The Corporate Transparency Act (the “CTA”), effective January 1, 2024, is the United States government’s attempt to make it harder for bad actors to hide or benefit from their ill-gotten gains through the creation of shell companies or other opaque ownership structures. The public policy rationale for requiring the filing of private information pertaining to otherwise unregulated entities includes aiding in the enforcement of tax laws and assisting law enforcement with a wide variety of other activities such as money laundering, drug trafficking and terrorism.

The CTA requires certain entities (known as reporting companies) to file a Beneficial Ownership Information (“BOI”) report with the United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCen”).

A.         Which entities are considered reporting companies?

1. Domestic reporting companies are corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
2. Foreign reporting companies are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.

There are 23 types of entities that are not considered a reporting company and exempt from any reporting requirements under the CTA. These entities primarily consist of those entities that are currently subject to existing regulations – for example, banks, credit unions, insurance companies and investment companies.

Additionally, one of the 23 exemptions to the CTA is known as the “large operating company” exemption. This exemption applies to those entities that have more than twenty full-time employees in the United States and reported over $5 million in gross receipts or sales in the previous year on their federal tax returns.

B.         When must reporting companies file their BOI report with FinCen?

A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial BOI report.

A reporting company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial BOI report.

Reporting companies created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial BOI report.
    
C.    Who is a Beneficial Owner?

A beneficial owner is an individual who either directly or indirectly (i) exercises substantial control over the reporting company; or (ii) owns or controls at least 25% of the reporting company’s ownership interests.

I.    Substantial Control:

An individual is considered to exercise substantial control over a reporting company if he/she falls into at least one of the following four categories:

1. The individual is a senior officer (i.e., the company’s president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function) of the reporting company.
2. The individual has authority to appoint or remove certain officers or a majority of directors (or similar body) of the reporting company.
3. The individual is an important decision-maker for the reporting company.
4. The individual has any other form of substantial control over the reporting company (a catch-all provision).

II.    Ownership Interest:

Determining whether an individual exercises substantial control is often a fact-based analysis. However, determining ownership is more clear-cut and all one needs to do is to look at the ownership rights of the reporting company. Examples of ownership interests include shares of equity, stock, voting rights, membership interests, partnership interests, or any other mechanism used to establish ownership.

D.    What information is included on the BOI report:

I.    For the Reporting Company:

1. Its legal name;
2. Any trade names, “doing business as” (d/b/a), or “trading as” (t/a) names;
3. The current street address of its principal place of business if that address is in the United States. For reporting companies whose principal place of business is outside the United States, the current address from which the company conducts business in the United States;
4. Its jurisdiction of formation or registration; and
5. Its Taxpayer Identification Number (or, if a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of the jurisdiction).

A reporting company will also have to indicate whether it is filing an initial report, or a correction or an update of a prior report.

II.    For each Beneficial Owner:

1. The individual’s name;
2. The individual’s date of birth;
3. The individual’s residential address; and
4. An identifying number from an acceptable identification document such as a passport or U.S. driver’s license, and the name of the issuing state or jurisdiction of identification document.*

*The reporting company will also have to report an image of the identification document used to obtain the identifying number in item 4.

III.     For the Reporting Company Applicant:

Those reporting companies registered on or after January 1, 2024, will also need to report information pertaining to their company applicants. A company applicant is (i) the individual who directly files the document that registers the reporting company; and (ii) if more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing. There should be no more than two individuals considered company applicants.

1. The individual’s name;
2. The individual’s date of birth;
3. The individual’s address*; and
4. An identifying number from an acceptable identification document such as a passport or U.S. driver’s license, and the name of the issuing state or jurisdiction of identification document.**

*If the company applicant works in corporate formation – for example, as an attorney or corporate formation agent – then the reporting company must report the company applicant’s business address. Otherwise, the reporting company must report the company applicant’s residential address.

**The reporting company will also have to report an image of the identification document used to obtain the identifying number in item 4.

E.    Updating the BOI:

If there is any change to the aforementioned information concerning the reporting company or its beneficial owners, the reporting company must file an updated report no later than 30 days after the date of the change.

A reporting company is not required to file an updated report for any changes to previously reported information about a company applicant.

F.    Who has access to the BOI reports:

The BOI reports will be stored by FinCen in a secure and non-public database. FinCen will permit federal, state and local officials, as well as certain foreign officials, to obtain individual BOI reports for authorized activities related to national security, intelligence and law enforcement. Financial institutions will have access to individual BOI reports in certain circumstances but only with the consent of the reporting company.

G.    Failure to comply with the ETA:

A person who willfully violates the CTA reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. That person may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000.

H.     Application to Co-ops and Condos:

The CTA applies to both cooperative corporations and condominium associations because the one defining factor which triggers the application of the CTA is whether the reporting company files a document with the secretary of state. A New York cooperative corporation files its Certificate of Incorporation with the New York Secretary of State; and a New York condominium association is required under the New York State Real Property Law to file its Declaration of Condominium with the New York Secretary of State – thereby causing both types of entities to become subject to the CTA.

Individual Co-op and Condo senior officers (i.e., the president, vice president, treasurer and secretary) and those individuals who serve on the board of a Co-op or Condo who are important decision-makers or otherwise exercise any form of substantial control over the entity, must file a BOI report. Additionally, as members of the Board turn-over after each election, the BOI must be updated within 30 days of the election results being certified.

Unless a Co-op or Condo qualifies for the “large operating company exception” described above, it will be considered a reporting company under the CTA.

I.    Is the CTA unconstitutional?:

On March 1, 2024, no less than 60 days after the CTA became effective, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional in the case National Small Business United v. Yellen.  FinCen released a press release in response which implied that FinCen will appeal the court’s decisions and made clear that the decision only applies to the plaintiffs specifically named in the case. Accordingly, we are advising our clients to comply with the CTA and to not rely on this court decision.

J.    New York State:

New York State recently passed legislation similar to the CTA which will be discussed in greater detail in a forthcoming article.

K.    Next Steps:

The CTA casts a very wide net and unless your reporting company can take advantage of one of the 23 exemptions, your reporting company will be required to file the BOI report with FinCen.

Please call us at your earliest convenience so that we can help you navigate through this process and to assist you in filing the appropriate documentation with FinCen in a timely manner. We look forward to working with you.