The Corporate Transparency Act: What You Need to Know

By William G. "Bill" Smith, LL.M., and Rachel L. Sears

The Corporate Transparency Act (the “CTA”) and its final regulations embody a significant shift in the way the United States government collects entity ownership information. The CTA’s primary aim is to combat money laundering and illicit financial activities, often associated with the use of opaque shell companies. The CTA mandates the establishment of a nonpublic centralized beneficial ownership registry, a secure database maintained by the Financial Crimes Enforcement Network (“FinCEN”) within the U.S. Department of the Treasury. This registry will gather and retain information about the true beneficial owners of legal entities, ensuring that law enforcement, financial institutions, and relevant authorities can access the necessary data to effectively combat financial crimes. However, in doing so, the CTA creates an administrative reporting burden on law-abiding entities and individuals.

Crucial Provisions of the Corporate Transparency Act

1. Who Must Report: The CTA defines a “reporting company” as any entity that must file with a secretary of state or other domestic governmental authority unless an exemption applies. These entities include corporations, limited liability companies (LLCs), limited partnerships, and similar structures, as well as foreign entities registered to do business in the United States. There are twenty-three types of entities exempt from reporting. Examples include: publicly traded companies; governmental authorities; certain entities already registered with various governmental agencies; certain registered tax-exempt entities; and “large” companies with more than 20 full-time employees and more than $5,000,000 in annual gross revenue.

2. Defining “Beneficial Owners”: Beneficial owners are individuals who, directly or indirectly, exert significant control over the entity or own or control at least 25% of the ownership interests. Their full legal names, dates of birth, and residential addresses must be reported to FinCEN.

3. Defining “Substantial Control”: An individual can exercise substantial control over a reporting company in four different ways. If the individual falls into any of the categories below, the individual is exercising substantial control:

• The individual is a senior officer (the company’s president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function).
• The individual has authority to appoint or remove certain officers or a majority of directors (or similar body) of the reporting company.
• The individual is an important decision-maker for the reporting company.
• The individual has any other form of substantial control over the reporting company
  

4. How the CTA Impacts Trusts: A trust is not itself a reporting company as it is neither created nor typically required to register to do business by the filing of a document with a secretary of state or any similar office. Instead, FinCEN examines the authority and beneficial interests of the parties involved namely, the trustee, the grantor, and the beneficiaries of the trust, in determining whether each one of them is a beneficial owner of a reporting company owned by the trust.

• A trustee of a trust can exercise substantial control over a reporting company through the exercise of his or her powers as a trustee over the corpus of the trust. For example: By exercising control rights associated with shares held in trust such as investment management and voting powers over ownership interests.
• The grantor of a trust can exercise substantial control over a trust if the grantor holds the authority to revoke the trust.
• A beneficiary who is the sole recipient of trust income and principal or who has the right to demand a distribution of or withdraw substantially all of the trust assets will be considered to have the ability to exercise substantial control over the trust.

5. Company Applicants: A reporting company must also report applicants who directly file the document with the secretary of state to create or register the reporting company. At most, two individual applicants must be disclosed: the one who files and the one who directs the filing; for instance, an attorney instructing a paralegal to file.

6. Reporting Deadlines: Reporting companies formed prior to January 1, 2024, must file no later than January 1, 2025. Reporting companies formed on or after January 1, 2024, must file within 90 days following formation. FinCEN’s instructions and other technical guidance are available at www.fincen.gov/boi.

7. Penalties and Safe Harbors: A person who willfully or knowingly violates the reporting requirements will be liable for civil penalties of not more than $500 each day the violation continues, with a maximum penalty of $250,000, face imprisonment of 5 years or less, or both. A company applicant can correct inaccurately reported information within 90 days after submission.

8. FinCEN Identifier: A “FinCEN identifier” is a unique identifying number that FinCEN will issue to an individual or reporting company upon request after the individual or reporting company provides certain information to FinCEN. An individual or reporting company may only receive one FinCEN identifier. It should be noted that an issuance of a FinCEN identifier places the holder under a lifelong obligation to file an update within 30 days after any of the application information changes. Failure to file a required update within the 30-day timeframe is a reporting violation subject to civil and criminal penalties. FinCEN is aware of the burden placed on those who hold FinCEN identifiers and is looking at options to allow deactivation of an individual’s FinCEN identifier.

Conclusion

Entities and their advisors need to start identifying all reporting companies in their organizational structures and gathering the required beneficial ownership information prior to their corresponding reporting deadlines. For more information and assistance with reporting and/or identifying your reporting company’s beneficial owners, please reach out to JFCTA@jonesfoster.com and a dedicated member of our Corporate & Tax legal team will promptly get in touch with you.