BY: TIMOTHY BARRETT, J.D.
Trust Counsel, Argent Trust
The Corporate Transparency Act (“CTA”) went into effect on January 1, 2024, for newly formed companies and imposes strict reporting requirements that many other companies must meet by year-end. Basically, the CTA requires that all affected companies report the identities of those persons who control the company. The primary purpose of the CTA is to strip U.S. shell companies of anonymity that can hide illicit financial activity for use in financing terrorism and other unlawful activities.
The CTA targets small companies, defined as those companies that do not meet the “Large Operating Company” exemption: a company with 20 or more full-time employees or whose gross receipts for the prior year exceeded $5 million. There are numerous other exemptions, most notably for banks, credit unions, brokers and dealers, investment companies, insurance companies, and accounting firms. Also excluded are tax exempt entities and all businesses who are not required to file articles of formation of any kind with a Secretary of State or equivalent foreign or domestic jurisdiction (sole proprietorships and general partnerships are excluded).
The companies that must report will be companies with less than 20 employees and whose gross receipts in the prior year fell below $5 million. These “Reporting Companies” must file a report with the U.S. Treasury’s Financial Crimes Enforcement Net (FinCEN) that discloses its legal name, any trade names, its U.S. street address, the place formation, its tax i.d. number, and the identities of all its “Beneficial Owners.” A Beneficial Owner is any individual (or trust) who either directly or indirectly exercises “Substantial Control” over the Reporting Company or owns or controls at least 25% of the Reporting Company’s “Ownership Interests,” which may be stock, equity, voting rights or some other mechanism delineating ownership.
Beneficial Owners, in turn, must go online at the FinCEN website and provide “Beneficial Owner Information” (“BOI”), including date of birth, tax i.d. number, current address and proof of identity, i.e., a passport or U.S. driver’s license. They will be issued a FinCEN Identifier number to provide back to the Reporting Company. Both the Reporting Company and the Beneficial Owners face civil and/or criminal penalties if they fail to provide their BOI, fail to keep it current or provide fraudulent or inaccurate information.
A company’s or individual’s failure to report can carry a fine of up to $500 each day until corrected, and a willful failure to file or update a required and timely BOI report or any action taken to intentionally file an inaccurate or fraudulent BOI report may also result in imprisonment of up to two years and a fine of up to $10,000.
FinCEN will start accepting reports on January 1, 2024. There is no fee for submitting a BOI report to FinCEN. Here are the deadlines for reporting:
- A Reporting Company created or registered prior to January 1, 2024, has until January 1, 2025, to report BOI.
- A Reporting Company created or registered on or after January 1, 2024, and before January 1, 2025, has to report BOI within 90 calendar days of receiving actual or public notice that the company’s creation or registration is effective, whichever is earlier.
- A Reporting Company created or registered on or after January 1, 2025, has to report BOI within 90 calendar days of receiving actual or public notice that its creation or registration is effective, whichever is earlier.
- Any BOI updates or corrections must be reported within 30 days of receiving actual or public notice of the change or correction, whichever is earlier.
Exactly who must file a report as a Beneficial Owner is more complicated than which Reporting Companies must file a report. For instance, the definition of Substantial Owner includes: a senior officer (president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function), anyone with authority to appoint or remove those officers or a majority of directors, any “Important Decision-Maker”, and anyone else who may exercise some form of substantial control.
Therefore, every U.S. company and foreign company controlled by U.S. citizens must determine if it meets an exception to filing a report. Then, if not, it must file a report identifying all Beneficial Owners and notify each of them of their requirement to file for a FinCEN Identifier. Each person notified must determine whether they agree with that notice and act accordingly. All before the end of 2024, or even earlier in some instances, with possible severe civil penalties for late filing or wrongfully declining to file a report.
The sheer scope of the regulatory administration this legislation requires begs for much narrower definitions and so much more granular instructions. One rather unresolved issue is how it may affect the use of corporations and limited liability companies in estate and trust legacy planning. A trust that owns at least 25% of a Reporting Company or which may exercise Substantial Control over a Reporting Company will attribute Beneficial Owner status to the trustee and certain other individuals under the trust instrument (charitable trusts and charitable split-interest trusts are exempt from reporting), including trust beneficiaries and trust advisors. A trust may exercise Substantial Control over a Reporting Company if the trust is considered an Important Decision-Maker for the Reporting Company or may exercise some other form of substantial control over the Reporting Company.
You may operate a small business that must file a report, or you may soon receive a notice in relation to your investment or control over a small business (personally or in your trust). If you are the settlor or beneficiary of a trust holding interests in an Operating Company, you should reach out to your estate planning attorney to determine if your trust is a Beneficial Owner. In any case, seek help if you cannot fathom the information provided by your company or the FinCEN website, but don’t ignore this. $500 a day is a substantial penalty.
You can access the public information available at https://www.fincen.gov/boi.
You will find the BOI Small Entity Compliance Guide at https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf.
You will find the latest FAQ at https://www.fincen.gov/boi-faqs.
