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The Corporate Transparency Act

By Contributor
Law

Why Compliance Is Crucial for Business Owners

By Russell F. Anderson, Esq. and James F. Martin, Esq.

 

The Corporate Transparency Act (CTA) is a federal initiative to limit money laundering, tax evasion, and other illicit activities that took effect on Jan. 1, 2024. The CTA requires many businesses and their owners to register with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

Russell Anderson

Russell Anderson

James Martin

James Martin

Persons and companies that violate the CTA’s reporting requirements by failing to report at all or by providing false information to FinCEN may be subject to civil penalties of $500 for each day the violation continues and may also risk additional criminal fines and imprisonment.

The reporting requirements of the CTA mainly apply to smaller entities that might otherwise slip under the federal government’s radar. These companies are classified as having a higher risk of abusing anti-money-laundering rules. While there have been legal challenges to the CTA, FinCEN has indicated that it will continue to enforce the law while these challenges are ongoing.

The CTA states that FinCEN must collect and maintain a federal database for beneficial ownership information (BOI) of companies. Unless there is an applicable exemption, all entities that are formed or registered to do business in the U.S. and have registered with the Massachusetts secretary of the Commonwealth’s office (or a similar office in a different state) need to register on the BOI database.

 

Exemptions

The CTA provides 23 different categories of exemptions, which include exemptions for entities that already make substantial public disclosures, such as financial institutions and tax-exempt charities. Most notably, there is also a more general exemption for larger organizations that have a physical presence in the U.S., employ more than 20 full-time employees, and report more than $5 million in annual revenue to the IRS.

No filing will be required if an entity is exempt, but compliance with the criteria will be determined on a continual basis. For example, if an entity drops below the 20-employee threshold, a prompt filing will be required.

 

Reporting

FinCEN’s reporting portal can be found at boiefiling.fincen.gov. Entities that are not exempt from BOI reporting must provide the following information for each “beneficial owner” of a company: full legal name, date of birth, current residential or business address, and a copy of an acceptable identification document (such as a driver’s license or passport).

A beneficial owner is considered to be an individual who exercises substantial control over the entity or owns or controls at least 25% of the ownership interests of the entity. Most C-suite officers (for example, CEOs, CFOs, COOs, and general counsel) will fall under the category of possessing substantial control over the entity.

To ensure the purpose of the CTA is being fulfilled, ownership is generally reported at an individual level and not through another reporting company. Thus, the reporting owner may be someone who is several levels up in a company’s organizational chart if holding companies are used.

Reporting ownership interests held by trusts may pose a challenge. A trust by itself is not subject to the reporting requirements under the CTA. However, if a trust holds a 25% or more ownership interest in an organization that is subject to the CTA, the trust’s grantors, trustees, and beneficiaries may all be required to be reported, depending on the specific terms of the trust.

For entities formed in or after 2024, at least one company applicant must also be identified for each entity. A company applicant includes the individual who controls the formation filing with the applicable secretary of state or the individual who actually submits the filing.

 

Compliance Is Key

For entities formed in 2024, the initial report must be filed within 90 days of formation. All entities that were created before the start of 2024 have until Dec. 31 to submit a BOI report to FinCEN. If there are changes in reported beneficial ownership information, the entity must file an updated report to FinCEN no later than 30 days after the date of the change.

Given the CTA’s draconian penalties, it is advisable to make your CTA registration a high priority and complete the required filing as soon as possible.

 

Attorneys Russell F. Anderson and James F. Martin are members of the Business and Finance practice at the law firm Pullman & Comley. Martin is based in the firm’s downtown Springfield office.

 

Corporate Transparency Act Creates New Reporting Requirements

By Contributor
Law

Prepare for Compliance

By David A. Parke, Esq.

 

The new reporting rules that became effective Jan. 1, 2024, under the federal Corporate Transparency Act (CTA) now require many small businesses and other entities to file reports with the U.S. Financial Crimes Enforcement Network (FinCEN). FinCEN estimates there are more than 30 million entities that are subject to these reporting rules on their effective date.

