By: Michael Castle

A New Era of Transparency

The Corporate Transparency Act (CTA) went into effect on January 1, 2024, ushering in a new era of transparency and accountability for companies across America. This groundbreaking legislation requires certain entities to report their “beneficial owners” to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The goal of the CTA is to crack down on illicit activities and bring to light the beneficial owners by requiring disclosure of ultimate ownership.

Entities subject to CTA requirements must report identifying information about their beneficial owners to the FinCEN, an agency of the U.S. Department of Treasury. This information includes a listing of beneficial ownership, which is defined as an individual who either directly or indirectly: (1) exercises substantial control over the reporting company or (2) owns or controls at least 25% of the reporting company’s ownership interests. Though the CTA and related filings are not tax filings with the IRS, we do want to help educate clients on the requirements and the potential impact. While FinCEN believes that most reporting companies will be able to file without assistance, if you have questions, you should consult with your legal advisors.

Reporting companies established before December 31, 2023, have until December 31, 2024, to make an initial filing with FinCEN. Once the initial filing is made, the reporting company has 30 days to update any changes to the information reported.

Reporting companies established beginning January 1, 2024, through December 31, 2024, have 90 days to make an initial filing. Once the initial filing is made, any changes must be reported within 30 days. After December 31, 2024, any new entity has 30 days to make an initial filing.  

Reporting Company Definition

The guidance defines a reporting company as any entity that meets the reporting company definition and does not qualify for one of twenty-three exemptions.

There are two types of reporting companies:

1. Domestic Reporting Company (formed under US Laws)

• A corporation
• An LLC
• Any company is created by filing a document with a secretary of state or similar office

2. Foreign Reporting Company (formed under the laws of a foreign country)

• A company registered to do business in any U.S. State or Tribal jurisdiction by filing a document with a secretary of state or similar office

There are twenty-three exemptions to the filing requirement. The most common is an exemption for large operating companies.

Large Operating Company

A sizeable operating company must meet all of the following requirements:

• Employ more than 20 full-time employees
• More than 20 full-time employees are in the United States
• The entity operates at a physical office within the United States

This must be owned or leased by the entity and physically distinct from the place of business of any other unaffiliated entity.

• Filed a tax return in the prior year demonstrating more than $5 million in gross receipts
• The entity reported the amount on an IRS Form filed with the IRS
• When sales outside the U.S. are excluded, the amount remains over $5 million

Other Exemptions

There are other exemptions for government, tax-exempt, and inactive entities. The full list can be reviewed at the FinCEN website.

Who is a Beneficial Owner

The definition of substantial control and ownership interest is broad, and you should review the specific FinCEN guidance and how it applies to your company. The general requirements are as follows:

Substantial Control over a reporting company

Companies are required to identify all individuals who exercise substantial control. Indicators of significant control are:

• Senior Officer
• Appointment of Removal Authority
• Important Decision Maker
• Any other form of Substantial control (we suggest you discuss this with legal advisors if you have any questions or concerns regarding this catch-all indicator.)

Owns or Controls at least 25% of the ownership interests of a reporting company

Reporting companies are required to identify all individuals who own or control at least 25% of the company’s ownership interests (directly or indirectly). If you have equity, you should review the details, as there are specific rules regarding the definition of total ownership interests. Potential types of ownership interests are as follows:

• Equity, Stock or Voting Rights
• Capital or Profit Interest
• Convertible Instruments
• Option or Privilege
• Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.

For reporting companies with indirect owners (via other entities), you need to consider the ownership interest of each individual in the indirect entity to confirm they are not a beneficial owner with more than 25% ownership. We suggest you discuss ownership interest calculations with your legal advisors for more complicated ownership structures.

Information Required to be Submitted

For the reporting company:

• Full legal name
• Any trade name or “doing business as” name
• Complete current U.S. address
• State, Tribal, or foreign jurisdiction of formation
• State or Tribal jurisdiction of first registration (foreign reporting company only)
• IRS taxpayer identification number (including employer identification number)

For each individual identified, the company is required to disclose the following:

• Full legal name
• Date of Birth
• Complete current address
• Unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents:
• U.S. Passport
• State Drivers License
• Identification document issued by a state, local government, or tribe
• If an individual does not have any of the previous documents, a foreign passport

Some individuals may want to avoid reporting that information to the reporting company. In those cases, the individual should apply to FinCEN and get an individual FinCEN identifier, which can be used in place of the above information. It is important to note that in the event of any changes to the reported information, the company or the individual must update that information within 30 days.

Company Applicant

For companies that were established on or after January 1, 2024, there is an additional requirement to submit the company applicant as part of the reporting. The information required to be submitted is the same as for a Beneficial owner; however, there are some exceptions. It is important to note there may be more than one Company Applicant.

There are two categories of Company Applicant:

1. Direct filer – this is the person who submitted the actual filing.
2. Directs or Controls the filing action – this person may not submit the filing but direct or control the application (which is generally an individual within the reporting company).

Failure to File

Noncompliance penalties are up to $500 per day (with a max of $10,000 and a potential of 2 years in prison). It is important to note that senior officers of an entity who fail to file a required BOI report may be held accountable for that failure.

In addition, a person may be subject to civil and criminal penalties for willfully causing a company not to file a required BOI report. This includes an individual refusing to provide the necessary information or submitting inaccurate information.

How will the Information Be Used?

On December 21, 2023, FinCEN issued a final rule implementing access and safeguard provisions of the CTA. The rule provides information about who and how the information in the BOI database can be accessed.

The rule allows access to the following:

• U.S. Federal agencies engaged in national security, intelligence, or law enforcement activity; U.S. State, local, and Tribal Law Enforcement Agencies.
• Foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities.
• Financial institutions with customer due diligence requirements;
• Federal functional regulators and other appropriate regulatory agencies acting in a supervisory capacity assessing financial institutions.
• U.S. Department of the Treasury officers and employees.

For each of the accesses, specific requirements need to be shown to gain access to the information detailed in the final rule. 

Access to the BOI information will be rolled out over time in a phased approach. The first access will be to crucial Federal agency users beginning in 2024. The second stage is planned to extend access to Treasury officers and other federal agencies. Subsequent stages will expand access to the other groups noted above.

Additional Information

FinCEN has created a website with guidance at the following: https://www.fincen.gov/boi, an excellent resource for up-to-date information. Both examples and decision trees provided will help determine the required information to be submitted.

FinCEN has also issued an urgent alert as there have been recent fraudulent attempts to solicit information from entities and individuals who may be subject to CTA reporting requirements. FinCEN does not send unsolicited requests. 

While Wiss will make clients aware of the new BOI reporting requirements and help with education, the basis of these rules is legal in nature, and we recommend you consult with your legal team concerning these new filing requirements and how they apply to your specific situation.