Under the Corporate Transparency Act (CTA), the deadline for “reporting companies” to file their initial beneficial ownership information (BOI) report with FinCEN is just over three months away. Since time seems to fly by much quicker at the end of the year, it makes sense to collect your information and prepare to file soon.
What About Legal Challenges to the CTA?
A federal district court in Alabama ruled that the CTA was unconstitutional, but this ruling is under appeal before the Eleventh Circuit Court of Appeals. In its ruling, the lower court held that only the plaintiffs to that case are exempt from reporting obligations under the CTA while litigation continues. While that case and several other cases challenging the CTA’s constitutionality remain underway, it is unlikely that these cases, even if successful, will relieve our clients of their reporting obligations under the CTA before the year-end reporting deadline.
Who Needs to Report?
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 with any U.S. secretary of state or similar body (for example, the Michigan Department of Licensing and Regulatory Affairs, or LARA). Some exemptions to the filing rule exist, including exemptions for certain nonprofit entities, “large operating companies” that meet certain employee and revenue thresholds, and heavily regulated entities such as public companies, registered securities entities, insurance companies and banks.
What Must be Reported?
The BOI report must include information about the company and information about each beneficial owner of the entity, and it must also include information about the company applicant(s) for entities formed on January 1, 2024, or after.
The following information must be reported for each beneficial owner (and each company applicant for entities formed on or after January 1, 2024):
- Full legal name.
- Date of birth.
- Current residential address (business address for company applicants serving in a professional capacity).
- Unique identifying number from an acceptable identification document (e.g., a driver’s license, passport or other government-issued identification document for U.S. residents; for non-U.S. residents, a non-expired foreign passport is acceptable).
- 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.
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 Preparation is Needed to File a BOI Report?
If your company is subject to the CTA’s reporting requirements:
- Identify your company’s “beneficial owners” whose information must be reported.
- Gather all required information for reporting companies and beneficial owners. We recommend obtaining FinCEN IDs for all beneficial owners, as discussed below.
Looking ahead, if you form new entities, you may wish to include provisions in your governance documents for new entities (e.g., shareholder agreements and operating agreements) that require officers/owners to provide the information needed for the entity to meet its CTA reporting obligations.
Reporting companies that existed prior to January 1, 2024, are required to file an initial BOI report by December 31, 2024.
Absent an exemption from CTA reporting obligations, entities formed in 2024 must file their initial CTA report within 90 days of formation. Beginning on January 1, 2025, this window shortens to 30 days after formation.
Is This a Recurring Obligation?
Once a BOI report is filed, the reporting company does not need to file another BOI report unless and until previously reported information changes. If any information contained in a BOI report becomes inaccurate, or if the company discovers that previously reported information was inaccurate when filed and needs to be corrected, an updated report must be filed within 30 days of the change.
Because information about beneficial owners (particularly residential address) may change without the knowledge of the individuals at the company who handle CTA reporting obligations for the company, we recommend using a FinCEN ID for each beneficial owner. When a beneficial owner obtains a FinCEN ID, the reporting company may simply report the beneficial owner’s name and FinCEN ID, rather than the complete list of information above.
If the beneficial owner’s information used to obtain a FinCEN ID (such as the beneficial owner’s residential address) changes, the beneficial owner must update FinCEN within 30 days, but the company does not have a reporting obligation as a result of the change because only the beneficial owner’s name and FinCEN ID – rather than their address and other information – were included in the company’s BOI report.
Beware of BOI Reporting Scams
FinCEN has alerted the public that bad actors are making fraudulent attempts to solicit information from both entities and individuals. These bad actors often purport to be a governmental agency to which information must be reported or a third-party service provider who can assist with BOI reporting. FinCEN cautions individuals and entities to be wary of any messages purporting to assist with CTA compliance obligations that have the following red flags:
- Correspondence requests payment. There is no fee to file BOI reports directly with FinCEN, and FinCEN will not send letters or emails requesting payment to file BOI reports. Immediately delete any emails that purport to be from a governmental agency that request payment to file BOI reports under the CTA.
- Correspondence contains a link or QR Code. Legitimate actors who provide genuine assistance with CTA filings do not tend to send emails or letters that contain links or QR codes to follow. Rather, they advertise their services and provide their business name. Recipients should separately search for the business name to assess the legitimacy of any service provider offering to assist with CTA reporting.
- Correspondence references a “Form 4022” or “Important Compliance Notice.” FinCEN has discovered a fairly widespread scam that purports to be an “Important Compliance Notice” and/or “Form 4022” from FinCEN or another governmental entity. There is no Form 4022 for CTA filing.
- Correspondence from or referencing a “U.S. Business Regulations Department.” One of our clients received a message from the U.S. Business Regulations Department that contained a link to file BOI reports. This scam also appears to be fairly widespread, as FinCEN has issued a warning that bad actors are using this false (but official-sounding) name. There is no U.S. Business Regulations Department, and following the link provided by this “Department” would have led to theft of our client’s data, rather than filing of a legitimate BOI report. Thankfully, our client suspected this message may be illegitimate and forwarded it to their Warner attorney for confirmation before clicking any links or sending a response.
Conclusion
The CTA remains the law of the land, at least for now, and the penalties for failure to report are steep. Now is the time to add this task to your calendar and prepare to submit your report. If you have concerns related to the CTA, contact your Warner attorney or Corinne Curtis.
