New Reporting Requirements May Affect Your Business: An Overview of the Corporate Transparency Act

Beginning on January 1, 2024, most businesses in the United States are subject to an important new federal reporting requirement. The Corporate Transparency Act (“CTA”) requires companies to report information about their “beneficial owners” to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury. The CTA, which Forbes has called the “single biggest issue facing business owners and their legal advisors,” not only imposes a new reporting requirement, but it also subjects non-compliant entities and individuals to substantial civil and criminal penalties, including fines of up to $10,000 and 2 years in jail, or both. Please read below for a high-level overview of the CTA and its requirements.

What is the CTA?

In 2021, the CTA was passed as a part of Title 64 of the National Defense Authorization Act (“NDAA”) in an effort to increase corporate transparency and reduce the threats of anonymous entity ownership. In response to the CTA, FinCEN generated rules mandating new requirements regarding the reporting of beneficial ownership information (“BOI”) for many U.S. and foreign companies.

BOI reporting is nothing new. For decades, the international financial community has encouraged the collection of BOI to reduce threats such as terrorism, money laundering, trafficking, and other illegal activities. In the early 2000’s, the United States was loudly criticized for our failure to comply with then-recognized financial standards by a global task force called the Financial Action Task Force (“FATF”). Though the United States has lagged most of the financial world in enforcing BOI requirements, the CTA seeks to bridge this international regulatory gap.

Where does the CTA apply?

The CTA applies to all U.S. States, territories, and tribal jurisdictions. Further, the CTA’s BOI reporting requirements affect both domestic entities and foreign entities. Even if an entity was not created in the United States, if it is registered to do business in any U.S. State, territory, or tribal jurisdiction, it is subject to the CTA.

Who does the CTA affect?

The CTA’s new BOI reporting requirements affect all entities defined as “reporting companies.” Reporting companies include:

• corporations,
• limited liability companies,
• foreign companies registered to do business in the U.S.,
• some business trusts, and
• several other entities

However, there are 23 exemptions to the definition of “reporting company.” An entity may be exempt from the new reporting requirements if it meets one of the following descriptions:

• Securities reporting issuer
• 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 entities, such as 501(c)’s
• Entity assisting a tax-exempt entity
• Large operating company
• Subsidiary of certain exempt entities
• Inactive entity

There is a check-box questionnaire to help determine the specific exemption requirements for each of the 23 categories above on page four of FinCEN’s BOI Reporting Guide. It is crucial to ascertain whether your company meets the definition of “reporting company” to avoid potential liability for failing to file a federally mandated report.

What information must a “reporting company” report under the CTA?

First, all reporting companies must file information about the company and its beneficial owners with FinCEN. Beneficial owners are the individuals who own or substantially control the reporting company. Owners are any individuals who have a 25% ownership interest or more in the company. Beneficial owners who have “substantial control” are defined as individuals who meet any of the following criteria:

• senior officers;
• authority to appoint or remove certain officers or a majority of directors of the reporting company;
• important decision-makers; or
• any other form of substantial control over the reporting company.

There is no limit on the number of individuals who exercise substantial control over an entity and who may therefore be required to report BOI. The company is responsible for ensuring that all people who qualify as beneficial owners are included in the report.

Second, companies that are created as of January 1, 2024 or later must file information about their “company applicants” with FinCEN. Company applicants are the individuals who directly file documents to create or register a company or individuals who are primarily responsible for directing or controlling the filing of the creation or registration document. Reporting companies must identify at least one but no more than two company applicants.

To comply with the CTA, reporting companies must submit the following information to FinCEN:

Company Information:

• full legal name,
• any trade names or “doing business as” names,
• current U.S. address,
• jurisdiction of formation, and
• IRS taxpayer identification number (“TIN”).

Beneficial Owner Information:

• full legal name,
• date of birth,
• current street address,
• driver’s license number with issuing jurisdiction or U.S. passport number, and
• image of identifying document above.

Company Applicant Information (only entities created on or after January 1, 2024):

• full legal name,
• date of birth,
• current residential address or relevant business address (depending on applicant),
• driver’s license number with issuing jurisdiction or U.S. passport number, and
• image of identifying document above.

When will the CTA’s reporting requirements go into effect?

