Corporate Transparency Act: An Overview of Impending Reporting Obligations

At a Glance

• The Corporate Transparency Act is a new federal law designed to combat money laundering, tax evasion, and other illicit financial activities by requiring “reporting companies” to disclose beneficial ownership information (BOI) about their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury.
• On January 1, 2024, reporting companies newly formed or registered in the U.S. on or after that date will have 90 days to report BOI, certain entity information about the reporting company and “company applicant” information to FinCEN; however, reporting companies formed or registered on or after January 1, 2025, will have 30 days to report such information.
• Reporting companies existing or registered in the U.S. prior to January 1, 2024, will need to report BOI and certain entity information about the reporting company (not “company applicant” information) to FinCEN by January 1, 2025. These entities should assess whether they will have reporting obligations well before this deadline.

This alert was updated on November 30, 2023

Every entity formed under U.S. law and foreign entities (i.e., non-U.S. entities) qualified to do business in any U.S. jurisdiction should assess whether there are reporting obligations under the Corporate Transparency Act (the CTA). The CTA, which was passed by Congress on January 1, 2021, as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act, is a new law designed to combat money laundering, tax evasion, and other illicit financial activities by requiring “reporting companies” to disclose beneficial ownership information (BOI) about their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury. 

There are several exemptions (23 to be exact) from the CTA reporting requirements. Exemptions generally are available to larger operating companies or companies already subject to rigorous state or federal reporting. Where an exemption applies to an entity, that entity is not a “reporting company” and would have no reporting obligations. Certain entity types (for example, sole proprietorships, general partnerships, certain trusts and other entities that are formed without a filing with a Secretary of State or equivalent) are not covered by the CTA at all and, therefore, do not have any reporting obligations.

FinCEN recently adopted a rule amendment that extends the reporting timelines under the CTA: the deadline applicable to entities formed or registered on or after January 1, 2024, and before January 1, 2025, was increased from 30 days to 90 days; however, entities formed or registered on or after January 1, 2025, will have 30 days to file initial reports with FinCEN.

Reporting companies formed or registered on or after January 1, 2024, will have 90 days to report BOI, certain entity information about the reporting company and “company applicant” information to FinCEN. Reporting companies existing prior to January 1, 2024, have until January 1, 2025, to report BOI and certain entity information about the reporting company (but not “company applicant” information). After the initial report, reporting companies have ongoing obligations to submit updated reports should BOI change or to correct errors. FinCEN expects to collect all such information through an online portal, which has not yet been made available to the public as of the date of this advisory. There are no filing fees for submitting reports.

Despite several exemptions, FinCEN estimates that there will be at least 32 million entities required to submit BOI reports beginning on the first effective date (i.e., January 1, 2024) and an additional five million entities would be required to submit BOI reports for each of the following ten years. It would be prudent for each entity to assess annually whether it is required to file a report.

This advisory summarizes the CTA and the final regulations relating to BOI reporting requirements. The items we highlight below are:

• Who are reporting companies?
• Reporting obligations
• Exemptions from reporting
• Penalties for noncompliance
• Who can access information?
• Other considerations

Who Are Reporting Companies?

The first step in understanding CTA compliance obligations is to determine whether an entity falls within the scope of the CTA. Covered entities include corporations, limited liability companies, limited partnerships, any domestic entity that is created or formed by the filing of a document with a U.S. Secretary of State or equivalent (including U.S. territories and possessions and tribal jurisdictions) and any entity formed under the laws of a foreign jurisdiction that registers to do business in the U.S. (including U.S. territories and possessions and tribal jurisdictions) by making a filing with a U.S. Secretary of State or equivalent.

Sole proprietorships, general partnerships and certain trusts are outside of the scope of the CTA, as are all other entity types that are not created by a filing with a U.S. Secretary of State or equivalent. Foreign entities that have not registered to do business in the U.S. by making a filing with a U.S. Secretary of State or equivalent are also outside of the CTA’s scope.

Covered entities that do not fall into a CTA exemption — referred to as “reporting companies” — will be required to report their BOI to FinCEN. There are two types of reporting companies: domestic reporting companies and foreign reporting companies. As discussed further below, there are 23 exemptions under the CTA.

Reporting Obligations

New Entities

Reporting companies formed or registered to do business in the U.S. on or after January 1, 2024, will be required to report BOI for “beneficial owners”, “company applicant” information and certain entity information about the reporting company to FinCEN within 90 days of when notice of formation or registration is provided by the applicable Secretary of State or equivalent.

Existing Entities

Reporting companies formed or registered to do business in the U.S. before January 1, 2024, will be required to report BOI for “beneficial owners” and certain entity information about the reporting company to FinCEN by January 1, 2025 (but not "company applicant" information).

