The CTA is in effect now with few exemptions
FinCEN Reporting and Compliance begins in 2024. Who is effected?
The new Corporate Transparency Act took effect January 1, 2024, creating reporting obligations
for most of the country’s 32M business entities. This includes corporations, limited liability
companies, and other entities formed by filing with a secretary of state or similar office (also
called Reporting Companies). Congress enacted it to combat money laundering, financing of
terrorism, tax fraud, and other illegal acts.
Most U.S. businesses obligated to comply with CTA
If you own an entity directly or indirectly or as part of your existing estate plan, this is the
information you need to know to ensure you comply with the CTA.
What is the Corporate Transparency Act?
The CTA requires business entities it identifies as Reporting Companies to electronically report
certain information about the company and its owners to the U.S. Department of the Treasury’s
Financial Crimes Enforcement Network (FinCEN).
How does FinCEN define “Reporting Company?”
As we mentioned earlier, a Reporting Company is defined as a corporation, limited liability company (LLC), or other similar entity (i) created by filing a document with the secretary of state or a similar office under the laws of a state or Indian tribe or (ii) formed under the laws of a foreign country and registered to do business in the United States.[1]
Information provided to FinCEN must include[2]:
- Company’s legal name, any trade names or doing business as (d/b/a) name
- Street address of principal place of business
- Jurisdiction where business was formed
- Tax identification number
Beneficial Owners must be reported to FinCEN
The CTA uses two measuring sticks to determine if a person is a Beneficial Owner of a business.
The FinCEN Beneficial Ownership Rule
- The Ownership Test: A person who holds, directly or indirectly, a significant equity
interest in the Reporting Company – generally, 25% or more of all interests - The Control Test: Someone who exercises substantial control over the Reporting
Company[3]
The CTA only counts humans as Beneficial Owners
Determining whether a person satisfies either test requires a specific analysis of the Reporting
Company’s ownership and organizational structure. The Beneficial Owner must also be a real
person. So, if another entity owns the business, it must look through those entities until people
are identified.
What identifies someone as an owner
Ownership includes not just stock, memberships, or ownership units, but also indirect forms,
such as convertible notes, puts, calls, and warrants. All of an individual’s direct or indirect
ownership will be aggregated for purposes of determining whether an individual has 25%.
Some pass the Control Test automatically
For the Control Test, certain senior officers of a Reporting Company (such as CEO, President,
general counsel) will automatically be treated as being Beneficial Owners. Individuals who serve
on the Board of Directors or have a similar role may also be treated as Beneficial Owners
depending on the scope of their authority.
Aside from individuals who hold certain key positions, owner(s) of a Reporting Company may
be Beneficial Owners under the Control Test because of a right to make or participate in
significant decisions, regardless of the percentage of ownership.
What CTA compliance requires
Once the Beneficial Owner(s) are identified, the Reporting Company must provide the following
information to FinCEN for each:
- Full legal name
- Date of birth
- Current residential address
- Unique identification number (SSN, TIN) from an acceptable identification document
If your company is brand new
For Reporting Companies created on or after January 1, 2024, the same information must be
provided about the company’s applicant (i.e., an individual who files a document to create or
form a domestic corporation, LLC, or similar entity or who first registers a foreign entity to do
business in U.S.).
Trust us, you need to know this about trusts
Although a trust is not considered to be a Reporting Company under the CTA, if your trust owns
an interest in one, such as an LLC, certain information about your trust may also have to be
disclosed. That’s because it may be deemed to be a Beneficial Owner. If that’s the case, the
Reporting Company will be required to electronically report beneficial ownership information to
FinCEN within 90 days of formation, subject to certain exemptions.
When a trust owns a company
More particularly, if a trust owns 25% or more of a Reporting Company or has substantial
control over it, then the individuals who ultimately own the interest in the entity through the trust
qualify as Beneficial Owners. This usually means one or more of the following individuals must
be reported: (i) the Trustee, (ii) the beneficiary, (iii) the Settlor, and (iv) other individuals named
in the trust who have certain powers. Bottom line: this needs to be determined if a trust owns
25% or more of a Reporting Company.
