The Corporate Transparency Act (CTA) is a federal law that will require various types of businesses – such as corporations, limited liability companies, and limited partnerships operating in the United States – to begin to provide certain information to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) during calendar-year 2024. This law aims to enhance transparency by disclosing who controls these businesses.
Under the CTA, businesses (called “reporting companies”) that don’t qualify for specific exemptions must obtain a federal identification number from FinCEN and submit a confidential online report known as the Beneficial Ownership Information Report (BOIR). This report includes essential identification details about the business and all individuals (e.g., name, address, a driver’s license or passport number and an image of the document) who have substantial ownership or control over it, referred to as “beneficial owners.”
A “beneficial owner” is an individual who either has direct or indirect ownership or control of 25% or more of a reporting company’s equity interests or exercises substantial control over the business. Senior officers are considered beneficial owners, even if they don’t own any equity in the reporting company.
CTA Compliance and Impact on Business
The primary burden of compliance with the CTA falls on small and medium-sized businesses that employ fewer than 21 full-time employees and generate less than $5 million in annual revenue. Approximately 32 million such businesses will be required to file BOIRs with FinCEN between January 1, 2024, and January 1, 2025, incurring an estimated cost exceeding $22 billion.
The reporting obligations under the CTA bear some resemblance to the beneficial ownership disclosures that corporate and other business entity borrowers already undertake in order to comply with commercial lenders’ recent “know your customer” (KYC) requirements in the form of a Certificate of Beneficial Ownership (often called a CBO or BOF). However, reporting companies must exercise care in adhering to the differing details of reporting on the BOIR form to FinCEN under the CTA.
Large businesses and those extensively regulated by the federal or state government – such as banks, insurance companies, certain investment funds, and publicly traded companies under SEC regulation – are exempt from the CTA and will not be subject to “reporting company” disclosure obligations.
The CTA was passed in late 2020 with the goal of addressing concerns about money laundering, financial corruption, terrorism financing, and foreign espionage facilitated by the use of opaque U.S. business entities.
Non-compliance with the CTA can lead to civil and criminal penalties, including imprisonment for individuals and fines for companies. To facilitate compliance, FinCEN has published guidance and interpretations in the form of FAQs and a Small Entity Compliance Guide.
Reporting Deadlines and Required Information
The reporting deadlines of reporting companies vary depending on the business’s formation date. Domestic U.S. reporting companies in existence on December 31, 2023 are required to submit their initial BOIRs no later than January 1, 2025 (and no earlier than January 1, 2024). Domestic U.S. reporting companies created after December 31, 2023 must file their initial BOIR within 90 days following their formation date and non-exempt domestic U.S. reporting companies formed after December 31, 2024 are subject to a reporting deadline of 30 days after their date of organization.
Each BOIR must include mandated identification information about the reporting company; its beneficial owners; and, for U.S. reporting companies formed after December 31, 2023, or those foreign reporting companies first registering to do business in the U.S. during 2024, details about one or two applicants. Beneficial owners and individual applicants may obtain a unique “FinCEN identifier” number for reporting purposes after January 1, 2024 and provide that information to a reporting company in lieu of the specified personal identification information, but they are also obligated to update their information within 30 days if it becomes inaccurate.
The CTA defines beneficial owners as individuals who either own or control at least 25% of the company’s ownership interests or exercise substantial control over it. Ownership can be indirect, involving intermediary entities.
There is no limit to the number of individuals that can be reported as beneficial owners and exemptions exist for certain categories of individuals, such as minors and employees with substantial control derived solely from employment status.
Exemptions and Special Provisions
The CTA exemptions cover 23 categories of businesses, including “large” companies with at least 21 full-time employees and $5 million or more of annual revenue. Publicly traded companies, government-regulated entities, SEC and CFTC regulated entities, tax-exempt nonprofits are exempted, as are wholly-owned subsidiaries of most exempt companies. Smaller private equity funds may be subject to the CTA if their portfolio value is below a certain threshold. Each portfolio company of a private equity sponsor that does not qualify for one of the exemptive categories will be subject to CTA reporting.
The CTA also contains provisions for reporting companies partially owned by exempt entities, allowing them to include the exempt entity’s name in lieu of individual-related information for certain beneficial owners.
Reporting companies that lose their exemption status must submit BOIRs within 30 days. Reporting companies must also update their BOIRs within 30 days of any changes.
Foreign entities doing business in the United States and foreign individuals with substantial control over non-exempt reporting companies should be aware of the reporting requirements and exemptions. Special reporting rules apply to foreign reporting companies and beneficial owners, and the CTA’s “substantial control” test is separate from other regulatory requirements, like those under the Committee on Foreign Investment in the United States (CFIUS).
We are continuing to monitor any developments related to the CTA. If you have any questions or need advice about filing the BOIR, please contact one of the authors, or your primary Bass, Berry & Sims attorney.