Are any of the ongoing lawsuits going to keep this law from going into effect? 

Probably not. Cases against the federal government asserting violation of privacy rights and security concerns are indeed ongoing. That said, at this point, there is no indication that any of these will result in the current deadline changing.

Can H+G help with this? 

Yes and no.  We will be happy to provide guidance on whether a business or its entities need to file a report. However, at this point H+G is not filing Beneficial Interest Reports on behalf of clients.  H+G may offer this service in the future, and we will provide an update once we have enough information about the reporting process.

Are there any provisions of entity documents or employment agreements that business owners should consider updating as a result of the CTA?

Yes, business owners should consider whether there are necessary updates to their entity documents and any employment agreements with officers or persons with substantial control.  As noted above, given the high daily financial penalties that could accrue to the entity, if a limited liability company or corporation has multiple members, businesses should consider amending their governing documents to include indemnification provisions. Employment agreements for persons that have substantial control of the entity, should be revised to include provisions creating an obligations for the employee to comply with the CTA and remedies for the Company for an employee’s failure to report.   It seems likely that over time, these clauses will be built into prevailing forms so that businesses and their owners have remedies for penalties that accrue, if any.

Where can I find additional information regarding CTA reporting and updates?

If you would like to review the CTA itself, a PDF of the law can be found at: Corporate Transparency Act.  The rules and interpretations from FinCen are changing frequently. Accordingly, if you would like to receive immediate email updates on Beneficial Ownership, please sign up for FinCEN updates at: FinCEN Updates. The FinCen Mandatory E-Filing Frequently Asked Questions can be found here: FAQs

We will do our best to provide updates to these materials based on any new developments on the CTA. However, given the nature of the continued changes to the roll out of the reporting website and the application of the CTA, the FinCen website should be reviewed for the most up to date information. In addition, if any aspect of the reporting obligations is not clear, business owners should seek review by counsel as soon as possible.