The CTA is intended to provide law enforcement with a means to combat crimes, like money laundering, that are aided through the use of shell companies. The CTA applies to ‘domestic reporting companies’ and ‘foreign reporting companies,’ as defined in the rules. This article will focus on domestic reporting companies.

Under the CTA, a reporting company, subject to the CTA, must file information with FinCEN regarding itself and its beneficial owners. For a reporting company formed on or after Jan. 1, 2024, the company must also report information regarding the individuals who created the company. Any changes to previously reported information must also be reported in a timely manner to FinCEN. The rules specify the information that must be reported about a reporting company and its beneficial owners and company applicants.

David A. Parke

David Parke

“The CTA is intended to provide law enforcement with a means to combat crimes, like money laundering, that are aided through the use of shell companies.”

A domestic reporting company under the CTA is any corporation, limited-liability company, or other entity created by filing a document with the secretary of State or a similar office under the law of a state or Indian tribe, unless exempt. There are 23 categories of entities that are exempt from reporting. The exemptions include highly regulated entities like issuers of securities registered under Section 12 of the Securities Exchange Act of 1934, banks, insurance companies, regulated public utilities, and certain tax-exempt organizations. Many small entities are likely not covered by an exemption and will need to report. The rules define more specifically the conditions of each exemption.

One exemption is for a ‘large operating company,’ as defined in the rules. This is a company that employs more than 20 full-time employees in the U.S., has an operating presence at a physical office within the U.S., and has more than $5 million in annual gross receipts or sales, excluding gross receipts or sales from sources outside the U.S., according to the company’s federal income-tax return for the previous year.

A ‘beneficial owner,’ whose information must be reported to FinCEN, is any individual who exercises substantial control over the reporting company or who owns or controls, directly or indirectly, at least 25% of the ownership interests of the reporting company. The reporting rules address various types of direct or indirect control or ownership arrangements under which an individual would be a beneficial owner.

An individual would be included as a beneficial owner if that individual is a ‘senior officer,’ which includes the president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function. The rules also include as a beneficial owner any individual who has authority over the appointment or removal of any senior officer or a majority of the board of directors or similar body, or has substantial influence over important decisions, including decisions of the type enumerated in the rules.

A ‘company applicant,’ whose information must be included for a domestic reporting company created on or after Jan. 1, 2024, is an individual who files the document that creates the company, and the individual who is primarily responsible for directing or controlling the filing where more than one individual is involved.

Any domestic reporting company created before Jan. 1, 2024, must file its initial report with FinCEN by Jan. 1, 2025. Any domestic reporting company created during 2024 must file within 90 days. Any domestic reporting company formed on or after Jan. 1, 2025 must file within 30 days. The deadlines are measured from the earlier of actual or public notice that creation is effective. If there is a change in any information previously reported to FinCEN regarding a reporting company or its beneficial owners, an updated report must be filed with FinCEN within 30 days.

FinCEN has an E-filing website for reporting information (boiefiling.fincen.gov), and charges no filing fee. FinCEN has also published a Small Entity Compliance Guide and Frequently Asked Questions to provide guidance regarding the CTA reporting rules. FinCEN allows for use of a FinCEN identifier, which is a unique number assigned by FinCEN to an individual who applies for such a number and submits the information required of a beneficial owner or company applicant. The reporting company’s report may include the FinCEN identifier in lieu of the information otherwise required for the individual.

The consequences of non-compliance can be significant. It is unlawful under the CTA for any person to willfully provide or attempt to provide false or fraudulent beneficial ownership information to FinCEN, or to willfully fail to report complete or updated beneficial ownership information to FinCEN. Under the CTA, violators are liable for a civil penalty of not more than $500 for each day the violation continues, and may be fined not more than $10,000, imprisoned for not more than two years, or both.

An entity that is or may become a reporting company should consider establishing an internal compliance program to identify reportable changes and assure that the necessary information is received in a timely manner. A company should also consider if any changes should be made to its governance documents to require beneficial owners to provide (again, in a timely way) the information needed for the reporting company to comply with its CTA reporting obligations.

These new reporting requirements will affect many entities. It is important for companies to inform themselves of the CTA’s requirements, determine if the CTA applies, and prepare for compliance.

 

David A. Parke is a partner in the Business/Finance department at Bulkley Richardson.