Corporate Transparency Act

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Implementation of Corporate Transparency Act Marks Major Change to Business Compliance Landscape

By Michael Duffy and Tricia Koss

On January 1, 2021, Congress enacted the National Defense Authorization Act, which, in addition to providing funding to the military, contained a series of legislative reforms that significantly altered the privacy rights of investors in the form of the Corporate Transparency Act (“CTA”). The legislation did not immediately go into effect when it was passed, but effective January 1, 2024, will apply to a vast majority of businesses.

Now that the law has gone into effect, law firms and other corporate service providers are scrambling to bring clients up to speed on their CTA reporting obligations. So, you may ask, what does this mean for you? This brief article is intended to highlight the key points business owners need to focus on.

What Does the CTA Do?

The CTA was enacted to assist with anti-money laundering and economic sanctions enforcement. The law is designed to create a reliable database that can be used by law enforcement and financial institutions. The database, which tracks the beneficial owners of most types of legal entities, fills a gap in current secretary of state filings, which generally do not contain any information on ownership.

To populate the database, the CTA requires most types of legal entities to file reports with the federal government’s Financial Crimes Enforcement Network (“FinCEN”). FinCEN is the government agency that individuals use to file annual foreign bank account reports (commonly referred to as “FBARs”). The CTA report (known as the “BOI Report”) discloses the identity and contact information of all key beneficial owners of covered legal entities as of the time of the filing. The CTA requires ongoing compliance after an initial BOI Report is submitted. Filers must submit updated BOI Reports to disclose changes in beneficial ownership interests within 30 days of such changes going into effect.

Covered Businesses

CTA compliance is mandatory for most types of business and nonbusiness legal entities. This includes corporations, partnerships, certain nonprofits, limited liability companies formed under state law, and foreign entities that are registered with a state to conduct business. Trusts, which are not created by a secretary of state filing, are not covered entities under the CTA.

Although all legal entities are assumed to be subject to the CTA, there are twenty-three exceptions to filing. For example, publicly traded companies, banks and credit unions, securities dealers, insurance companies, public utilities, and Section 501(c)(3) tax-exempt organizations are not required to file a BOI Report. The CTA does not apply to wholly owned subsidiaries of legal entities that are otherwise exempt. Large operating companies, as that term is used in the CTA regulations, are also exempt.

Beneficial Ownership Reporting

Once it has been determined that a legal entity is subject to the CTA, a BOI Report must be submitted to FinCEN identifying the entity’s key beneficial owners and, for newly created entities, its company applicants. Under the CTA, the concept of beneficial ownership for the purposes of preparing the reports is very broad.

A beneficial owner is defined as any individual who, either directly or indirectly, exercises substantial control over the reporting entity; who owns at least 25% of the reporting entity’s equity; or who controls at least 25% of the reporting entity’s equity. The definition is therefore not limited to those individuals with vested equity ownership but includes all persons who are functionally in control of the entity.

Effective Dates

Under the CTA, entities created on or after January 1, 2024, and through December 31, 2024, must file a BOI Report within 90 calendar days of being formally organized under state law. After December 31, 2024, newly formed legal entities must file a BOI Report within 30 days of formation.

For legal entities organized prior to January 1, 2024, the first BOI Report is due before January 1, 2025.

Penalties

The penalties for failing to comply with the CTA — much like the penalties imposed for failing to file an FBAR with FinCEN — can be severe. For example, the CTA imposes a civil penalty for a willful failure to file equal to $500 per day such failure occurs, up to a maximum of $10,000 per report. Willful violations can also result in criminal liability.

Because only willful violations can result in civil penalties under the CTA, FinCEN is actively campaigning to notify the public of the filing requirements. By the end of 2024, it is unlikely many business owners will be unfamiliar with the overall requirements of the law.

Privacy Implications

In order to prepare the BOI Report, every reporting entity needs to identify all its beneficial owners and collect their personal information. The BOI Report contains the full legal name of all owners, their dates of birth, their current mailing address, and an image copy of an identifying document such as a passport or drivers’ license. This is not information always retained by law firms or service providers, and it is expected this additional requirement will create headaches for initial filers.

Planning for CTA Compliance

An estimated 32 million businesses will need to submit BOI Reports this year. This will be a major undertaking for FinCEN, the public, and service providers, as the number of expected filings is more than twenty times greater than the number of FBARs that are typically submitted each year. The large number of exemptions and the expansive definition of beneficial ownership will require careful analysis of an entity’s controlling legal documents and the dynamics between its management and owners.

Complying with the CTA presents four challenges in the interim: 1) law firms and other corporate service providers will need to adjust their internal processes to take the CTA into consideration when forming new entities, 2) existing businesses will need to determine whether they are considered covered entities or are exempt from the CTA, 3) covered entities will need to determine who their beneficial owners are under the CTA’s guidelines and gather the owners’ personal information to submit to FinCEN, and 4) covered entities will need to implement internal processes to ensure the continuing reporting obligations of the CTA are met timely.

As a law firm, we expect to spend a significant amount of time this year helping new and existing clients figure out their CTA reporting obligations. For more information on the CTA and a copy of the compliance memorandum we are sending to clients, please follow this link. If you need assistance determining whether you have a CTA compliance obligation or need assistance in filing, please reach out to attorneys Michael Duffy (mduffy@fletchertilton.com) or Tricia Koss (tkoss@fletchertilton.com).

FletcherTilton.com | 508.459.8000

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