By: Ana-Maria Bruneteau, Esquire
The Corporate Transparency Act effective January 1, 2024 (“CTA”) requires disclosure of a company’s beneficial owners by name, address, and forms of identification (referred to as “Beneficial Ownership Information”, or shortly, “BOI”) to the U.S. Treasury Department, unless such company is exempt from disclosing such information (as discussed in more detail below). The reporting companies are required to file a BOI report identifying the company, its beneficial individual owners and the company’s applicant, with the Financial Crimes Enforcement Network (“FinCen”) of the U.S. Treasury Department, as discussed in further detail below.
- Reporting Deadlines
- Companies formed prior to January 1, 2024 have until January 1, 2025 to file an initial BOI Report.
- Companies formed on or after January 1, 2024 have 90 days from the date of formation to file an initial BOI Report.
- Companies formed on or after January 1, 2025 must file within 30 calendar days of formation.
- A Company that is exempt from reporting but becomes no longer exempt has to file within 30 days after no longer meeting exemption criteria.
- Reporting Companies
CTA identifies as “reporting companies” (i) any domestic entity 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; and (ii) any foreign companies registered to do business in the U.S. by the filing of a document with a secretary of state or any similar office. This means that all corporations, LLCs, LLPs, LPs, STs, and BTs are expected to report to FinCen.
Entities not expected to report are entities not created by any document filing or whom the beneficial owners are easily identifiable by the taxing authorities, such as sole proprietorships, general partnerships, unincorporated associations, common law trusts and foreign entities that are not registered to do business in the U.S., as well as exempt entities.
- Companies exempt from reporting
There are 23 categories of entities that are not “reporting” companies under CTA and therefore not required to file a BOI report with FinCen, as follows:
- Securities reporting issuer (i.e., publicly traded companies);
- Governmental authorities;
- Banks;
- Credit Unions;
- Depository institution holding companies;
- Money services business registered with FinCen;
- Broker or dealer in securities;
- Securities exchange or clearing company;
- Other Exchange Act Registered Entity;
- Investment Company or investment adviser registered with the SEC;
- Venture capital fund adviser;
- Insurance company;
- State-licensed insurance producer;
- Commodity Exchange Act registered entity;
- Accounting firms;
- Public utility companies;
- Financial market utility;
- Pooled investment vehicle;
- Tax exempt entities;
- Entity assisting a tax-exempt entity;
- Large operating companies;
- Subsidiaries of certain exempt entities; and
- Inactive entities.
Although the majority of these entities are clearly distinguishable, “large operating companies”, or “inactive companies” require further explanation.
A “large operating company” is any entity that:
- Employs more than 20 full-time employees in the U.S. (the definition of “full-time employee” is the one employed by the IRS based on business tax principles, headcount of employees may not be consolidated for affiliated entities);
- Has an operating presence at a physical office within the U.S. (regularly conducts business at a physical location in the U.S. that the entity owns/leases and that is distinct from the place of business of any unaffiliated entity) ; AND
- Has filed a Federal income tax return/information in the U.S. for the previous year evidencing at least $5 million in earned gross receipts or sales
- For an entity that is part of an affiliated group of corporations that filed a consolidated return, the applicable amount shall be the amount on the consolidated return for such group. As opposed to the rule for the employees which does not allow the headcount of the employees to be consolidated between affiliated entities, the amount of gross receipts or sales can be the consolidated amount between the affiliates.
- Excludes gross receipts or sales from sources outside of the U.S.
An “inactive entity” is an entity that:
- Was in existence on or before January 1, 2020;
- Is not engaged in any active business;
- Is not owned, directly/indirectly or wholly/partially, by a foreign person;
- Has not experienced any change in ownership in the preceding twelve (12) month period;
- Has not sent or received any funds in an amount greater than $1000 either directly or through a financial account in which the entity or any affiliated entity had an interest in the preceding twelve (12) month period; and
- Does not otherwise hold any type of assets, whether in the US or abroad, in any corporation, limited liability company, or other similar entity.
- Beneficial Owners (can only be an individual)
There are two tests for determining who is a beneficial owner under the CTA:
- Substantial control test
An individual exercises substantial control over a reporting company if the individual:
- Serves as senior officer of the reporting company (i.e., CEOs, COOs, CFOs, general counsels, managers of LLCs);
- Has authority over the appointment or removal of any senior officer or a majority of the board of directors or similar body;
- Directs, determines or has substantial influence over important decisions made by the reporting company; or
- Plays any significant role in the decision making of the entity.
An individual may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control through:
- Board representation;
- Ownership/control of majority of the voting power/rights of the reporting company;
- Rights associated with any financing arrangement or interest in the company;
- Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;
- Arrangements or financial or business relationships, formal or informal, with other individuals or other entities acting as nominees (e.g., voting trusts); or
- Any other contract, arrangement, understanding, relationship, or otherwise.
