December 14, 2023Client Alert

Required Compliance under Corporate Transparency Act Begins January 1, 2024

As of January 1, 2024, the Corporate Transparency Act (“CTA”) will require most small legal entities in the United States to disclose to the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) information regarding their beneficial ownership (“BOI Information”).


What is the Corporate Transparency Act?

  • In 2021, Congress passed the CTA in an effort to combat money laundering and the financing of terrorism in the United States. The CTA requires most domestic and foreign entities to report significant personal information to FinCEN. The reported information will be maintained in a federal database that may be shared by state, federal, and foreign law enforcement, as well as certain financial institutions.
  • On September 29, 2022, FinCEN issued the final rule (“Rule”) implementing the CTA. The Rule will go into effect January 1, 2024.

What is a “Reporting Company”?

  • Absent an exemption, the CTA broadly applies to the following entities (“Reporting Companies”):
    • Domestic entities created by filing formation documentation with a state's secretary of state or similar office under the laws of a US State or Indian Tribe, including limited liability companies and corporations.
    • Foreign entities registered to do business in the U.S. by filing documentation with a state's secretary of state.

Whose BOI Information must be reported?

  • Reporting Companies must report to FinCEN information about individuals or entities that:
    • Own or control at least 25% of the Reporting Company’s ownership interest, or
    • Exercise substantial control over the Reporting Company. 
  • The CTA will also require BOI Information to be disclosed for “company applicants.”


Beneficial Ownership

What qualifies as 25% of ownership interest in a reporting company?

  • Reporting Companies must identify all individuals who own or control at least 25% of the ownership interests of the Reporting Company.
  • Ownership interests include: equity, stock or voting rights; a capital or profit interest; convertible instruments; options; and any other instrument, contract, or other mechanism used to establish ownership. All forms of ownership interests must be calculated on a fully converted and fully diluted basis.

What is considered “substantial control” over an entity?

  • Reporting Companies must identify all individuals who exercise substantial control over the Reporting Company. Individuals with substantial control include:
    • Senior officers and individuals performing the functions of a senior officer;
    • Persons with authority over appointment/removal of officers or a majority of the board of directors;
    • Persons with “substantial influence” over “important decisions” of the Reporting Company, including its lease/sale of assets, corporate structure, major expenditures, selection/termination of business lines or geographic focus, senior officer compensation schemes, significant contracts, and amendments of substantial governance documents.

Who is considered a “company applicant”?

  • Reporting Companies must identify the companies/individuals that file or decide to file the formation/registration documents with a secretary of state on behalf of the Reporting Company. This may include, for example, the Reporting Company’s attorneys and paralegals.

What BOI Information must be reported to FinCEN?

  • Reporting Companies will need to disclose three (3) sets of information to FinCEN:
    • The following information about the Reporting Company:
      • Full legal name;
      • Trade name and DBAs;
      • Business street address of the reporting company’s primary location in the United States where it conducts business;
      • Jurisdiction of formation and/or registration; and
      • Company IRS Tax ID Number or a foreign tax identification number.
  • The following information about beneficial owners of the Reporting Company:
    • Full legal name;
    • Date of birth;
    • Current residential address; 
    • Unique identifying number from an acceptable ID document; and
    • Image of the ID document.
  • The same information about company applicants as is required to be filed regarding beneficial owners.



Are there exemptions to filing beneficial ownership reports with FinCEN?

  • Yes.  The CTA provides for 23 types of entities that are exempt from the reporting requirements:
    • Public company;
    • Governmental authority;
    • Bank;
    • Credit union;
    • Depository institution holding company;
    • Money services business;
    • Broker or dealer in securities;
    • Securities exchange or clearing agency;
    • Other Exchange Act registered entity;
    • Investment company or investment adviser;
    • Venture capital fund adviser;
    • Insurance company;
    • State-licensed insurance producer;
    • Commodity Exchange Act registered entity;
    • Accounting firm;
    • Public utility;
    • Financial market utility;
    • Pooled investment vehicle;
    • Tax-exempt entity;
    • Entity assisting a tax-exempt entity;
    • Large operating company;
    • Subsidiary of certain exempt entities; and
    • Inactive entity.


Timelines and Noncompliance

What are the reporting timelines?

  • Reporting Companies that were created or registered to do business before January 1, 2024 must file an initial report before January 1, 2025.
  • Reporting Companies that were created or registered to do business after January 1, 2024 but before January 1, 2025 must file an initial report within 90 days after such creation or registration.
  • Reporting Companies that were created or registered to do business after January 1, 2025 must file an initial report within 30 days after such creation or registration.

What are the ongoing compliance timelines?

  • Loss of Exemption: an entity that was previously qualified for an exemption under the CTA, but subsequently fails to continue to meet such exemption, must report the required information within 30 days of losing the exemption.
  • Incorrect information: Reporting Companies must correct any inaccurate information and file updated reports within 30 calendar days of becoming aware or having reason to know that such reported information is inaccurate.
  • Changes in Reporting Companies: Reporting Companies must file updated information within 30 calendar days of a change in such information.

What are the consequences of not filing the necessary reports?

  • Noncompliance may result in the following penalties:
    • For willful failure to report or willfully providing false information/documentation:
      • civil penalty of up to $500 per day,
      • criminal fine of $10,000, and
      • up to 2 years in prison.
    • For knowingly disclosing or using BOI Information for an unauthorized purpose:
      • civil penalty of $500 per day,
      • criminal fine of up to $250,000, and
      • up to 5 years in prison.


Filing and Access to Information

How do I comply and file reports?

  • All required disclosures will be made to FinCEN through an electronically secured filing system that FinCEN will make available on its website.  FinCEN intends to create a form for persons to report BOI Information to the secured filing system. 
  • The secured filing system and beneficial ownership form have not been created and/or released to the public but will be available before the reporting requirements take effect.

Who can access the BOI information?

  • Federal, State, local, and Tribal officials, as well as certain foreign officials who submit a request through a U.S. Federal government agency, will be permitted to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will also have access to beneficial ownership information in certain circumstances, with the consent of the reporting company.

Do reporting companies need to do anything else?

  • Reporting Companies should update their respective corporate governance practices to ensure that their beneficial owners are compliant with the CTA, including by updating the company’s governing documents.  


Further Information

The CTA and its implementing Rule present sweeping changes to entity formation practices in the U.S. Michael Best has attorneys who will continue to monitor developments under the CTA and can assist companies in complying with the CTA. Please contact a member of our team for assistance. For additional information, please see the information below:


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