Banking and Business Monthly – October 2023

Starting January 1, 2024, the Federal Corporate Transparency Act (“CTA”), 31 U.S.C. § 5336, will go into effect. All entities formed or registered to do business in the United States will need to either (1) confirm they qualify for an exemption from the CTA’s reporting requirements, or (2) submit a timely beneficial ownership information (“BOI”) report to the U.S. Treasury’s Financial Crimes and Enforcement Network (“FinCEN”). 

Who is Covered Under the Act? 

Any business entity that is considered a “Reporting Company” is covered under the CTA. This term includes all business entities (unless an exemption applies) that are formed to do business in the United States by filing with a secretary of state or similar office. If an entity is not created by such a state filing, then the entity is not in the scope of the CTA. 

What Information is Required to Report? 

Reporting Companies will be required to submit BOI reports to FinCEN. The expected submission process is that the reports will be filed electronically through an online interface. A Reporting Company must provide identification information about itself, its Beneficial Owners, and Company Applicants. 

Beneficial Owners

A “Beneficial Owner” is any individual who either: 

• Directly or indirectly, through any contract, arrangement, or otherwise, exercises substantial control over the Reporting Company; or 
• Owns or controls at least 25% of the ownership interests of the Reporting Company. (there is always at least one, and there can be more than one).

On September 29, 2022, FinCEN published a reporting rule fact sheet that provides some more clarity on how Reporting Companies, Beneficial Owners, and Company Applicants are defined. This sheet also outlines some next steps FinCEN will or already has taken in developing the infrastructure and compliance guides for adhering to this new rule. 

Company Applicants

Company Applicants includes a maximum of two individuals: (1) the person who directly files the formation or registration document of the Reporting Company and (2) the person primarily responsible for directing such filing. However, entities formed prior to January 1, 2024 will not be required to provide BOI reports for their Company Applicants. 

Information required in the BOI report includes:

• The individual’s full legal name; 
• Date of birth; 
• Complete current address (business address may be used for a Company Applicant); 
• A unique identifying number from an identification document (passport or driver’s license);
• Copies of identifying documentation; and 
• For individuals who already file with FinCEN, FinCEN will provide a unique identifier, and this FinCEN Identifier can be submitted instead of separate personal information.

This information will not be publicly available. Generally, it will only be disclosed to (1) federal and state law enforcement agencies in special circumstances, or (2) with the Reporting Company’s consent, to financial institutions in connection with their know-your-customer obligations. 

What Are the Current Deadlines? 

Business entities organized on and after January 1, 2024, will need to submit BOI reports within thirty days of organization. For entities created before January 1, 2024, there is a buffer period, and these entities will need to complete and submit a BOI report by January 1, 2025. After the initial report, there is no annual or quarterly requirement. However, reporting companies must file an amendment to their BOI report within thirty days after any subsequent change to their reported information. 

What Are the Penalties For Noncompliance? 

The CTA provides for both civil and criminal penalties for companies that fail to meet reporting requirements, or companies that disclose BOI without authorization. Willful failure to file initial or updated accurate reports with FinCEN will be subject to a $500 per-day fine (up to $10,000) and a possible two years’ imprisonment. More information on making sure your company complies with the new requirements can be found in a Small Entity Compliance Guide published by FinCEN in September. 

Are There Any Exemptions Available? 

There are 23 listed exemptions in the CTA. These include, among others:

• “Large operating companies,” which are entities that (1) have more than 20 full-time employees (not counting employees of affiliated entities), (2) reported more than $5 million in revenue from U.S. sources to the IRS for the previous year, and (3) have an operating presence at a physical U.S. location. 
• Nonprofit entities, political organizations, and certain tax-exempt trusts. 
• Public companies, insurance companies, banks, registered investment companies, registered investment advisers, and certain other entities already subject to regulatory oversight. 
• Subsidiaries that are wholly owned, directly or indirectly, by the foregoing exempt entities.

For a full list of all other entities exempt from the beneficial ownership reporting requirements, or any other detailed information not covered in this summary, please refer to FinCEN’s FAQ page regarding the CTA. 

What is the Future Outlook? 

To this point, New York is the only state to pass a similar Transparency Act. If signed into law, the Act would only require LLCs formed or registered to do business in the state to submit the BOI report. However, the state will make the name and address of each beneficial owner publicly available. California has also proposed but has not yet passed its own Corporate Transparency Act. 

On September 27, 2023, FinCEN published a Notice of Proposed Rulemaking to extend the period for certain entities to file an initial BOI report. The amendment would give Reporting Companies created or registered on or after January 1, 2024, and before January 1, 2025, 90 days to file the report as opposed to the current 30-day deadline. This proposal would not change the January 1, 2025, filing deadline for Reporting Companies created or registered before January 1, 2024, or the 30-day filing deadline for any created on or after January 1, 2025. 

For further inquiries or questions, please contact me at smigala@lavellelaw.com or (847) 705-7555. Thanks go to Nathan Toy for his assistance with this month’s article.