SAN FRANCISCO, CA – October 04, 2024. The Corporate Transparency Act (or CTA) is U.S. (federal) legislation designed to combat illicit financial activities such as money laundering, terrorism financing, and tax evasion. Passed on a bipartisan basis as part of the National Defense Authorization Act in 2021, the CTA introduces new requirements for corporations, limited liability companies (LLCs), and similar entities to disclose key information about their beneficial owners. While the CTA was passed in 2021, many (most) reporting companies will have a January 1, 2025 filing deadline for their first report. Accordingly, with this deadline looming, companies should pay immediate attention to their CTA filing obligations.
The primary goal of the CTA is to prevent individuals from using anonymous shell companies to hide their identities and engage in unlawful activities. Prior to the CTA, Congress asserted that the lack of transparency around company ownership allowed criminals to exploit corporate structures to obscure their financial dealings. The new law requires businesses to provide the Financial Crimes Enforcement Network (or FinCEN) with detailed information about the business and its beneficial owners, which is filed by way of what FinCEN calls a Beneficial Ownership Report (or BOI Report).
Key Provisions of the CTA:
1. Business Information and Beneficial Ownership Reporting: Under the CTA, reporting companies must report their full legal name, tradenames/DBAs, current address, state of formation, and IRS taxpayer identification number; beneficial owners must report their name, date of birth, current address, and a unique identifying number such as a passport or driver’s license. For businesses formed after January 1, 2024, the person(s) who first directly filed to create the business with a Secretary of State or similar entity, as well as anyone who directed or controlled this filing, must also report the same data required of beneficial owners. This information is to be stored in a secure, non-public database maintained by FinCEN. The aim of this reporting structure is to enhance transparency without unduly burdening legitimate businesses.
2. Who Is a Beneficial Owner: An individual who either directly or indirectly owns or controls at least 25% of the ownership interests of the company or who exercises substantial control over its operations. “Substantial control” is generally defined to include senior officers, individuals with appointment or removal authority, or important decision-makers regarding the business, finances, or structure of the company. “Ownership interests” include equity, stock, voting rights, capital or profit interests, convertible instruments, options, or privileges.
3. Who Must Comply: Most domestic and foreign companies operating in the U.S. are required to comply with the CTA, including LLCs, corporations, limited partnerships and similar entities. However, there are exemptions for certain entities, including large corporations (with over 20 full-time employees and more than $5 million in annual revenue), regulated entities like banks and credit unions, money service businesses, brokers/dealers in securities, investment companies/advisers, venture capital fund advisers, insurance companies, pooled investment vehicles, tax-exempt entities, certain tribal entities, and inactive companies. A complete list of exemptions can be found at https://www.fincen.gov/boi-faqs. Consequently, the burden from BOI Reporting will largely fall upon small, private businesses.
4. Enforcement and Penalties: Willful failure to file, late filings, or willful submission of false information can result in civil penalties of up to $500 per day or criminal penalties that include fines of up to $10,000 and/or imprisonment for up to two years for willful violations.
5. How to Report: The BOI Report must be filed electronically through the secure BOI E-Filing system on FinCEN’s website. The website is https://boiefiling.fincen.gov. There is no fee required for submitting BOI Reports.
6. Filing Deadlines: There are various filing deadlines depending on when the reporting company was formed:
- New Companies: Businesses formed after January 1, 2024 but before January 1, 2025 must file beneficial ownership information within 90 days of incorporation or registration. Businesses formed after January 1, 2025 must file within 30 days of incorporation or registration.
- Existing Companies: For businesses formed before January 1, 2024, the deadline to file is January 1, 2025.
- Changes in Ownership: For many reporting companies, this is a one-time filing. However, if there is any change about the company or its beneficial ownership (such as a change in who controls the company or a change in personal details), the company must file an updated report within 30 days of the change
Implications for Businesses: The CTA represents a significant shift in the regulatory environment for businesses operating in the United States. Companies will need to ensure they have systems in place to gather and report accurate beneficial ownership information. While the reporting requirements may pose some administrative burdens, the law is intended to promote corporate transparency and accountability, helping to safeguard the financial system from abuse by criminals and bad actors.
Various legal challenges are before the courts seeking to restrict or invalidate the CTA. At present, it is impossible to predict the outcome of these challenges, and companies should remain prepared to timely file their BOI Report.
In sum, the CTA is intended as a key step in enhancing transparency in the U.S. corporate sector, contributing to the broader global effort to combat financial crime.
This alert is intended to summarize the CTA requirements in a general manner and does not constitute legal advice. More information on the CTA is available on FinCEN’s website at https://fincen.gov/boi, including a Frequently Asked Questions page at https://www.fincen.gov/boi-faqs. In addition, please reach out to any member of your Joseph, Cohen & Del Vecchio legal team, and we can assist you as required.
For Further Information, contact:
Kristina A. Del Vecchio
Partner
Joseph, Cohen & Del Vecchio, PC
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Jonathan D. Joseph
Managing Partner
Joseph, Cohen & Del Vecchio, PC
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Michael L. Kadish
Of Counsel
Joseph, Cohen & Del Vecchio, PC
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James C. Olson
Partner
Joseph, Cohen & Del Vecchio, PC
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Randall Schai
Partner
Joseph, Cohen & Del Vecchio, PC
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Angie Cohen
Associate
Joseph, Cohen & Del Vecchio, PC
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