March 19, 2024

The Corporate Transparency Act (the “CTA”), effective January 1, 2024, is a new federal law that requires many small businesses to make informational filings with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). The CTA is intended to prevent illegal activity through anonymous shell companies by requiring certain privately held entities to report information about the entity’s beneficial owners to FinCEN (“BOI Reports”).[1]

Reporting Companies

Generally, any legal entity that meets the definition of a “reporting company” is required to file BOI Reports with FinCEN, unless they meet the criteria for a specific exemption. The CTA’s expansive definition of reporting company means that most U.S. businesses that operate through a form of legal entity will be required to file BOI Reports with FinCEN, unless they meet the criteria for a specific exemption.

Exemptions from the CTA’s Reporting Requirements

The CTA provides a number of exemptions from its reporting requirements for entities that operate in highly regulated industries or otherwise report beneficial ownership information to U.S. regulatory agencies. The most relevant exemption to most operating businesses is the Large Operating Company exemption. For the Large Operating Company exemption to apply, all of the following criteria must be met:

  • The entity must employ more than twenty (20) full time employees in the U.S.;
  • The entity must have an operating presence at a physical location in the U.S.; and
  • The entity must have filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5,000,000 in gross receipts or sales.

Timing Requirements

Reporting companies that already existed before January 1, 2024 must file their initial BOI Report by January 1, 2025.

Reporting companies created or registered to do business in the U.S. on or after January 1, 2024, and before January 1, 2025, will have ninety (90) calendar days after receiving actual or public notice that their creation or registration is effective to file their initial BOI Report. Reporting companies created or registered to do business in the U.S. on or after January 1, 2025, will have thirty (30) calendar days after receiving actual or public notice that their creation or registration is effective to file their initial BOI Report.

If there is any change to the required information about a reporting company or its beneficial owners in a previously filed BOI Report, an updated BOI Report must be filed no later than thirty (30) calendar days after the date on which the change occurred.

Information Included in BOI Reports

BOI Reports will contain the following information about the Reporting Company:

  • Legal name of the company.
  • Any trade name or doing business as name.
  • Complete current U.S. address.
  • Federal taxpayer identification number.
  • Jurisdiction of formation for domestic reporting companies or jurisdiction of first registration for foreign reporting companies.

BOI Reports will contain the following information about each Beneficial Owner:

  • Full legal name.
  • Date of birth.
  • Complete current address.
  • Unique ID number, issuing jurisdiction and picture of a driver’s license, U.S. passport or state identification document.

Determining Beneficial Owners

The CTA defines “beneficial owners” as any individual who directly or indirectly exercises “substantial control” over a reporting company or directly or indirectly owns or controls at least 25% of the ownership interests of a reporting company.

Individuals who exercise “substantial control” over the company include all senior officers and important decision makers of the company. “Substantial control” can be triggered by contractual consent or approval rights.

It is important to note, when evaluating which individuals own 25% of the ownership of a reporting company, that the definition of ownership interests includes equity, stock, voting rights, capital or profits interests, convertible instruments, options and even non-binding privileges to buy or sell any of the foregoing.

Determining which individuals hold ownership interests meeting the threshold for beneficial ownership and which individuals exercise “substantial control” over a reporting company will require thoughtful analysis of the company’s capitalization table and control structure.

No Public Disclosure

            The information disclosed in a BOI Report will not be publicly available. Generally, it will be disclosed only (i) to federal, state and territorial law enforcement agencies in specified circumstances and (ii) with the reporting company’s consent, to financial institutions in connection with know your customer (KYC) obligations.

Further information

The CTA’s beneficial ownership reporting requirements impose new reporting obligations for many small to medium sized businesses that require thoughtful analysis of a reporting company’s control and ownership structure. Please contact us at CTA@rezlegal.com with any questions on BOI Reports or CTA compliance.

[1] A U.S. District Court Judge in Alabama recently ruled that the CTA is unconstitutional. The relief granted by the court, however, was limited to the plaintiffs in that case. Accordingly, it appears that other parties should still comply with the CTA until further notice.