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Client Alert: Corporate Transparency Act Compliance

Corporate Transparency Act Compliance Columbus, Ohio

The Corporate Transparency Act (CTA), which aims to combat money laundering, tax fraud, the financing of terrorism, and other illicit activity through the use of anonymous shell and front companies, has officially gone into effect. This new requirement affects nearly all of our clients by requiring “reporting companies” to report beneficial ownership information (BOI) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). New business entities will also have to disclose information about who created the entity or registered it to do business in the U.S. 

Is Your Business Required to Comply with the CTA?

Your business is considered a “reporting company” under the CTA if it is a corporation, limited liability company, or any other entity created by filing a document with the Secretary of State. Reporting companies also include foreign entities that are registered to do business in the United States. 

However, the CTA contains numerous exemptions which effectively limit CTA compliance to small businesses. The most common exemptions we expect to see include:

  • Large operating companies – businesses with more than 20 full-time employees in the US, that reported more than $5 million in gross receipts or sales on last year’s federal income tax return, and that operate from a physical office in the U.S.
  • Certain inactive businesses that existed on or before January 1, 2020
  • Insurance companies and producers (Note: To qualify for the exemption, producers must be state-licensed and subject to the supervision of the state’s insurance commission or similar official and must operate from a physical office within the U.S.)
  • Tax-exempt entities
  • Subsidiaries that are wholly owned or controlled by certain exempt entities

What Information Must Be Reported About My Business?

If your company is considered a reporting company and no exemption applies, then there are generally 3 categories of information that will be reported to FinCEN: information about the company itself, information about the beneficial owners, and for new entities, information about its “company applicants.” 

Reporting company information will include the company’s legal name, any trade names (whether registered or not), a street address, jurisdiction of formation or registration, and the tax ID number. 
Beneficial ownership information will include information about any individual who, directly or indirectly, exercises substantial control over the company (including senior management) or owns or controls 25% or more of the ownership interests in the company. The rules surrounding ownership interests are designed to drill down to the individuals who ultimately own or control the company, regardless of how their ownership interest is held. Because of this, holding your ownership interest in a reporting company through various layers of other entities (including trusts) won’t prevent your personal information from being disclosed. Similarly, the rules also apply to convertible interests, warrants, rights to purchase interests, options, etc. No matter what you might try to call it, if it looks or sounds like an ownership interest, it is an ownership interest under the CTA. 

If your company is considered a reporting company and no exemption applies, then there are generally 3 categories of information that will be reported to FinCEN: information about the company itself, information about the beneficial owners, and for new entities, information about its “company applicants.” 

Reporting company information will include the company’s legal name, any trade names (whether registered or not), a street address, jurisdiction of formation or registration, and the tax ID number. 
Beneficial ownership information will include information about any individual who, directly or indirectly, exercises substantial control over the company (including senior management) or owns or controls 25% or more of the ownership interests in the company. The rules surrounding ownership interests are designed to drill down to the individuals who ultimately own or control the company, regardless of how their ownership interest is held. Because of this, holding your ownership interest in a reporting company through various layers of other entities (including trusts) won’t prevent your personal information from being disclosed. Similarly, the rules also apply to convertible interests, warrants, rights to purchase interests, options, etc. No matter what you might try to call it, if it looks or sounds like an ownership interest, it is an ownership interest under the CTA. 

Company applicant information will include information about the 1-2 individuals directly responsible for creating a new entity. However, this information is only required for new entities created on or after January 1, 2024. 

What Personal Information Must be Disclosed?

If you are considered a beneficial owner or a company applicant, the BOI report will include your full legal name, date of birth, complete residential street address, a unique identifying number from an unexpired government-issued ID, and an image of that ID showing the unique identifying number. Certain company applicants, primarily attorneys, can use their business address in lieu of their residential address. Any beneficial owner or company applicant can also apply for a FinCEN ID, which can then be used in lieu of providing personal information directly to the reporting company. If you choose to apply for a FinCEN ID, keep in mind that you will be responsible for updating your information if and when it changes. 

When is My BOI Report Due?

If your company was created before January 1, 2024, then you have until January 1, 2025, to file the initial BOI report. 

​If you create a reporting company between January 1 – December 31, 2024, then you will have 90 days to file the initial BOI report. 

If you create a reporting company on or after January 1, 2025, then you will have 30 days to file the initial BOI report. 

​If your entity loses its exemption from the reporting requirements, then you will have 30 days to file the initial BOI report. 

If information about either the reporting company or its beneficial owners changes, then you will have 30 days to update or correct the BOI report. 

Penalties for Noncompliance

While CTA compliance may be a hassle, especially for entities with several beneficial owners and/or complicated ownership structures, keep in mind that there are significant penalties for non-compliance. The CTA imposes penalties of up to $10,000 in fines and up to 2 years imprisonment for willfully providing or attempting to provide false or fraudulent BOI or willfully failing to report complete or updated BOI to FinCEN. These penalties can be imposed on both the reporting company and the individual beneficial owners. Additional penalties can be imposed for knowingly disclosing or using BOI reported to FinCEN in an unauthorized manner. 

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Next Steps

Don’t wait until the last minute to deal with this new compliance issue. We have created a client questionnaire to determine whether your company is a reporting company, who the beneficial owners are, and what information needs to be collected from each individual. We are ready to begin working with clients to ensure their initial beneficial ownership information reports are filed in a timely manner. 

Consider having us update your LLC operating agreement or corporate shareholder agreements to require all beneficial owners to cooperate in providing the information necessary to comply with the CTA and to notify the company when any of that information changes. 

As data privacy laws continue to proliferate, we can also assist clients with putting in place data privacy and confidentiality policies to comply with new and existing laws and reassure those who will be sharing their personal information. 

Consider dissolving inactive businesses and subsidiaries to simply reporting requirements. 

Notify us immediately if there is any change in your company’s beneficial ownership and/or the personal information of any individual identified as a beneficial owner. 

Finally, watch out for scams! FinCEN is already reporting fraudulent attempts to collect personal information from individuals. You will not receive a compliance notification from FinCEN. If you do receive any notices, do not click on the links or open the QR codes. The only individuals who should be involved in your company’s BOI reporting are your beneficial owners, attorneys, and/or accountants. Do not trust a random third party that claims to provide this compliance service.

If you have any questions about CTA compliance or any other regulatory requirements applicable to your business, don’t hesitate to schedule a client meeting or consultation today. 

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