Corporate Transparency Act (CTA) Set to Take Effect

What Businesses Need to Know Now

In 2021, as part of the National Defense Authorization Act, Congress established the Corporate Transparency Act (CTA) to prevent money laundering, financing of terrorism, tax evasion, corruption and other illicit activity. The Financial Crimes Enforcement Network (FinCEN) was charged with enforcing this Act by establishing the Beneficial Ownership Information (BOI) reporting rules for corporations, limited liability companies (LLCs) and other reporting entities, effective in January 2024.

The BOI report will be provided to certain government agencies with proper authorization to aid, prevent and detect crime. Specifically, FinCEN will share information with federal, state, local and tribal officials, as well as certain foreign officials who submit a request through a U.S. federal government agency, to obtain beneficial ownership information for authorized activities related to national security, intelligence and law enforcement. Information collected includes various identifying information about the beneficial owners of a company as well as the individuals that formed or registered it. Keep reading to learn more:

Background on Beneficial Ownership Information (BOI) Reporting

• Who must file a report? First, let’s explore what companies need to file the BOI report. A “reporting company” is a company that must report various information about its beneficial owners. This company can take two forms – domestic or foreign. A domestic reporting company is a corporation, LLC or other entity formed or created in the U.S. by filing with the Secretary of State under the laws of a state. This would even include a “single member LLC” (SMLLC) that may not file a separate tax return. A foreign reporting company is an entity registered to do business in any U.S. state.
• Who does not need to file a report? FinCEN does not require all companies to file BOI reports. It has provided 23 exemptions for types of companies that do not need to adhere to the requirement. Each entity stands on its own. Related companies under common control cannot be aggregated as one to determine eligibility. Interpretation of reporting rules can be complicated and could call for legal advice. If an entity is not required to file with the Secretary of State or equivalent, it may not be required to report under the CTA. Some of the notable filing exemptions are as follows:
  • Publicly Traded Companies;
  • Tax-Exempt Entities;
  • Bank and Credit Unions;
  • Brokers or Dealers in Securities;
  • Insurance Companies;
  • Accounting Firms;
  • Public Utilities;
  • Inactive Entities;
  • Large Operating Companies;
  • All 23 exemptions are found in the “BOI Small Compliance Guide” (See Chart 2 in Chapter 1 of this Guide).
• How is a “Large Operating Company” defined in this list of exemptions? FinCEN focuses on the company’s employees, the location of its business operations and its gross receipts for this determination. The company must employ more than 20 full-time employees (with full-time measured as an employee that works an average of 30 or more hours per week) and more than 20 employees in the U.S. Next, the company must have a physical presence in the U.S. to conduct its operations. The company must also file a U.S. tax return for the prior year (on Form 1120; Form 1120-S; or Form 1065) showing more than $5 million of gross receipts or sales. If the company has sales from sources outside of the U.S., these are excluded and, therefore, the balance of the company’s gross receipts must still exceed $5 million. This large operating company exemption may apply to many mid-sized companies, too, relieving them from filing BOI forms.
• Who is treated as a beneficial owner of a reporting company? Once it is determined that an entity is a reporting company, the next step is to identify who the beneficial owner of the company is. FinCEN defines a beneficial owner as any individual who directly or indirectly:
  • Owns 25% or more of the ownership in the reporting company; or
  • Exercises substantial control over the reporting company.
• It is likely a reporting company will have more than one beneficial owner. The BOI guide noted above addresses what an ownership interest and substantial control are in more detail. Please refer to this guide to help you determine who is or is not a beneficial owner of the company. The guide also addresses certain exceptions in which an individual is not treated as a beneficial owner of the company.
• What is a “Company Applicant” for BOI reporting purposes? Another individual that must be included on the BOI report, besides the beneficial owner, is described as the “company applicant.” Each reporting company must have at least one company applicant but no more than two. The company applicant must be an individual person, not a company or separate entity.It should be noted that there are two types of company applicants. One is described as the “direct filer,” who directly files the forms to create the entity with the Secretary of State. The other is described as the individual that directs or controls the filing action with the registration. A company applicant only applies to new reporting companies formed on or after January 1, 2024 – it does not apply to companies formed before January 1, 2024. Again, this company applicant is further addressed in the BOI guide.
• Now that we have determined what a reporting company is, who a beneficial owner of the company is, and who a company applicant is, what information is provided in the BOI report? Let’s turn to the reporting company: it must include its legal and/or trade name; U.S. address; and state of jurisdiction. Further, each beneficial owner and company applicant needs to provide the individual’s name; date of birth; current address; and a unique identifying number from a passport, driver’s license or other form.

Due Dates for BOI Filing

Once a company has determined all of the above, it needs to know what form to file and when to file it. Starting on January 1, 2024, BOI reports can be filed electronically using FinCEN’s secure filing system. Domestic or foreign reporting companies that meet the above criteria must file the initial BOI report by January 1, 2025. However, any reporting company created in 2024 must file a BOI report within 90 days of the earlier of:

• The date it receives actual notice, or;
• The date of creation from the public notice itself.

In addition, a reporting company must file a BOI report within 30 days if there is a change in its beneficial ownership information. This includes changes in the ownership of the entity, in who exercises control over the entity and a change of address for a beneficial owner. There are many situations in which an updated BOI form must be filed, and an entity will constantly need to monitor its BOI information and that of its beneficial owners. The BOI guide should be referenced to determine when these changes must be reported. The required filing of this updated BOI form within the 30-day period is cause for concern – as many businesses could be penalized for noncompliance or late filing.

In September, FinCEN extended this 30-day filing period to 90 days for the initial filing year of 2024; but in November, it indicated that the 90 days for new entity filing only applies for 2024. For 2025 and after, this is scaled back to 30 days. No other dates have been changed at this point by FinCEN. The due dates can be summarized as follows:

• The new reporting rules are effective January 1, 2024;
• Reporting companies created or registered before January 1, 2024 will have one year, until January 1, 2025, to file its initial reports;
• Reporting companies created or registered after January 1, 2024 will have 90 days after creation or registration to file its initial reports. This 90-day period only applies for the 2024 year, and then drops to 30 days beginning in 2025;
• 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 its beneficial ownership information.

Company Response to BOI Reporting, as well as a Tax Practitioner’s Perspective

• Companies need to become familiar with these new rules, whether it is a long-standing company or a newly created one. Businesses should determine if it is a reporting company or not, and whether any of the exemptions apply. If it is a reporting company, determining the beneficial owners can be an involved process in some cases.These forms have not yet been released by FinCEN but should be unveiled soon, as companies will need to begin filing these. The actual filing of the BOI form is important to address, with steep penalties for noncompliance or late filings. Penalties can be up to $500 per day, and additional consequences could be up to two years in prison and a $10,000 fine.
• Tax practitioners are learning about the BOI reporting as well. There are still many uncertainties with BOI and the exposure is significant, so many practitioners are deciding not to directly assist clients with it. It should be noted that both accountants and attorneys are proceeding very cautiously, and this puts companies in a position to deal with the BOI online reporting internally or seek other outside parties that may focus on providing this compliance service.

Possible BOI Legislation

Congress has received some pushback from various business groups about the BOI reporting. There is pending legislation in Congress that may delay the initial filing of existing companies from January 1, 2025 to January 1, 2026. Still, initial filing for companies first created in 2024 remains. The House passed this legislation nearly unanimously before it adjourned for the year, and the legislation is awaiting action in the Senate. We will continue to monitor this.

We will follow BOI and any further guidance on this from FinCEN. Please contact your Sikich advisor with any questions.