On January 1, 2021, the National Defense Authorization Act (NDAA) was approved by Congress. Part of the NDAA is the Corporate Transparency Act (CTA).[1] The law goes into effect on January 1, 2024, and will have a significant impact on companies of all sizes and industries. This article explains what you need to know about the CTA and what you and your lawyer should be prepared to do in January.
What Is the Corporate Transparency Act?
Primarily intended to make it harder to operate shell companies for illicit purposes, the CTA requires more beneficial ownership transparency. This transparency will help law enforcement detect, prevent, and punish terrorist funding, money laundering, selling narcotics, sex trafficking, and other criminal conduct.
Per the CTA, “reporting companies” and their beneficial owners must register with the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN). FinCEN will create and maintain this nationwide database of owners, managers, and company applicants.[2]
What Is a Reporting Company?
Any organization that qualifies as a “reporting company” under the CTA must register with FinCEN:
- A “domestic reporting company” is any entity that is a corporation, a limited liability company, or created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.
- A “foreign reporting company” is any entity that is a corporation, limited liability company, or other entity, formed under the law of a foreign country, and is registered to business in any State or tribal jurisdiction by a filing with the secretary of state or similar office.[3]
However, these definitions are not as clear as one would hope, and there is some uncertainty around the requirements for entities that are not created through filings at a secretary of state.
According to the Notice of Proposed Rulemaking, this definition likely includes most limited partnerships, limited liability partnerships and limited liability limited partnerships. Entities such as business trusts, sometimes referred to as statutory trusts, are seemingly included, as they are established by statute and involve a secretary of state filing in states like Delaware.[4]
However, in other states, like Oklahoma, the formation of a business trust involves the submission of the trust instrument (or a memorandum of trust) to the county clerk in the trust’s location, along with a copy to the Oklahoma Tax Commission.[5]
Also missing from the definition of covered entities are series limited liability companies. Currently, 30 states allow for series LLCs; of those, only 15 have public registration of the series individual cells, with 13 requiring public registration. Oklahoma is one of the states that has allowed for series LLCs, but it does not require public registration of the individual cells, merely that they are established in the operating agreement.[6] Whether the individual cells fall under the definition of a reporting company is an open question, as they are not created by a filing with the secretary of state.
Lastly, there is no exemption for law firms. So, unless another exemption applies, law firms like Sherwood, McCormick, & Robert may be considered a reporting company and have to file with FinCEN.
Who Must Be Reported to FinCEN?
Along with information about the reporting company, each reporting company must provide the personal information of at least one “beneficial owner” and one “company applicant” to FinCEN.
Beneficial Owner
An individual is a beneficial owner if they either: exert substantial control over the reporting company or possess or manage at least 25% of the reporting company’s ownership interests.[7]
“Substantial control” can be either direct or indirect and is defined as owning a majority stake in the reporting company, having considerable control over financing deals, holding a senior officer or board member position within the company, and similar.[8] There are various scenarios where a person could be seen to have substantial control over the reporting company.[9]
In the case of a beneficial owner who owns or controls a minimum of 25% of the reporting company’s ownership interest,[10] the proposed regulations do not offer methods for calculating beneficial ownership on a pass-through basis if there are multiple layers of investors.
Company Applicant
Reporting companies are obligated to disclose information about every individual who submits an application to form an entity or registers an entity to do business in the United States. Which also encompasses “any individual who is primarily responsible for directing or controlling the filing if more than one individual is involved in the filing of the document.”[11]
For example, an attorney who assumes the role of an incorporator for the reporting company may be considered a company applicant. As a result, their personal information could be in the CTA database.[12]
Which Organizations Are Exempt?
There are 23 types of exempt entities under the CTA, meaning they won’t have to file with FinCEN. These include, but are not limited to:
- Securities and Exchange Commission reporting companies
- Government authorities
- Public utilities
- Investment companies and advisors
- Banks
- Bank holding companies
- Credit unions
- Insurance companies
- Tax-exempt entities[13]
- Entities whose ownership interests are held, either directly or indirectly, by exempt entities[14] (Note this is restricted to subsidiaries entirely owned by an exempt entity.[15])
What Are the Filing Requirements For the CTA Report?
Your company will file its report via a secure, online portal…which isn’t available yet. When it is live, you’ll be notified and can then proceed.
The report to FinCEN will include the reporting company’s:
- Legal name
- Trade name or “doing business as”
- Business address
- State or tribal jurisdiction[16]
- Taxpayer identification number
- Employer identification number[17]
Also, every beneficial owner must submit their legal name, date of birth, and current address. “Current address” is defined as the business address for a company applicant and residential address (the one used on their taxes) for a beneficial owner or management.
Additionally, both company applicants and beneficial owners must submit identification, such as a passport, state driver’s license, or another form of identification issued by a state, local government, or Indian tribe.[18]
Organizations that need to submit multiple filings can obtain a FinCEN identifier number.[19]
What Is the Timeline for Filing?
On November 29, 2023, FinCEN extended the deadline for certain reporting companies to file their initial beneficial ownership information (BOI) reports. Reporting companies created or registered in 2024 will have 90 calendar days from their formation date to file their initial reports. Previously, it was 30 days.[20] (Note that FinCEN will not accept BOI reports from reporting companies until January 1, 2024—no reports should be submitted to FinCEN before that date.)