Each reporting company also has ongoing reporting obligations. If the reporting company reported inaccurate information in a previously submitted report or has updates to such report, the reporting company is required to submit a corrected or updated report within 30 days of when the reporting company becomes aware of or has reason to know of an inaccuracy in the report (in the case of corrected reports), or within 30 days of when any change occurs (in the case of updated reports). There are no de minimis exceptions — all changes to previously reported information are to be reported via updated reports. Additional information regarding updated reports is provided below in Section C. Initially exempt companies that have lapsed exemptions need to submit an initial report by the later of January 1, 2025, or within 30 days after the lapse. A reporting company that becomes exempt is required to file an updated report indicating that it is newly exempt from reporting requirements.

FinCEN is expected to roll out an online filing system for submitting reports. The system is expected to be available on January 1, 2024.

1. Who Are Beneficial Owners:

   A reporting company can have multiple “beneficial owners.” The CTA states that a “beneficial owner” is any individual who, directly or indirectly, either (1) owns or controls at least 25 percent of the “ownership interests” of a reporting company; or (2) exercises “substantial control” over a reporting company.

   Ownership interests are defined broadly to include stock, equity, profits interests, voting rights, convertible instruments (including convertible debt instruments), warrants, options, put rights, call rights and any other instrument, contract, arrangement, understanding, relationship or mechanism used to establish ownership.

   An individual exercises “substantial control” if they meet any of the following criteria:

   1. They hold senior offices holding the position or exercising the authority of president, chief executive officer, general counsel, chief financial officer, chief operating officer or any other officer (regardless of title) who exercises the authority of these officers.
   2. They have authority to appoint or remove any senior officer or a majority of the board, or directors or equivalent body.
   3. They direct, determine or have substantial influence over important decisions made by the reporting company, such as strategic business decisions, compensation schemes for senior officers, business reorganizations or acquisitions.
   4. They exercise any other form of substantial control over the reporting company.

   Examples of ways substantial control can be exercised indirectly include control over one or more intermediary entities that individually or collectively exercise substantial control over a reporting company and control via relationships with another individual who is acting as a nominee, intermediary, custodian or agent.

   There is no limit on the number of individuals who can be reported for exercising substantial control.

2. Exemptions From Beneficial Owner Definition:

   There are five exceptions to the definition of beneficial owners:

   1. Minor children as defined under the laws of the reporting company's jurisdiction or registration (however the reporting company must report BOI regarding the minor child’s parent or legal guardian).
   2. An individual acting on behalf of an actual beneficial owner as a nominee, intermediary, custodian, or agent, such as advisors and tax professionals (BOI must still be reported for actual beneficial owners).
   3. Certain actual employees (not independent contractors) of reporting companies who are not senior officers and whose substantial control over, or economic benefits, from the reporting company are derived solely from employment status.
   4. An individual whose only interest in a reporting company is a future interest through a right of inheritance.
   5. A creditor of a reporting company, so long as the right to payment to satisfy a debt or loan is the only “ownership interest” the creditor has in the reporting company.

3. A Reporting Company Will Have to Report the Following Information:

   Information about the reporting company:

   • Legal name
   • Any trade names, “doing business as” (d/b/a), or “trading as” (t/a) names
   • Current street address of its principal place of business
   • Jurisdiction of formation or first U.S. registration
   • Taxpayer Identification Number (TIN) from the IRS (foreign reporting companies without a TIN must report a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction)

   Information about beneficial owners:

   • Full legal name
   • Date of birth
   • Residential address (not business)
   • A unique identifying number from a (non-expired) driver’s license, passport or other state or federal issued identification
   • A copy of the document that the unique identifying number is from

   Alternatively, an individual beneficial owner can submit its BOI to FinCEN directly via an online filing system and obtain a “FinCEN identifier,” which is a unique identifying number assigned by FinCEN to the individual. The FinCEN identifier would be issued almost immediately (similar to the way a TIN is issued).

   The reporting company may then provide FinCEN identifiers to FinCEN in its initial report in lieu of BOI. This alternative may be helpful if a reporting company does not want to collect and handle BOI, which is considered personally identifiable information that is covered by applicable privacy laws.

   Information About Company Applicants:

   Reporting companies formed or registered to do business in the U.S. on or after January 1, 2024, will be required to report "company applicant" information in addition to BOI for “beneficial owners” and certain entity information about the reporting company. Reporting companies existing or first registered prior to January 1, 2024, do not have to report “company applicant” information. The next section details company applicant information that is to be reported.

   Type of Report:

   A reporting company will have to indicate the type of filing it is making (that is, whether it is filing an initial report, a correction of a prior report, or an update to a prior report).

