Beginning January 1, 2024, the Corporate Transparency Act (CTA) will require a substantial number of closely held entities to disclose certain information to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). This sweeping legislation aims to discourage the use of shell corporations to disguise and move illicit funds by imposing reporting requirements on “reporting companies” to disclose their “beneficial owners” and the “company applicants” involved in formation of the entity. Official estimates claim that roughly 32.6 million existing entities will be classified as “reporting companies” and will be required to submit a report to FinCEN, and approximately 5 million new “reporting companies” will be formed each year.
Who Qualifies as a Reporting Company?
A “reporting company” is a domestic or foreign corporation, limited liability company or other similar entity that is created or qualified to do business through a state filing.
There are 23 categories of entities exempt from the CTA’s reporting requirements, but the exemptions will cover relatively few closely held entities. Exempt entities include nonprofit entities, large operating companies that meet certain employee and revenue thresholds, heavily regulated entities such as public companies, registered securities entities, insurance companies and banks, and wholly owned subsidiaries of certain (but not all) exempt entities.
What are the Reporting Requirements for a Reporting Company?
A reporting company must submit a beneficial ownership information (BOI) report that includes the reporting company’s 1) full legal name and any assumed names (d/b/a names), 2) business street address, 3) state of formation and 4) taxpayer identification number.
What is a Beneficial Owner and a Company Applicant?
A “beneficial owner” is any individual who 1) owns or controls at least 25% of the reporting company’s ownership interests or 2) who exercises “substantial control” over the reporting company. This definition is intentionally broad and may include trustees and trust beneficiaries. Senior executive officers are also “beneficial owners” whose information must be reported, even if they do not have equity in the reporting company.
A “company applicant” is an individual who 1) directly files the formation documents with a secretary of state or similar authority or 2) is primarily responsible for directing or controlling the filing of such formation documents. A reporting company may have a maximum of two applicants.
What are the Reporting Requirements for a Beneficial Owner and Company Applicant?
The BOI report must include information for each beneficial owner and company applicant including the individual’s 1) full legal name, 2) date of birth, 3) current residential address (business address for applicants serving in a professional capacity), 4) a unique identifying number from an acceptable identification document (e.g., a driver’s license, passport or other government-issued identification document) and 5) an image of the identification document.
An individual who will frequently qualify as a beneficial owner or company applicant may obtain a unique FinCEN identifier number to use on BOI reports, which streamlines reporting and updating obligations. We expect it will become fairly common for individuals who frequently form, control or materially own business entities to obtain and use an individual FinCEN number.
Filing the Initial BOI Report
Reporting companies existing prior to January 1, 2024, are required to file an initial BOI report by December 31, 2024. Such reporting companies will not be required to include information regarding their company applicants.
Reporting companies formed on or after January 1, 2024, will have 30 days* from its date of formation to file an initial BOI report.
How Should You Prepare?
Contact your Warner attorney to determine if your company is subject to the CTA’s reporting requirements. If so:
- Identify your company’s “beneficial owners” whose information must be reported.
- Begin gathering all required information for reporting companies and beneficial owners.
- Dissolve entities that are no longer needed by December 31, 2023.
- Include provisions in organizational documents for new companies requiring officers/owners to provide information needed for reporting.
If you have concerns related to the CTA, please contact Corinne Sprague, Loren Andrulis, Phil Haywood, Alan Jurcak or a member of Warner’s Corporate Practice Group.
*The 30-day deadline for reporting companies formed after January 1, 2024, is subject to a pending proposal that would extend the 30-day period to 90 days for companies formed during 2024. Under the proposed rule, companies formed after January 1, 2025, will still be required to report within 30 days of formation.
