What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) of 2019 is a historic new law impacting millions of America’s existing small corporations and LLCs, as well as newly formed entities. Part of the Anti-Money Laundering Act of 2020, the CTA requires the disclosure and reporting of business ownership information (BOI) directly to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of Treasury.

This is the first time in history that the federal government will create and maintain a database of private company ownership for law enforcement purposes. The purpose is to enhance national security by preventing the use of corporations and LLCs for criminal activities, such as money laundering.

Businesses required to file under the CTA include all LLCs, corporations, and similar entities that meet the following criteria:

• Less than 20 employees;
• Less than $5 million in reported annual revenue, and
• Has a physical office in the United States.

Willful violations of the law — such as choosing not to comply with providing the business data and details requested — are subject to substantial fines ($500/day) and criminal penalties (up to $10,000), including prison time.  

Unfortunately, reporting is anticipated to be somewhat complex and time-consuming. Meeting the new requirements, including understanding them and providing the necessary information and supporting documentation, will not be check-the-box simple – especially not for the initial filing in 2024. 

How much time will my CTA filing take?

In a public notice released in January of this year, FinCEN outlined their estimates of the anticipated time burden on “reporting businesses,” those required to comply with the new Corporate Transparency Act regulations. Note that these estimates are what the government anticipates for businesses; they are not based on real-time data as the CTA filings have not yet begun.

BOI reporting for the initial report submitted is expected to be time-consuming as business entities must figure out the new rules and requirements. Professional assistance is recommended for this process, especially with the initial filing. Putting off the necessary tasks until the last minute can create unnecessary stress and expense, not to mention potential legal ramifications if deadlines are missed, support services are unavailable, or complete BOI information is not possible at an accelerated timeline. Early action is recommended.

Here are the time burden estimates reported by FinCEN based on their assessment of the impact these new requirements will have on businesses that qualify as reporting entities. The time of BOI response will vary based on the complexity of the business structure.

Simple ownership structures: 90 minutes per response 

• 40 minutes to read and understand the forms and paperwork;
• 30 minutes to identify and collect information about beneficial owners and company applicants;
• 20 minutes to fill out and file the report;
• Additional time to gather and attach an image of an acceptable identification document for each beneficial owner and company applicant.

Complex ownership structures: 650 minutes (10.8 hours) per response 

• 300 minutes to read the form and understand the requirement;
• 240 minutes to identify and collect information about beneficial owners and company applicants;
• 110 minutes to fill out and file the report;
• Time to gather and attach an image of an acceptable identification document for each beneficial owner and company applicant.

Once a business entity’s initial 2024 filing is completed, the time for meeting the requirements each following year is expected to decrease. FinCEN estimates the average burden of updating such reports for companies with simple ownership structures will be about 40 minutes per update (20 minutes to identify and collect information about beneficial owners or company applicants and 20 minutes to complete and file the update). For those with more complex business ownership structures, the government estimates the time burden to be just under 3 hours (60 minutes to identify and collect information about beneficial owners or company applicants and 110 minutes to fill out and file the update). 

In their assessment, FinCEN believes that reporting companies with “intermediate” beneficial ownership structures will have a time burden that an average of simple and complex business structures or somewhere in between, as BOI reporting will vary depending on the complexity of how the reporting company is structured. 

Source: Federal Register:: Agency Information Collection Activities; Proposed Collection; Comment Request; Beneficial Ownership Information Reports

When does the Corporate Transparency Act take effect?

The start dates for CTA requirements vary based on the date of entity formation.

New Companies: Entities created or registered to do business in the United States on and after January 1, 2024, must disclose BOI details in the FinCEN reporting system within 30 calendar days of receiving notice of their creation or registration. They must also include company applicant information when the BOI report is filed.

Existing Companies: Entities established before January 1, 2024, have until January 1, 2025, to file their initial BOI report and will not be required to disclose information on the company applicant.

Formerly Exempt Companies: Entities that no longer qualify for an exemption from filing must file their BOI report within 30 calendar days of the date upon which it no longer meets the criteria for exemption as a reporting company or within the days left in the one-year filing period if it ceases to be exempt during the first year after the effective date (whichever period is longer).

All Reporting Companies: Both previously existing companies and later created companies are required to keep their reported information current. If a reporting company discovers that reported information is not accurate, or if ownership changes (making previously reported information to be inaccurate), the reporting company has 30 days from the time it became aware – or should be aware – of such inaccuracy to report the changes. In other words, ignorance is not bliss. You must keep CTA details up to date or get help to do so to avoid financial penalties or worse.

How will the CTA database information be used?

This is the first time in history that the federal government will create, monitor, and maintain a database of private company ownership for law enforcement purposes. The goal is to enhance national security by preventing the use of corporations and LLCs for criminal activities, such as money laundering.

FinCEN is only authorized to disclose BOI collected for two purposes: 

a) To support national security, intelligence, and law enforcement activities 

b) To confirm BOI in the database with financial institutions to help them comply with anti-money laundering and customer due diligence requirements.