Who must be reported as Beneficial Owners
The Trustee must be reported if the Trustee has authority to dispose of trust assets or vote shares
of the Reporting Company. A beneficiary must be reported if the beneficiary is the sole
permissible recipient of income and principal of the trust, or has the power to withdraw
substantially all of the trust assets. The Settlor must be reported if the Settlor has the right to
revoke the trust or withdraw the assets of the trust (this could include a Settlor’s power to swap
assets with the trust and reacquire assets from the trust).
Got authority? FinCEN needs to know
If an individual other than the Trustee (i.e., a distribution advisor, a trust protector, a member of
the trust committee, and an investment advisor) has the authority to dispose of trust assets, that
individual must be reported. If a corporate Trustee is serving, the Reporting Company will be
responsible for obtaining the names and information of the employees who administer the trust
on behalf of the corporate Trustee.
Does the CTA impact you? Most likely
Many business regulations apply only to large businesses, but the CTA specifically targets
smaller entities. If you own a small business, you may be subject to the CTA unless your
business falls under one of the stated exemptions.
Who is exempt from the CTA?
Most exemptions apply to industries that are already heavily regulated and have their own
reporting requirements.
Your business may also be exempt from the reporting requirements if it employs more than 20
full-time employees, filed a return showing more than $5 million in gross receipts or sales, and
has a physical office located within the United States.[4]
Don’t minimize CTA compliance
Complying with the requirements of the CTA is of the utmost importance if you own a business
entity or have one as part of your estate plan. The potential consequences for non-compliance
are significant. First, a “willful failure” to report complete or updated beneficial ownership
information to FinCEN, or the willful provision of or attempt to provide false or fraudulent
beneficial ownership information may result in civil or criminal penalties, including civil
penalties of up to $500 for each day that the violation continues, or criminal penalties, including
imprisonment of up to two years and/or a fine of up to $10,000. Also, a person may be subject to
civil and/or criminal penalties for “willfully causing” a Reporting Company not to file a required
report or to report incomplete or false beneficial ownership information.
(See the FinCEN Beneficial Ownership Information Reporting FAQ
at https://www.fincen.gove/boi-faq#B_1 for more detail on exemptions).
Submit FinCEN Beneficial Ownership Information:
To comply with the CTA, you should gather the required information for all reporting companies
you own and all other Beneficial Owners.
- For entities created before January 1, 2024, submit the initial reports (called Beneficial Owner Information or BOI reports (BOIs)) for each Reporting Company by January 1, 2025.
- For entities created on or after January 1, 2024, and before January 1, 2025, submit the initial BOI within 90 days of the entity’s creation.
- Entities created on or after January 1, 2025, will have 30 days to submit the BOI.
- FinCEN has created an online database for Reporting Companies to file their BOIs known as the BOSS (Beneficial Ownership Secure System) platform which is available on FinCEN’s website at https://www.fincen.gov.
Within BOI, Reporting Company must provide:
- Its full legal name
- EIN or other tax identifier
- State of formation and current U.S. business address.
- Full names of all Beneficial Owners, including copies of state identification (such as driver’s license or passport), SSN, and residential address, subject to a few exceptions.
When you can provide info directly to FinCEN
For Beneficial Owners who do not wish to provide this information to a Reporting Company, they can provide it directly to FinCEN and receive a unique number, referred to as a FinCEN identifying number. The Beneficial Owner can then provide just that FinCEN identifying number to the Reporting Company.
Keep data current
Aside from the initial report, the Reporting Company must update the report within 30 days if any of the information in a report changes, which would include a change of address or updated ID for a Beneficial Owner.
(See the FinCEN Beneficial Ownership Report Filing Dates at https://www.fincen.gov/boi
for more information).
Please contact your Practus attorney or one of the individuals below for more information on the content of this alert or if you would like our assistance with any aspect of the CTA or its reporting requirements.
Jeffrey C. Rambach M. Brad Hill
jeffrey.rambach@practus.com brad.hill@practus.com
+1 (312) 620-9300 +1 (919) 651-3739
[1] 31 U.S.C. § 5336(a)(11).
[2] 31 C.F.R. § 1010.380(b)(1)(i).
This client alert is intended as an information source for the clients and friends of Practus, LLP. The
content should not be construed as legal advice, and readers should not act upon information in the
publication without professional counsel. This alert may be considered advertising under certain rules of
professional conduct.
[3] 31 U.S.C. § 5336(b)(2)(A).
[4] Id. § 5336(a)(11)(B)(xxi).