Reporting companies formed prior to January 1, 2024, must file the beneficial ownership report by January 1, 2025.[21] However, there is no requirement for companies formed before January 1, 2024, to include company applicant information.
If there are any changes in beneficial ownership, you must update your report within 30 days.[22]
Who Can Access the FinCEN Database?
The database containing beneficial ownership information will not be publicly accessible. Information from the database will only be obtainable upon request by:
- Federal law enforcement agencies
- State, local, or tribal law enforcement agencies, if granted via a court order
- Federal agencies on behalf of a foreign country, if under an international agreement
- Financial institutions for customer due diligence, if approved by the reporting company[23]
What Are the Penalties for Noncompliance?
The CTA imposes civil penalties of up to $500 each day, up to $10,000 if the violation persists.[24]
That being said, you won’t be financially on the hook for a typo. The CTA includes a safe harbor provision, which gives individuals who file incorrect information about beneficial ownership 14 calendar days to correct it once the reporting company realizes the error. This provision applies if the individual did not intend to evade the reporting requirement, did not know of the error, and corrects the error within 90 calendar days after the report is submitted.[25]
Be Ready for January
To prepare for the CTA’s enactment on January 1, 2024, reporting companies and beneficial owners should start collecting information about the reporting company and beneficial ownership immediately.
Your attorney can help you prepare for the filing and determine what safeguards need to be put into place for the reporting company itself, as well as the beneficial owners and company applicants.
If you need legal advice on how your organization should handle the CTA, contact us.
[1] NDAA for Fiscal Year 2021, https://bit.ly/3U3yCRj.
[2] NDAA §6403(a).
[3] NDAA §6403(a)(11)(A); 31 C.F.R. §1010.380(c)(1).
[4] Department of the Treasury, Financial Crimes Enforcement Network (FinCEN), Notice of Proposed Rulemaking, 31 C.F.R. § 1010, RIN 1506-AB49, Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 81094 (Dec. 8, 2021).
[5] 68 OK Stat §68-1211 (2014).
[6] 18 OK Stat §2054.4 (2022).
[7] Ownership interest is defined quite extensively, including; equity like shares in a corporation or interests in a limited liability company, as well as formal documents that create equity, like profit interests, convertible debt, warrants, or options granting the right to gain equity, capital, or other interests. 31 C.F.R. §1010.380(d)(3). There is an incomplete number of examples to highlight that individuals can in different ways acquire or oversee ownership interests. Id. §1010.380(d)(3)(ii).
[8] Such as: the nature, scope and attributes of the business of the reporting company, including the sale, lease, mortgage or other transfer of any principal assets of the reporting company; the reorganization, dissolution or merger of the reporting company; major expenditures or investments, issuances of any equity, incurrence of any significant debt or approval of the operating budget of the reporting company; the selection or termination of business lines or ventures or geographic focus of the reporting company; compensation schemes and incentive programs for senior officers; the entry into or termination or the fulfillment or non-fulfillment of significant contracts; and amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws and significant policies or procedures. Id. §1010.380(d)(1)(iii).
[9] Id. §1010.380(d)(1), (d)(2).
[10] Id. §1010.380(d)(3)(iii).
[11] 31 C.F.R. §1010.380(d)(3)(iii) This may include workers of business formation services, law firms, associates, agents, or even family members, who file documents for another individual.
[12] A lawyer who oversees the filing process will still be defined as an applicant even if they have their client sign. Lawyers who form entities must make the determination whether the reporting company or themselves will be responsible for the filings. If a lawyer opts to file, they must maintain formation documents so that they may file reports.
[13] NDAA §§6403(a)(11)(B); 31 C.F.R. §1010.380(c)(2). Additionally, the CTA allows with the agreement of the Secretary of the Treasury, Attorney General, and the Secretary of Homeland Security, to identify further exclusions for specific entity types. Although, it is not expected that there will be more exemptions.
[14] 31 C.F.R. §1010.380(c)(2)(xxii).
[15] The rationale behind this limitation is to prevent partially owned entities from becoming exempt and potentially concealing information about their beneficial owners.
[16] In the case of a foreign reporting company, the jurisdiction where the entity was formed.
[17] 31 C.F.R. §1010.380(b)(1)(i).
[18] Id. §1010.380(b)(1)(ii).
[19] To avoid the need to file multiple updated reports, any changes made to the original filing should be applicable to everything filed by the identifier number holder.
[20] https://www.fincen.gov/news/news-releases/fincen-extends-deadline-companies-created-or-registered-2024-file-beneficial
[21] Id. §6403(b)(1)(B); 31 C.F.R. §1010.380(a)(1)(iii).
[22] Id. §6403(b)(1)(D). Such as: after the initial filing obtaining exemption, alterations in the address of current beneficial owners or company applicants, and the addition of beneficial owners or company applicants. 31 C.F.R. §1010.380(b)(4).
[23] NDAA §6403(c)(2)(B).
[24] Id. §6403(c)(3)(A).
[25]Id. §6403(c)(3)(C); see also 31 C.F.R. §1010.380(a)(3). A report with the correct information submitted within a fourteen (14) time period will be considered compliant with 31 U.S.C. 5336(h)(3)(C)(i)(I)(bb) if it is submitted within ninety (90) calendar days from filing of the defective report.
