Client Alert: A New Federal Reporting Requirement will Affect Many Business Entities

Summary: As of January 1, 2024, most private corporations, limited partnerships and LLCs are required to comply with new reporting requirements that call for owners to disclose personal information to the Department of Treasury.

As of January 1, 2024, the Corporate Transparency Act (“CTA”) now requires a number of companies that are formed or otherwise registered to do business in the United States to file a first-time beneficial ownership information (“BOI”) report with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).  More specifically, most private corporations, limited partnerships and LLCs—including those established for estate planning purposes—will be required to comply with these new reporting requirements.

What is the CTA?

The CTA passed in January 1, 2021 as part of the anti-Money Laundering Act of 2020 to assist law enforcement efforts to counter money laundering and other illicit acts by enhancing the federal government’s oversight of state-created entities.  The CTA requires a reporting company (“Reporting Company”) to file a BOI report with FinCEN, which will disclose certain personal information about the beneficial owners of the entity (“Beneficial Owners”).  For Reporting Companies formed after January 1, 2024, the Reporting Company will be required to disclose certain personal information about  the  person  who has filed an application to create or register an entity (referred to as the “Company Applicant”).  FinCEN will use this information to establish and maintain a national registry of companies and their Beneficial Owners, and will provide access to the registry to certain authorized users, such as law enforcement.

Which companies qualify as a Reporting Company?

A Reporting Company is generally defined as any corporation, LLC or other similar entity created by filing a document with a secretary of state or similar office in any state or territory or with a federally recognized tribal government, or any corporation, LLC or other similar entity that is formed under the laws of a foreign country and registered to do business in the United States.

There are 23 types of entities exempt from the definition of a Reporting Company.  A high-level list of the types of entities that are exempted are shown below.

Who qualifies as a Beneficial Owner?

A Beneficial Owner is any individual who either directly or indirectly:  (1) owns or controls at least 25% of the Reporting Company’s ownership interests (“Ownership Interest”); or (2) excercises substantial control (“Substantial Control”) over the Reporting Company.

Ownership Interests

The FinCEN regulations define Ownership Interest broadly, and it encompasses not only ownership of stock or membership interests, but also voting rights, capital or profit interests, convertible instruments, options, and any other instrument, contract, or other mechanism used to establish ownership.  Each person or entity that owns at least 25% of the Ownership Interests of a Reporting company is a Beneficial Owner and must report their information.

Substantial Control

Pursuant to the FinCEN regulations, an individual is considered to exercise Substantial Control over a Reporting Company if they serve as a senior officer of or otherwise manage the Reporting Company (e.g., president, chief executive officer, chief financial officer or general counsel).  An individual is also considered to exercise Substantial Control over a Reporting Company if they have authority over the appointment or removal of senior officers or a majority of the board of the Reporting Company; or if they direct, determine, or have substantial influence over important decisions made by the Reporting Company (e.g., decisions concerning the nature, scope, and attributes of the Reporting Company’s business; entry into or termination or fulfillment of significant contracts; major corporate transactions and reorganizations; major expenditures or investments or incurrence of any significant debt; any equity issuances; operating budget approvals; compensation arrangements for senior officers; or amendment of substantial governance documents or significant policies or procedures). A Reporting Company can have multiple Beneficial Owners, but it will always have at least one person that is reportable under the Substantial Control prong of the Beneficial Owner tests.

Who qualifies as a Company Applicant?

A Company Applicant is any individual who directly files the document that creates the domestic Reporting Company or registers the foreign Reporting Company, and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.  As of January 1, 2024, if Dunn Carney LLP assists with the formation or registration of a Reporting Company, then the individuals at Dunn Carney LLP primarily responsible for such formation or registration will be a Company Applicant and subject to FinCEN and the applicable reporting requirements.

What information needs to be reported?

Beneficial Owners and Company Applicants must disclose their full legal name, date of birth, current residential address, a unique identifying number from an acceptable identification document (e.g., an unexpired passport, driver’s license or government issued identification card), and a scanned photograph of the identification document.

The Reporting Company must also disclose its full legal name, any trade name or “doing business as” name, a complete address, the jurisdiction of formation, and its IRS Tax-payer Identification Number (TIN).