- The 25% ownership/control test (percentage calculated at present time and any options or similar interests shall be deemed exercised). In general, “ownership interests” refer to arrangements that establish ownership rights in the reporting company, such as:
- Shares of stock, LLC interests, voting trust certificates, certificates of deposit for equity securities, interests in joint ventures or business trusts, regardless of whether these confer voting power or voting rights;
- Any capital or profits interests in an entity;
- Any convertible instruments, with or without consideration, convertible into any shares, warrants, puts, calls, regardless of whether characterized as debt;
- Any put, call, straddle, options, or privilege of buying such instruments described above, with the exception of those options or privileges that are held by a third-party without the knowledge of the reporting company;
- Any other arrangements used to establish ownership
- This also includes individuals owning/controlling, directly or indirectly, ownership interests through:
- Joint ownership with one or more other persons of an undivided interest in such ownership interest;
- Through another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual;
- In the case of trusts/similar arrangements:
- As a trustee/person with authority to control/dispose of trust assets;
- As a beneficiary who either (a) is the sole permissible recipient of income and principal from the trust, or (b) has the right to demand distribution of, or withdraw substantially all of the assets of the trust;
- As a grantor/settlor who has the right to revoke the trust or otherwise withdraw the assets from the trust.
- Ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the reporting company.
- This also includes individuals owning/controlling, directly or indirectly, ownership interests through:
*Similarly, ownership of non-voting stock has to be reported. As of January 1, 2024, the CTA prohibits holding reporting company equity in “bearer” form.
*Calculation of ownership interest percentage for reporting companies that issue capital or profit interests (including entities treated as partnerships for federal income tax purposes) are calculated as follows: the individual’s ownership interests are the individual’s capital and profit interests in the entity, calculated as a percentage of the total outstanding capital and profit interests of the entity.
- Exemptions from the term “beneficial owner” – individuals that are not considered “beneficial owners”
- Minor children (parent/guardian need to report);
- Nominees, agents, intermediaries, custodians, or agents acting on behalf of another individual;
- Employees acting solely as employees of the reporting company;
- Individuals who own a future interest through a right of inheritance in the reporting company;
- Creditors of the reporting company.
- BOI Reports
The initial BOI report will include the following information:
- About the Company: basic identifiable information about the company, such as the company’s name and dba, address of principal place of business, jurisdiction of formation and taxpayer identification number.
- About the Beneficial Owners: personal identifiable information (PII) about the company’s beneficial owners, such as full legal name, date of birth, current address, an acceptable form of ID.
- About the Company Applicant: a “Company Applicant” is (a) an individual who is primarily responsible for directly creating the entity, (b) an individual who files to create the entity, or (c) the individual who directs or controls the filing of the document creating the entity (i.e., attorneys, paralegals, corporation services companies, etc.). This reporting of the “Company Applicant” only applies to entities that are created on or after January 1, 2024.
- FinCen Identifier
FinCen allows application through the use of a unique ID number that can be -provided in lieu of providing PII on each individual company report. This would be useful to streamline applications of individuals that are “beneficial owners” in multiple reporting companies, which are expected to be identified on multiple reports.
- Penalties
There are potentially severe civil and criminal penalties, including imprisonment, for companies that fail to report BOI or correct incomplete or incorrect information. They may be subject to a daily $500 fine until the violation is corrected. In the case of a willful failure to file, to provide complete or updated information, or fraudulent conveyance of false information, companies may be subject to a penalty of up to $10,000 and a two-year imprisonment.
The filing of the Beneficial Ownership Information (“BOI”) Report is the responsibility of the entity and its beneficial owners. PK Law Attorneys will not take any action or file any BOI reports, whether or not currently or previously engaged as an attorney for the entity or any of the entity’s beneficial owners, unless expressly engaged to do so.
The information contained in this article is informative only and it is not intended to provide legal advice and should not be acted upon without consulting an attorney.
If you would like assistance determining if your business is a reporting company, who are the beneficial owners of your business and, if applicable, a company applicant of your business, PK Law can help. Please contact a PK Law Corporate and Real Estate Attorney or information@pklaw.com to discuss an engagement for these services.
Ms. Bruneteau is an attorney in the firm’s Corporate and Real Estate Group. Her practice covers an extensive range of transactional and business law matters including mergers and acquisitions, corporate governance, entity formation, business structuring, business finance, general contracts, commercial financing and real estate. Ms. Bruneteau can be contacted at 410-740-3152 and abruneteau@pklaw.com.
The following sources were used in the preparation of this article:
https://www.fincen.gov/sites/default/files/shared/Corporate_Transparency_Act.pdf
https://www.wolterskluwer.com/en/expert-insights/small-businesses-and-the-corporate-transparency-act
