By Rod
Simmons The Corporate Transparency Act, or the CTA, is a new federal law that went into effect on Jan. 1, 2024, and imposes a new federal reporting regime on companies in the U.S.
Although news about the CTA has been relatively widespread in professional and business journals and on social media, many business owners and legal practitioners remain largely unaware of the full scope of the CTA and its unprecedented reporting requirements.
Overview of CTA
The CTA creates a new reporting system in which companies will now be required to report to the U.S. government information about the individuals who ultimately own and control those companies. These reports called “Beneficial Owner Information Reports” or BOIRs will need to be filed online with the U.S. Department of Treasury’s Financial Crimes Enforcement Network, or FinCEN, where they will be compiled into a new cloud-based database called the Beneficial Ownership Secured System, or BOSS.
While Congress passed the CTA in 2021 to combat the use of anonymous shell companies by bad actors for illegal activities such as money laundering, terrorist financing and other illicit activity the impact of the CTA on legitimate small and privately held businesses is wide-reaching. It is anticipated that millions of domestic and foreign companies in the U.S. will need to comply with this new reporting requirement.
Which companies are required to file a BOIR?
Under the CTA, every “reporting company” must file a BOIR. A “reporting company” includes any corporation, limited liability company or other entity, such as a limited partnership, 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.
The term also includes non-U.S. entities that are registered to do business in any state or tribal jurisdiction by the filing of a document with that jurisdiction.
Are there exemptions from reporting?
Yes, the CTA provides 23 exemptions from the definition of “reporting company,” but those generally will only apply to businesses that are already highly regulated, such as publicly traded companies, regulated insurance companies, registered investment companies, banks and tax-exempt entities.
There is also an exemption for any “large operating company,” which is defined as an entity that (i) operates in a physical office in the United States, (ii) employs more than 20 employees on a full-time basis in the United States, and (iii) filed a federal income tax return for the previous year reflecting more than $5,000,000 in gross receipts or sales.
However, given the actual language used in the CTA regulations, there may be timing issues and other highly technical considerations that would cause a company not to qualify for one of these exemptions.
When does the initial BOIR need to be filed?
Reporting companies that were created or registered before Jan. 1, 2024, have until January 1, 2025 to file their initial BOIR
New companies created or registered during calendar year 2024 have 90 days from the date of formation or registration to file their initial BOIR
New companies created or registered on or after Jan. 1, 2025, have only 30 days from the date of formation or registration to file their initial BOIR
What will need to be included in the BOIR?
For the reporting company itself:
- Full legal name of the company
- Any trade name or “doing business as” (dba) name
- Current street address of the principal place of business
- Jurisdiction of formation
- Employer Identification Number (EIN) of the reporting company
For every “beneficial owner” of the reporting company:
- Full legal name of the individual
- Date of birth of the individual
- Current residential address of the individual
- A copy of a non-expired U.S. passport or driver’s license (or similar identification document) or non-U.S. passport if the individual does not have any of the foregoing
Who is considered a ‘beneficial owner’ of a reporting company?
A “beneficial owner” is any individual who:
- Owns or controls at least 25% of the ownership interests in the company; or
- Directly or indirectly exercises “substantial control” over the company
The CTA defines these concepts extremely broadly. For example, “ownership interests” includes equity, stock, voting rights, capital or profit interests, convertible instruments, options and any other instrument, contract or other mechanism used to establish ownership.
“Substantial control” is defined even more broadly and includes: (1) all “senior officers” (e.g., president, CEO, CFO, COO, general counsel); (2) all individuals with authority to appoint or remove such officers or a majority of the company’s board or similar governing body; (3) all individuals with “substantial influence” over important decisions made by the reporting company, including corporate transactions, major expenditures, equity issuances, executive compensation or entry into or termination of material contracts; and (4) any other individual with “any other form of substantial control” over the company.
As a result, a reporting company may have multiple “beneficial owners” beyond just the actual equity owners of the company.
Does information about who created the company get reported?
Yes, but only for new companies created or registered on or after Jan. 1, 2024. For those companies, the BOIR will also need to include the same information that is provided for beneficial owners of the reporting company (i.e., name, DOB, address, photo ID, etc.) for up to, and no more than, two “company applicants.”
A “company applicant” is: (1) the individual who directly files the document that creates or registers the company; and (2) if one or more persons are involved in the filing, the individual who is primarily responsible for directing or controlling the filing (e.g., an attorney at a law firm who instructed the paralegal to make the filing).
For example, if on or after Jan. 1, 2024, a paralegal at a law firm forms a reporting company by filing the formation documents at the request of an attorney, both the paralegal and the attorney will be “company applicants” for the reporting company, and their information will need to be included in the company’s BOIR.
Do changes to BOIR information need to be reported?
Yes. Any change in the information provided in a BOIR, including any change with respect to who is a beneficial owner, or the information reported for any particular beneficial owner, must be reported within 30 days.
For example, if a new individual acquires an ownership interest that makes that person a beneficial owner, or if an existing beneficial owner changes his or her residential address disclosed in the BOIR, the reporting company must update its BOIR with FinCEN within 30 days of such change.
One exception, however, is that no updates are required with respect to information related to any company applicant.
Are there penalties for non-compliance?
The willful failure to file a complete or updated BOIR with FinCEN, or the willful provision of or attempt to provide false or fraudulent information in a BOIR, may result in civil or criminal penalties. This may include civil penalties of up to $500 for each day that the violation continues, up to $10,000, or criminal penalties, including imprisonment for up to two years.
Senior officers of a reporting company that fails to file a required BOIR may also be held personally accountable for that failure. However, the CTA provides a “safe harbor” from penalties if a person has reason to believe that a BOIR filed with FinCEN contains inaccurate information and voluntarily submits a report correcting the information within 90 days of the deadline for the original BOIR.
What steps should a company take to comply with the CTA?
Although existing companies will have until Jan. 1, 2025, to submit an initial BOIR, all companies should begin taking steps to determine whether they constitute a “reporting company” under the CTA or whether they may qualify for one of the exemptions.
If a company is not exempt, the company should also begin identifying those individuals who will be the “beneficial owners” of the company, whose personal information (i.e., name, DOB, address, photo ID) will need to be provided in the company’s BOIR.
How does a reporting company file a BOIR?
A reporting company that is required to report its beneficial ownership information to FinCEN under the CTA may do so electronically by accessing the filing system available via FinCEN’s BOI E-filing website (
https://boiefiling.fincen.gov/ ) and selecting the “File BOIR” icon.
Various third-party corporate service companies also offer fee-based filing services to assist reporting companies in filing BOIRs.
Roderick (Rod) W. Simmons is a partner in the Richmond office at Hirschler. For nearly 30 years, he has counseled businesses on a wide array of legal issues, principally involving mergers and acquisition (M&A) transactions as well as ongoing day-to-day business operations. He may be reached at rsimmons@hirschlerlaw.com . Copyright © 2024 BridgeTower Media. All Rights Reserved.
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