How to Prepare for the Corporate Transparency Act of 2020

November 29, 2023 Update: In the ever-evolving world of the Corporate Transparency Act (the CTA), there was good news from the Treasury Department today. Reporting Companies formed on or after January 1, 2024, will have ninety (90) days after being formed to provide the Beneficial Ownership Information, rather than 30 days as previously required. Read more on FinCEN’s website here. This does not change our guidance as to year end planning if you anticipate forming a company in the near future. 

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As you may know, the Corporate Transparency Act (“CTA”) is set to take effect on January 1, 2024 (“Effective Date”), impacting many privately held corporations, limited partnerships, statutory trusts, limited liability companies, and other similar entities. At a high level, the goal of the CTA and its associated beneficial ownership information regulations (the “BOI Regulations”) is to penetrate through layers of intermediate entities and identify to the United States Department of Treasury’s Financial Crimes Enforcement Network ("FinCEN"), for law enforcement purposes, the individuals ultimately exercising control or enjoying ownership of entities doing business in the U.S.

The CTA will require certain companies (each, a “Reporting Company”) to (1) report specific beneficial ownership information (“BOI”) to FinCEN, (2) disclose information about who created the entity or registered it to do business in the United States, and (3) report any change to previously reported information within a specified time period.

The CTA may apply to most if not all of the entities in your organization, and it adds a new material layer of regulatory compliance for your entities. This update is intended to bring the CTA to your attention and is provided for informational purposes only. This is a summary only, and you may wish to consult with us for legal advice before you report.

Which Entities Are Reporting Companies?

There are two types of Reporting Companies, domestic and foreign. An entity created by the filing of a document with a secretary of state or similar office under the laws of a U.S. state is a “domestic reporting company,” unless it is exempt. A “foreign reporting company” is an entity formed under the laws of a country other than the U.S., but registered to do business with a secretary of state or similar office under the laws of a U.S. state, unless it is exempt. This encompasses nearly all entities (e.g. corporations, LLCs, LLPs, etc.) unless an exemption applies.

When Must a Report Be Filed?

For a domestic Reporting Company created before January 1, 2024 or an entity that became a foreign Reporting Company before January 1, 2024, a report must be filed with FinCEN not later than January 1, 2025. For a domestic Reporting Company created after January 1, 2024 and entities that become a foreign Reporting Company after January 1, 2024, a report must be filed within thirty (30)[1] calendar days after receipt from the secretary of state or other appropriate governmental office of notice of creation (domestic Reporting Companies) or registration to do business in the U.S. (foreign Reporting Companies).

Who Is a Beneficial Owner?

A beneficial owner is an individual who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over an entity or owns or controls, directly or indirectly, 25% or more of the ownership interests in an entity. Rights to convert into an ownership interest, such as options, warrants, and convertible notes are treated as if exercised when calculating ownership.

As stated in the BOI Regulations, under the “substantial control” prong of the beneficial owner definition, the following persons are beneficial owners:

• any “senior officer,” defined as a person “exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer or any other officer, regardless of official title, who performs a similar function” 
• any member of the board of directors
• any individual with authority to appoint or remove a majority of board of directors
• any individual who “directs, determines or has substantial influence over important decisions”
• any individual who exercises “any other form of substantial control”
• any individual exercising indirect control through: ownership or control of a majority of the voting power; control over “one or more intermediary entities that … exercise substantial control over” the company; and “arrangements or financial or business relationships, whether formal or informal”

This list is not exhaustive and additional persons may be deemed to exercise “substantial control” depending on the circumstances.

What BOI Must Be Reported?

A Reporting Company must disclose the following information with regard to each individual beneficial owner:

1. full name;
2. date of birth;
3. complete current residential street address;
4. ID number and jurisdiction of issuance for one of the following:
   • US passport,
   • state, local, or Indian tribal identification document, or
   • state-issued driver’s license; and
5. an image of the document from which the ID number was obtained

If the individual has none of the above listed documents, a passport issued to them by a foreign government will suffice.

When BOI previously reported to FinCEN changes, an updated report must be filed within thirty (30) days. For example, if a company’s president changes residence, the Reporting Company must file an updated report with the new address (and new ID reflecting the new address when one is obtained) within thirty (30) days.

In addition to BOI, the Reporting Company must disclose the following information to FinCEN:

1. Full legal name of the entity;
2. Any trade names, doing business as (d/b/a), or trading as (t/a) names through which it conducts business;
3. The entity’s complete current address of its principal place of business in the U.S.;
4. State, tribal, or foreign jurisdiction of formation; and
5. The entity’s federal employer identification number (EIN), or federal individual taxpayer identification number (ITIN), or if these are not available, the taxpayer identification number from a foreign jurisdiction and the name of such jurisdiction.

FinCEN will issue a unique identifying number to beneficial owners (individuals or entities) upon request. A Reporting Company may report the beneficial owner’s FinCEN identifier to FinCEN, rather than an individual’s or entity’s BOI. This will be useful in instances where a beneficial owner does not want to disclose its BOI to the Reporting Company. If a Reporting Company reports a beneficial owner’s FinCEN identifier rather than its BOI, this will also put the onus on the beneficial owner (rather than the Reporting Company) to report any changes to the beneficial owner’s BOI.

Which Entities Are Exempt from the Reporting Requirements of the CTA?

The BOI Regulations provide some limited exemptions. These exemptions include tax-exempt nonprofit entities, tax-exempt trusts, and certain entities already subject to regulatory oversight such as public companies, registered investment companies, and registered investment advisors. The regulations also exempt “Large Operating Companies,” which are companies with more than twenty (20) full-time employees[2] in the US, an operating presence at a physical office within the US, and more than $5 million in gross receipts or sales from sources inside the United States on its prior year federal tax return. Wholly-owned subsidiaries of exempt entities may also be exempt. If a previously exempt company becomes a Reporting Company, for example, a Large Operating Company no longer has twenty (20) full-time employees, then it is required to file a report with FinCEN within thirty (30) days.

How Can You Prepare for Compliance?

In anticipation of the implementation of the CTA, it is recommended that clients begin to prepare now for the impacts of the CTA commencing on January 1. Notably, companies should consider taking the following steps:

1. Determine which entities that are owned and managed will be considered Reporting Companies under the CTA and whether any exemptions may apply.
2. Determine the beneficial owners of those Reporting Companies, both at an ownership level and in terms of “substantial control.”
3. When available, apply for a FinCEN identifier number to facilitate filings.
4. Commence a process of requesting and collecting BOI that will need to be reported.
5. Designate person(s) who will be responsible for compliance and making the required filings.
6. Update internal policies and procedures to effectively collect and report BOI for new Reporting Companies, and create an internal system to capture and report changes to BOI previously reported to FinCEN.

Additionally, companies should consider updating a variety of company documents to address CTA issues. For example, it could be appropriate to revise shareholder agreements, LLC agreements, and director and officer engagements to require beneficial owners to provide their BOI to the entity so it can comply with BOI reporting requirements under the CTA. Due diligence for loans, mergers, and acquisitions will likely need to include CTA compliance.

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[1] FinCEN has proposed to extend the thirty (30)-day period to ninety (90) days for Reporting Companies that were created between January 1, 2024 and January 1, 2025. We expect that proposal to be implemented, but as of today it has not.

[2] Employees at subsidiary companies do not count towards the number of employees. FinCEN uses the IRS definition of full-time employee which is an employee that works thirty (30) hours or more per week and more than one hundred thirty (130) hours per month.