Even though the Federal Government has stated that it will use the CTA-reported data on a confidential basis, FinCEN may disclose information stored in this new database by request in certain circumstances. This may include requests from federal agencies engaged in national security or law enforcement activities, requests from state or local authorities authorized by a court for use in a criminal or civil investigation, requests from a federal agency on behalf of a foreign law enforcement agency, and requests by financial institutions to satisfy due diligence requirements under applicable law. Of course, aside from the confidentiality of the reporting information, there will always be concerns regarding potential breaches in cybersecurity.

To ensure that your business entities have the necessary documentation to meet the new federal requirements that go into effect in 2024, we strongly encourage you to contact your attorney at Wegman Hessler Valore soon for assistance. As we get closer to the deadline, obtaining necessary services (such as valuations and assessments) may become more difficult to schedule – and more expensive as provider schedules fill up.

FinCEN estimates that 32.5 million businesses will submit initial BOI reports in Year 1, 2024. Schedule time now with Wegman Hessler Valore to review your corporate governance documentation, ownership structure and other entity details to avoid any issues. 

What qualifies as a Reporting Company?

The requirements target small businesses. The term “reporting companies” in the act is defined as any entity created by filing a document with a secretary of state (or similar office) under the law of a state. This includes entities formed under foreign legal jurisdiction that is registered to do business within the U.S. With some exceptions, businesses required to file under the CTA include all LLCs, corporations, and similar entities that meet all of the following: 

• Less than 20 employees; 
• Show less than $5 million in reported annual revenue; 
• Has a physical office in the United States. 

Exceptions include entities registered with the Securities Exchange Commission, banks, credit unions, tax-exempt non-profit corporations, and of their subsidiaries. If a business entity is NOT registered with the SEC or publicly traded, entities may be exempt from reporting requirements if they meet all of the following criteria: 

• More than 20 people; 
• Show more than $5 million in reported annual revenue (gross receipts);
• Has a physical office in the United States. 

What makes someone a Beneficial Owner for BOI?

According to Congress, having a beneficial ownership reporting requirement is necessary to help government agencies and law enforcement to identify bad actors who are using U.S. business entities to launder money and commit other financial crimes. With that, all reporting companies must disclose beneficial ownership information (BOI) under the CTA.

A beneficial owner is defined as someone with substantial control of or interest in 25% or more of the business entity. It is important to note that the BOI requirement refers to a real person as opposed to an entity or person; Ownership and control (as stated in the definition of a beneficial owner under the CTA) must be traced to an individual.

The Final Rule of the CTA provides three criteria to further define “substantial control”: 

a) Serves as a senior officer of the entity;

b) Has authority over the appointment or removal of any senior officer or as part of a dominant majority of the board (or similar governing body); 

c) Has substantial influence over important matters of a reporting company, including directional and decision-making functions. 

According to FinCEN, examples of important decisions as it relates to “substantial control” includes:

• Compensation.
• Approval of equity assurances.
• Approval of operating budgets.
• Changes to governing documents.

It’s important to note that control can also be established through broad representation, ownership, and “rights associated with any financing arrangement or interest.” 

Ownership interests by CTA definition can include equity interests, capital and profit interests, convertible instruments, options, warrants, arrangements related to voting, proprietorship interests, “future conversion of ownership interests,” and a catch-all provision which includes “any other instrument, contract, arrangement, understanding, relationship or other mechanisms to establish ownership.” 

While several BOI requirement categories are relatively straightforward, some will require further detail from FinCEN to help reporting companies to make the right decisions regarding which beneficial owners to disclose in their reporting. Some requirement details have yet to be released. We encourage our clients and business leaders to contact Wegman Hessler Valore to discuss their unique situation.

Are there any BOI exclusions?

There are five categories of individuals and entities excepted from the CTA’s definition of a beneficial owner: minor children whose parent or parents’ information is reported; individuals acting as intermediaries, custodians, or agents on behalf of other individuals; individuals working as an employee for an organization, and “whose control over or economic benefits from such entity is derived solely from the employment status of the person”; individuals with an inheritance interest in the entity; or a creditor of an entity (unless they exercise substantial control or own more than 25% of the ownership interests of the company).

What Beneficial Owner Information must be reported?

A reporting company’s CTA reporting must include details of each beneficial owner, information on the company itself, and, if applicable, each “company applicant.” BOI includes:

• Full legal name
• Date of birth
• Current residential or business address
• A unique identifying number from an acceptable government-issued identification document (including an image of the document confirming that number) or a previously assigned FinCEN identifier.

Newly formed reporting companies after January 1, 2024, must also provide reports on “company applicants,” individuals who file documents that form entities or register them to do business in the United States. These company applicants include any individuals who directed or controlled (i.e., hired) the individual to file that documentation. That means that various service providers, such as attorneys and CPAs, are included in the requirements and must be included in the business entity’s reporting. Reporting requirements are the same as those listed above.

What business information must be reported?

