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May 2023
The Corporate Transparency Act (CTA) was enacted on January 1, 2021, as part of the National Defense Authorization Act, to prevent evasion of anti-money laundering rules and other illegal activities.
As a result, “reporting companies,” subject to exceptions, must report information about their business and its beneficial owners to the Financial Crimes Enforcement Network (FinCEN) division of the Treasury Department.
For a full description of the Corporate Transparency Act and what it entails, click here.
What is a “reporting company”?
Generally, reporting companies (e.g., corporation, LLC, Limited Partnership) are entities whose formation requires filing a document with the secretary of state or a similar office.
Information required to be reported to FinCEN by “reporting company”
(1) Full legal name (including any trade name or “doing business as” name)
(2) Business address
(3) Jurisdiction of formation
(4) Taxpayer identification number (TIN), employer identification number (EIN) or a foreign identification number issued by a foreign jurisdiction and the name of that jurisdiction.
What is a beneficial owner?
A beneficial owner is someone who directly or indirectly owns or controls more than 25% of a reporting company, or exercises “substantial control” over a reporting company (e.g., CEO, COO, CFO, general counsel plus those possessing other forms of control).
Information required to be reported to FinCEN by “beneficial owner”1
(1) Name
(2) Date of birth
(3) Current residential address
(4) A unique identifying number from an acceptable identification document (e.g., state driver's license, passport number).
Obtaining a “FinCEN Identifier”
Instead of furnishing the above information to the reporting company, a beneficial owner can furnish that information to FinCEN who will issue the beneficial owner a unique number called a “FinCEN Identifier.” The beneficial owner then furnishes their “FinCEN Identifier” to the reporting company, who then includes that number on the Beneficial Owner Information (BOI) report it files with FinCEN.
Critical Information
Trusts must report if they own or control more than 25% of the reporting company or otherwise has “substantial control” over the reporting company. Trustees, grantors and/or beneficiaries may have to report if they are considered:
• a trustee with the authority to dispose of trust assets, qualifying as a beneficial owner,
• a grantor who has the right to revoke the trust or otherwise withdraw the assets, and
• a beneficiary who is the sole permissible recipient of income and principal, or has the right to demand a distribution of, or withdraw, substantially all the assets.
Reporting companies are obligated to update information by reporting any change to their initial filing within 30 days. Example: Change in residential address.
Potential penalties – $500/day; $10,000 fine and up to two years in prison.
Exceptions: A total of 23 different types of entities are exempt from the definition of a reporting company. Exemptions apply mostly to organizations that are already highly regulated. For instance, there is an exemption for “large operating companies,” which have physical presences in the U.S., more than $5 million of gross receipts or sales on the prior year’s tax return, and more than 20 full-time employees.
Effective date – January 1, 2024. Companies in existence as of 1/1/2024 have until 1/1/2025 to report. Companies formed after 1/1/2024 must report within 30 calendar days of formation.
Click here to download the full paper
Footnotes:
1This information goes to the reporting company who then furnishes it to FinCEN.
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