   Updates/Corrections:

   After the initial filing is made, reporting companies are required to submit updated reports within 30 days of when a change occurs to any information reported about the reporting company or its “beneficial owners.” There is no de minimis exception. For example, each of the following scenarios require an updated report: the reporting company hires a new senior officer, a beneficial owner dies, a beneficial owner gets married and changes their name, or when a beneficial owner that was a minor child reaches the age of majority.

   Reporting companies are required to submit a corrected report revising previously reported inaccurate information (whether the inaccurate information related to BOI or company applicant information, discussed below) within 30 days of when the reporting company becomes aware of or has reason to know of the inaccuracy.

4. Who Are Company Applicants:

   Company applicants are (1) the individual who directly files the document that creates, or first registers, the reporting company; and (2) the individual that is primarily responsible for directing or controlling the filing of the relevant document.

   Paralegals and lawyers could be company applicants. For example, Individual B, paralegal at a law firm, directly forms an entity by filing a document with a Secretary of State, and Individual A, lawyer at a law firm, was primarily responsible for directing or controlling the filing. Individuals A and B are both company applicants in this scenario.

   Reporting companies need only report company applicant information for up to two company applicants.

   Reporting companies are required to report essentially the same information for company applicants as reported for “beneficial owners” other than the residential address requirement.

   A Reporting Company Will Have to Report the Following Information About Company Applicants:

   • Full legal name
   • Date of birth
   • Business address (not residential)
   • A unique identifying number from a (non-expired) driver’s license passport or other state/federal issued identification
   • A copy of the document the unique identifying number is from

   As discussed above, company applicants can also obtain FinCEN identifiers.

Exemptions From Reporting

There are 23 categories of exempt entities. The below list highlights the exemptions that would likely apply to the broadest swath of entities:

• Publicly traded companies or companies otherwise subject to reporting requirements under Section 15(d) of the Securities Exchange Act of 1934 (Exchange Act).
• Companies 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 registered public accounting firms).
• Companies controlled or wholly owned by exempt companies.
• Companies meeting all three of the following criteria: (1) employs more than 20 full-time employees in the U.S., (2) have previously filed federal tax returns demonstrating more than $5 million in gross receipts or sales from U.S. sources. and (3) have an operating presence at a physical office in the U.S.
• Dormant companies that meet certain conditions.

Penalties for Noncompliance

The CTA imposes civil penalties of up to $500 per day that the violation continues and fines of up to $10,000 or imprisonment for up to two years (or both) for any person who willfully provides, or attempts to provide, false or fraudulent BOI to FinCEN, or willfully fails to report complete or updated BOI to FinCEN. Senior officers of a reporting company that fails to file a report may be accountable for that failure.

Those who submit incorrect information to FinCEN are, however, shielded from these penalties provided they can prove that: (1) they had no knowledge of the inaccuracy; (2) they were not knowingly trying to evade the CTA requirements; and (3) the information is corrected within 90 days of the initial filing.

Who Can Access Information?

FinCEN will permit federal, state, local and tribal officials, as well as certain foreign officials who submit a request through a U.S. federal government agency, to obtain BOI for authorized activities related to national security, intelligence and law enforcement. Financial institutions will also have access to BOI in certain circumstances, with the consent of the reporting company. Those financial institutions’ regulators will also have access to BOI when they supervise the financial institutions.

BOI reported to FinCEN will be stored in a secure, nonpublic database. FinCEN has said it will work closely with those authorized to access BOI to ensure that they understand their roles and responsibilities to use reported information only for authorized purposes and handle such information in a way that protects its security and confidentiality.

Other Considerations

1. Compliance/Monitoring

   It is prudent for all covered entity types that are subject to an exemption to monitor (at least annually) whether an exemption remains applicable.

   Reporting companies should consider establishing reporting and monitoring policies to obtain BOI for initial reports and to obtain updated BOI for updated or corrected reports on a consistent basis. One possibility is to solicit beneficial owners for updated information at a regular interval.

   Reporting companies should consider implementing policies and procedures for the collection, handling of, and storing of, BOI, which is personally identifiable information subject to data privacy laws. One possibility is to require all beneficial owners and company applicants to obtain FinCEN identifiers and to provide only that number to the reporting company.

2. Transactional

   Transactional advisors may consider whether there should be changes to transaction documents, such as the addition of representations and warranties regarding CTA compliance, covenants to provide BOI and any updates thereto (in the case of joint ventures or limited partnership agreements), changes to assumptions in legal opinions and changes to financing documents.

   With regard to private funds, it is important to note that certain private funds or portfolio companies may have to report, even if the fund or portfolio company wholly owns an entity that is itself exempt. Each entity in the corporate structure needs to be analyzed to determine whether it is a reporting company.

3. Planned Entity Formation

   Consider whether to form any new, planned entities before the end of 2023 to push out the CTA compliance deadline to January 1, 2025.

Please reach out to the author or your regular Faegre Drinker contact with questions.