Entities in existence prior to January 1, 2024, will have until January 1, 2025 to submit their initial BOI report. Entities created during calendar year 2024 are subject to BOI reporting regulations and must file an initial BOI report within 90 days of their creation. For entities created on or after January 1, 2025, BOI reports must be filed within 30 days of their creation.

How can companies comply with the CTA?

Entities created on or before December 31, 2023, can comply with the CTA by submitting a BOI report to FinCEN on or before January 1, 2025. An entity created in 2024 can comply with the CTA by submitting a BOI report within 90 days of its date of creation/registration. Entities created on or after January 1, 2025 must submit an initial BOI report within 30 days of creation/registration to comply with the CTA.

Additionally, to remain compliant with the CTA, reporting companies must promptly update their BOI report anytime there is a change in reportable information for the entity or any of its beneficial owners. Companies must report updated information within 30 days of the date of the change.

In other words, there are many scenarios in which a reporting company may become obligated to update their BOI report. For instance, the following circumstances may trigger a company’s duty to update their report:

• if a beneficial owner or company applicant changes their name or address
• if a beneficial owner or company applicant updates their passport or driver’s license
• if there is a change in business ownership interests
• if there is a change in leadership or officers that results in a new or changed individual with substantial control
• if a beneficial owner dies

How does a company file their initial BOI report or updates?

Companies must file their initial reports with FinCEN’s new data collection system, the Beneficial Ownership Secure System, or “BOSS”, which is located at https://www.fincen.gov/boi. Companies may also update their BOI report in BOSS. FinCEN does not charge a fee for submitting or updating BOI reports.

Importantly, an individual or a reporting company can file their BOI report directly with FinCEN without a FinCEN identifying number. However, to assist in filing, both individuals and reporting companies may request a FinCEN identifier. FinCEN identifier applications require the same information as BOI reports require for beneficial owner or company applicants.

What are the penalties if a company does not comply with the CTA?

If a company or an individual beneficial owner or company applicant refuses to comply with the CTA’s reporting requirements, they could be subject to civil penalties of $500 per day, as well as fines of up to $10,000 and up to 2 years in jail, or both. It is important to remember that compliance includes both filing an initial report and updating that report as long as the entity is active. Further, if a senior officer of an entity or any other person causes a company to provide false information to FinCEN, they may be subject to serious civil or criminal penalties.

There is one safe haven built into the CTA for those who inadvertently make mistakes. If a company or an individual makes a mistake on their initial BOI report, they may voluntarily submit corrections within 90 days of the deadline for the original report without penalty.

Who will have access to the information that companies report?

After submitting a BOI report, the following organizations have access to a company’s BOI information:

• FinCEN
• U.S federal law enforcement agencies, if requested from FinCEN
• Potentially other enforcement agencies with court approval
• Non-U.S. law enforcement agencies, judges, or prosecutors if requested from a U.S federal law enforcement agency

Additionally, with the consent of the company, financial institutions and their regulators may gain access to the company’s BOI report.

Where is there more information on the CTA?

FinCEN has published several resources to aid companies in understanding their potential CTA compliance responsibilities. Here are three helpful links:

• FinCEN Small Entity Compliance Guide
• FINCEN BOI Reporting FAQ’s
• Contact FinCEN directly with questions.

The lawyers at Spotts Fain PC are available to assist you and your business in understanding the CTA. Please do not hesitate to contact us with any questions.

Download the Spotts Fain CTA Client FAQ sheet here.

Please contact your relationship attorney to learn more. Alternatively, you can reach out to:

J. Thomas O'Brien, Jr. heads the firm's mergers and acquisitions (M&A) team and serves as outside general counsel to many of the firm's clients. Tom frequently counsels business owners in entity formation and exit strategy planning.
Email: tobrien@spottsfain.com

Edward B. Lumpkin works with a broad range of for-profit and non-profit organizations, from start-up ventures to public companies, on a wide variety of matters, with an emphasis on mergers and acquisitions, joint ventures, franchising and licensing arrangements and general corporate, regulatory and securities matters.
Email: elumpkin@spottsfain.com

The authors would like to thank Sam Cerchio for her research in completing this article. Sam is a third-year law student at the University of Richmond School of Law, and has accepted an Associate's position at Spotts Fain in September 2024.