The Corporate Transparency Act Brings New Reporting Requirements That Will Affect Over 32 Million Existing Business Entities

New York, NY — February 27, 2023
Contributors: Allen Schaefer, CPA, MBA, and Michael Saban

 
 

What is the Corporate Transparency Act?

On September 29, 2022, announced via a press release the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) issued a final rule ("The Final Rule" or "The Rule"), implementing the beneficial ownership information (BOI) reporting requirement of the Corporate Transparency Act (CTA), a new anti-money laundering initiative enacted by Congress as part of the Anti-Money Laundering Act (AMLA) of 2020 in the National Defense Authorization Act for Fiscal Year 2021. The Final Rule requires most private companies including certain domestic and foreign entities, unless exempted, to submit specified BOI to FinCEN and will affect more than 32 million existing business entities. The CTA is designed to increase transparency by requiring "reporting companies" to file basic business, "beneficial ownership" and "company applicant" information with FinCEN, and is aimed at helping law enforcement in the fight against money laundering and the use of shell companies to perpetrate fraud and other illicit activities by making it harder for criminals, organized crime rings, and other illicit actors to obfuscate their identities and launder money through the U.S. financial system.  

Who Must Report and When? 

The Final Rule sets forth who must file a BOI report, what information must be disclosed in such a report, and when "reporting companies," which includes existing and future domestic and foreign companies, subject to certain exemptions must file their initial BOI reports with FinCEN. "Reporting companies" include:

  • Domestic Companies: A domestic reporting company is any corporation, limited liability company, or any other entity created by filing a document with a secretary of state or similar state or tribal office. FinCEN expects this will include a variety of non-corporate entities such as limited liability partnerships, limited liability limited partnerships, business trusts, or limited partnerships.

  • Foreign Companies: A foreign reporting company is any corporation, limited liability company, or any other entity formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or similar office.

As an observation, sole proprietorships, certain types of trusts, and general partnerships are ordinarily not created through the filing of such documents and would not appear to meet the definition of "reporting companies". Many trusts will be beneficial owners, however, and will be involved in the reporting requirements.

Regarding whom would be a "beneficial owner" and who would be a "company applicant" required to report BOI, under the Rule.

  • A "beneficial owner" would include any individual who meets at least one of two criteria: (1) any individual who, directly or indirectly, either exercises "substantial control" over such reporting company; or (2) any individual who owns or controls at least 25 percent of the "ownership interests" of such reporting company. The proposed regulations defined the terms "substantial control" and "ownership interest" and proposed rules for determining whether an individual owns or controls 25 percent of the ownership interests of a reporting company. 

  • An individual can exercise "substantial control" over a reporting company if they (1) serve as a senior officer in the reporting company, (2) have authority over the appointment or removal of senior officers or a majority of the board, or (3) have substantial influence over important decisions of the reporting company. The broad definitions may include third parties. Note: Minor children (provided a parent or legal guardian is reported as a beneficial owner), nominees, employees (excluding senior officers), future inheritors, and creditors do not qualify as beneficial owners.In the case of a domestic reporting company, a "company applicant" would be the individual who files the document that creates the entity.

  • In the case of a foreign reporting company, a company applicant would be the individual who files the document that first registers the entity to do business in the U.S. The proposed regulations specified that anyone who directs or controls the filing of an entity creation or registration document by another would also be a company applicant.

The rule is effective January 1, 2024. Reporting companies created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports with FinCEN, while reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports. Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information. There is no annual filing requirement. 

Who Is Exempt? 

The CTA exempts 23 specific categories of entities, many of which are already subject to substantial federal and/or state regulation, from the definition of "reporting company", and empowers FinCEN to create new exemptions. Key statutory exemptions include:

  • Large operating companies (more than 20 full-time employees in the US and filed a federal tax return in the previous year with more than $5 million in gross receipts and have a physical operating office in the U.S.)

  • Issuers registered with the Securities Exchange Commission

    • Banks, bank holding companies, savings and loan holding companies, credit unions, financial market utility entities, and money services businesses registered with FinCEN

    • Registered Commodity Exchange Act entities, registered investment companies or investment advisers, broker-dealers, and registered venture capital fund advisers

    • Insurance companies or state-licensed insurance producers

  • Accounting firms

  • Public Utilities

  • Certain pooled investment vehicles

  • Tax exempt entities (or certain entities assisting tax exempt entities)

  • Inactive companies

  • Political organizations

  • Certain insurance producers in the U.S.

FinCEN assesses that in general smaller entities have less complex ownership and control structures, so the definition of reporting company tends to limit the potential number of beneficial owners who would exercise substantial control at a given reporting company.

Who has access to this information?

In certain circumstances, FinCEN is authorized to share reported BOI with government agencies, financial institutions, and financial regulators, subject to appropriate protocols. Information cannot be disclosed to the press or other private individuals in accordance with the Freedom of Information Act.

What are the penalties for noncompliance and misuse?

Failure to comply with the CTA's reporting requirements (or disclosing inaccurate information) can lead to stiff civil and criminal penalties, including include: (1) A maximum of $500 per day in civil monetary penalties (up to $10,000), and (2) imprisonment for up to two years. A safe harbor exists, however, to exempt a person from penalty if the person acting in good faith corrects inaccurate information submitted to FinCEN within 90 days of the inaccurate report. In addition, significant penalties are provided for the misuse of BOI, including a fine up to $250,000, imprisonment of up to five years, or both.

Additional

FinCEN will provide guidance and publish BOI reporting forms that companies can use to comply with the reporting rule. As the new reporting requirements take form, the Perelson Weiner team is keeping close tabs and will inform your business of necessary updates. If you have questions about how the CTA may affect your business and whether your business has a reporting requirement, please contact your Perelson Weiner partner.

Perelson Weiner is a full service Certified Public Accounting and consulting firm dedicated to serving the needs of successful entrepreneurs, high net worth individuals and families and international companies doing business in the United States. Perelson Weiner LLP is a member of the Center for Public Company Audit Firms and the Private Company Practice Section of the American Institute of Certified Public Accountants (AICPA). The firm is a member of PrimeGlobal, the third largest association of independent accounting firms in the world, comprised of over 350 highly successful independent public accounting firms in 90 countries.