Gozdecki, Del Giudice, Americus & Brocato, LLP (“GDAB”) recognizes that our clients are extremely busy. That being said, required reporting under the brand new Corporate Transparency Act is right around the corner and it is imperative that all potential reporting companies read the below client advisory. This advisory provides a general summary of the Corporate Transparency Act and its requirements and is not intended to, and does not, provide legal, compliance or other advice as to any individual or entity. Please reach out to your primary GDAB contact for assistance regarding the application of the Corporate Transparency Act to your specific situation.

CLIENT ALERT: CORPORATE TRANSPARENCY ACT

Effective January 1, 2024, virtually every legal entity incorporated, organized, or registered to do business in the United States must disclose information relating to its owners, officers, and controlling persons with the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) pursuant to the Corporate Transparency Act (“CTA”). CTA was passed by Congress in January of 2021 as part of the National Defense Authorization Act. The goal is to combat money laundering, financing of terrorism and other illegal activities.  On September 29, 2022, FinCEN issued a final rule implementing the CTA’S beneficial ownership information (“BOI”) reporting provisions.

There are three important definitions in the CTA that business owners and fiduciaries should be aware of to ensure proper compliance: the definition of a “Reporting Company,” “Beneficial Owner,” and “Company Applicant”.

What is a “Reporting Company”?

The rule identifies two types of Reporting Companies: domestic and foreign. A domestic Reporting Company is a corporation, limited liability company (LLC), or any entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. (emphasis added). A foreign reporting company is a corporation, LLC, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. Under the rule, and in keeping with the CTA, certain entities may qualify for one of the twenty-three exemptions which are listed in the next section.

Who is exempt from the definition of a “Reporting Company”?

After determining if an entity is a Reporting Company, the next step is to identify any applicable exemptions from Reporting Company status for each entity within a company structure. Currently, the CTA rules provide twenty-three exemptions, most of which involve entities already subject to regulation by governmental authorities (e.g., certain SEC-registered issuers (public companies), banks, broker-dealers and/or investment advisers). One potentially significant exemption for GDAB clients is the "large operating company" exemption. See below for more information on the large operating company exemption. Additionally, entities, the ownership interests of which are controlled or wholly owned, directly or indirectly, by certain types of exempt entities (i.e., exempt entities other than money services business, pooled investment vehicles or entities assisting a tax-exempt entity), are also exempt from CTA reporting requirements (but the full scope of this exemption is not clear). See the below chart for a list of all twenty-three exemptions.

How do I know if my entity is considered to be a “Large Operating Company” or if my entity qualifies for any other exemptions?

The “Large Operating Company” exemption, applies to an entity that (a) directly (i.e., not on a consolidated or affiliated basis) employs more than 20 employees on a full-time basis in the United States; (b) filed in the previous year a federal income tax or information return in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate (on a consolidated basis, if applicable, and exclusive of gross receipts or sales from sources outside the United States); and (c) has an operating presence at a physical office within the United States. If an entity believes that it may qualify for a reporting exemption under the CTA, entity representatives should consult the Small Entity Compliance Guide[1] and other FinCEN resources. See below for a chart from the Small Entity Compliance Guide related to the Large Operating Company exemption:

Who is a “Beneficial Owner”?

A beneficial owner is any individual who, directly or indirectly: 1) exercises substantial control over a reporting company; or 2) owns or controls at least 25 percent of the ownership interests of a reporting company. A reporting company can have multiple beneficial owners and reporting companies are required to identify all individuals who exercise substantial control over the company. There is no limit to the number of individuals who can be reported for exercising substantial control. An individual exercises substantial control over a reporting company if the individual meets any of four general criteria: (1) the individual is a senior officer (i.e. president, CFO, GC, CEO, COO, any other officers); (2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company; (3) the individual is an important decision-maker (i.e. any individual who directs, determines, or has substantial influence over important decisions made by the reporting company including decisions related to the business, finances, or structure of the reporting company); or (4) the individual has any other form of substantial control over the reporting company (catch-all for flexible corporate structures that do not perfectly fit into one of the above categories.)

The following types of individuals cannot be considered beneficial owners of a reporting company:

1. minor children (however, the reporting company must report information regarding the minor child’s parent or legal guardian)
2. an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual (in which case that individual would be the beneficial owner)
3. an employee of the reporting company, acting solely as an employee, whose substantial control over or economic benefits from the entity are derived solely from the employment status (provided that the person is not a senior officer of the entity)
4. an individual whose only interest in a reporting company is a future interest through a right of inheritance, and
5. a creditor of the reporting company (unless they exercise substantial control or have a 25-percent ownership interest in the reporting company).

Are there any other reporting requirements?

The CTA obligates reporting companies to provide identifying information for the “company applicants” of the reporting company. The CTA states that a company applicant is one of two people: (a) the individual who is responsible for filing the documents that create the entity or, in the case of a foreign entity qualified to do business in the US, the individual who directly files the document that first registers the foreign reporting company to conduct business in a state; and (b) the individual who is primarily responsible for directing or controlling the filing of the relevant formation or registration document by another.[2]

What needs to be reported to FinCEN?

A reporting company must include the following information when filing the report with FinCEN:

1. the full legal name of the entity
2. any trade or d/b/a name
3. the address of the entity
4. the jurisdiction of formation of the entity, and
5. the federal taxpayer ID number.

Additionally, a reporting company must include the following information when filing the beneficial owner report with FinCEN for each beneficial owner and company applicant:

Beneficial Owner:

1. name
2. date of birth
3. current residential address
4. a unique identifying number and issuing jurisdiction (eg, US passport or driver’s license), and
5. an image of the document that contains the identifying number. Alternatively, an individual or entity can obtain a FinCEN identifier which can be included on subsequent filings in lieu of this information. [3]

Company Applicant:

1. name
2. date of birth
3. current business address
4. a unique identifying number and issuing jurisdiction (eg, US passport or driver’s license), and
5. an image of the document that contains the identifying number. Alternatively, an individual or entity can obtain a FinCEN identifier which can be included on subsequent filings in lieu of this information.

What is the deadline to report and what happens if my entity does not comply?

Businesses that fit the criteria of a “reporting company” under the CTA will have either 90 days (if formed on or after 1/1/24, but before 1/1/2025)[4] or 1 year (if formed prior to 1/1/24) to comply with the provisions of the CTA. Failure to comply or the provision of false or fraudulent reports may result in civil fines of $500 a day for as long as the reports remain inaccurate. Failure to comply may also subject the violators to the criminal penalties of a $10,000 fine and/or 2 years in jail.

Is my data secure?

FinCEN is currently designing and building a new IT system called the Beneficial Ownership Secure System (BOSS) to collect and store CTA reports, but this system is not yet available. Reports filed with FinCEN will not be accessible to the public and are not subject to requests under the Freedom of Information Act. However, the following government agencies will have access to the information: (1) federal agencies engaged in national security, intelligence, and civil and criminal law enforcement, (2) the Department of the Treasury in connection with its official duties, including tax administration, and (3) state and local law enforcement agencies in connection with criminal or civil investigations. FinCEN may also disclose information to financial institutions to assist in their anti-money laundering compliance activities.

DISCLAIMER: If your company is an existing client of the firm and may be a reporting company or has questions about the application of the CTA, please be aware that the firm’s current engagement DOES NOT INCLUDE legal advice regarding your company’s reporting obligations or compliance with the CTA. Any legal advice regarding reporting obligations or application of the CTA to any client will require a new or updated written engagement letter with the firm.