When do companies need to comply with the new reporting obligations?

For a Reporting Company in existence before January 1, 2024, the initial BOI report must be filed by January 1, 2025; however, for convenience, Dunn Carney LLP is recommending that each Reporting Company take the necessary steps to file the initial BOI report at the same time that the annual report is due for the Reporting Company during the 2024 calendar year.

For Reporting Companies established or registered to do business in the United States on or after January 1, 2024 and before January 1, 2025, the initial BOI report must be filed within 90 days after receiving actual or public notice that its creation or registration is effective.  Starting on or after January 1, 2025, the initial BOI report must be filed within 30 days creation or registration is effective.

In general, a Reporting Company will not need to file a BOI or other report each year.  Rather, a Reporting Company must report only when there is a change to the personal information that was previously reported, a change in the Reporting Company’s Beneficial Owners, or a change in the Reporting Company’s tax exempt/non-exempt status.  Updated reports are due within 30 days after a change occurs.

What are the penalties for non-compliance?

The CTA applies civil and criminal penalties for willfully failing to report or update a Reporting Company’s information, or for providing false or fraudulent information. Civil penalties include up to $591 per day (as of 2024; inflation adjusted) that the violation continues. Criminal penalties include up to two years’ imprisonment and/or fines of up to $10,000. Senior officers of a company that willfully fail to file a required report may be held accountable for that failure.

Which companies are exempt from CTA reporting obligations? 

Provided certain criteria are met, the following types of entities will generally be exempt from the reporting obligations:

  1. Securities reporting issuer (issuers of certain registered securities with ongoing SEC reporting requirements)
  2. Governmental authority
  3. Bank
  4. Credit union
  5. Depository institution holding company
  6. Money services business
  7. Broker or dealer in securities
  8. Securities exchange or clearing agency
  9. Other Exchange Act registered entity
  10. Investment company or investment adviser
  11. Venture capital fund adviser
  12. Insurance company
  13. State-licensed insurance producer
  14. Commodity Exchange Act registered entity
  15. Accounting firm
  16. Public utility
  17. Financial market utility
  18. Pooled investment vehicle
  19. Tax-exempt entity
  20. Entity assisting a tax-exempt entity
  21. Large operating company: Any entity that: (a) employs more than 20 full time employees in the U.S. (as defined by FinCEN regulations), (b) has an operating presence at a physical office within the U.S., and (c) reported more than $5 million in gross receipts or sales from U.S.-sources only on its prior year federal tax return.
  22. Subsidiary of certain exempt entities: Any entity whose Ownership Interests are controlled or wholly owned, directly or indirectly, by any exempt entity, except money services businesses, pooled investment vehicles, entities assisting a tax-exempt entity, or inactive entities.
  23. Inactive entity: Any entity that (a) was in existence before January 1, 2020; (b) is not engaged in active business; (c) is not owned by a foreign person directly or indirectly, wholly or partially; (d) has not experienced any change in ownership in the preceding twelve months; (e) has not sent or received any funds greater than $1,000, either directly or through any account the entity or an affiliate had an interest, in the preceding twelve months; and (f) does not hold any assets in the U.S. or abroad, including any ownership interests.

What steps should be taken now?

As of January 1, 2024, a company may be subject to CTA and its reporting requirements.  We recommend that companies begin the process of determining whether they may be subject to CTA and if so, familiarize themselves with the various reporting requirements including identification for individuals who may qualify as Beneficial Owners.  After the Beneficial Owners are determined, a company should begin compiling information to satisfy the reporting requirements.

If you have any questions about the CTA, its reporting requirements and how it may apply to you, please feel free to contact your Dunn Carney attorney or either of the following members of the Dunn Carney Business Team:  Jeff Perry at jperry@dunncarney.com or Margie Elken at melken@dunncarney.com.   If DCA Administrative Services LLC is the registered agent for your company, you will receive additional communications from us with respect to your options for using Dunn Carney to assist with the reporting requirements.

©2024 Dunn Carney LLP.  This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Dunn Carney LLP and any recipient.