Initial reports are required to include the following information regarding the reporting company: 

• Full legal name of the company; 
• All trade names or “doing business as” names used by the company; 
• The complete current address of the company’s primary place of business (for U.S.-owned companies); for all other cases, the U.S. address of the primary location where the reporting company conducts business;
• The company’s formation jurisdiction;
• If foreign, the jurisdiction where the company was first registered/incorporated, and 
• The company’s IRS Taxpayer Identification Number (“TIN”), which includes the company’s Employer Identification Number (EIN); if a foreign company should report but does not have a TIN, it must report the equivalent to the TIN as issued by its foreign jurisdiction.

Here is a helpful guide created by FinCEN to provide more details on BOI rules: https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet.

What happens if I don’t do it right?

Penalties for non-compliance: Violations are severe for those who willfully provide false information or willfully fail to report complete ownership information. Such violations are subject to substantial civil penalties (up to $500 a day) and criminal penalties (up to $10,000), including up to two years in prison. 

Do real estate investment LLCs have to follow CTA regulations?

Real estate investors and those in the real estate space who meet the criteria outlined above must also comply. While these organizations may already be used to providing BOI for banks, lenders, title agencies, and business partnerships, CTA regulations may require capturing necessary details for a broader number of individuals involved in or invested in the entity for the FinCEN database. 

Are Trusts and Estates included in CTA reporting requirements?

Not all trusts are exempt from CTA requirements. While most trusts will not qualify as a reporting company based on the CTA’s definition, trusts that own one or more entities will qualify as a reporting company and must provide BOI. This means a trustor, trustee, fiduciary or nonfiduciary officeholder, powerholder, or trust beneficiary may qualify as a beneficial owner if they beneficially own at least 25% of the entity or possess substantial control over it. The inclusion of Trustees is explained in the regulation: “through the exercise of his or her powers as a trustee over the corpus of the trust, for example, by exercising control rights associated with shares held in trust.” This means a trustor, trustee, fiduciary or nonfiduciary officeholder, powerholder or trust beneficiary may qualify as a beneficial owner if they beneficially own at least 25% of the entity or possess substantial control over it.

The regulations outline that individuals having “substantial control” of a reporting company held by a trust can include an individual, including a trustee, that directly or indirectly has “substantial control” over a reporting company based on the following: 

• Board representation, serving as a member of the board; 
• Ownership and/or control of a majority of the voting rights or voting powers of the reporting company held in the trust; 
• Rights associated with any financing arrangements or financial interest in a company; 
• Having control over one or more intermediary entities that alone or combined have substantial control over a company that must report; 
• Arrangements, including formal or informal financial or business relationships with other individuals or entities acting as nominees; or 
• Any other contract, arrangement, understanding, relationship, or otherwise.”

In determining whether an individual would be viewed as having at least 25% of the ownership interests in a reporting company held in a trust, the regulation defines this as whether or not the person directly or indirectly owns or controls an ownership interest of a reporting company through “any contract, arrangement, understanding, relationship, or otherwise.” This definition of control includes: a trustee with the authority to dispose of trust assets, a beneficiary who is the sole recipient of income and principal from the trust or all of the help from the trust, or an individual who is a grantor or settlor with the right to revoke the trust or otherwise withdraw the assets of the trust. 

Note that an individual’s overall ownership is also considered, as are the various ways a person may be deemed to “own” an interest. Also, more than one person can qualify as a beneficial owner of a trust’s interest in a reporting company, so all individuals who have interests in the trust holdings and have power over it must be considered for CTA reporting. This includes certain trustors, trustees, office holders, powerholders, and beneficiaries that fall within the definition of a beneficial owner, provided they possess the powers and Ownership described here (and provided in greater detail in the regulation).

Of course, all of this can be complicated by legal tools and trust instruments, for example, those that limit the right to information in silent trusts. Be sure to consult with Wegman Hessler Valore to apply the CTA regulations for your unique circumstances properly.

How to submit and update your CTA information

In compliance with the Paperwork Reduction Act of 1995, reporting companies must file their report information electronically through an online interface. In addition to providing details on ownership and about the entity itself, the reporting company must certify that the report is true, correct, and complete. The rule also requires that reported information be updated as needed, including correcting previous incorrectly reported information within specific timeframes. 

According to the Final Rule, companies have 30 days to update information previously submitted to FinCEN. That 30-day deadline starts on the day the change occurs, whether or not the reporting company has actual or constructive knowledge of the change. 

Wegman Hessler Valore specializes in business law for business leaders, applying legal discipline to solve business problems to help leaders run smarter. For over 50 years, this Cleveland law firm has provided full-service strategic legal counsel for closely held businesses, corporations, and individuals. Practice areas include: business law; litigation; corporate governance; estate planning and wealth protection; intellectual property; family law for business owners; HR and employee matters; commercial real estate; business acquisition, and more. Get in touch to learn more.

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Copyright © Wegman Hessler Valore. This information is for educational purposes. It does not reflect an attorney-client relationship with the author(s) or the firm. This information should not be used as a substitute for professional legal advice in specific situations.