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Business Update: Corporate Transparency Act

News |Mar 27, 2024|5 min read

Effective as of January 1, 2024, the Corporate Transparency Act (“CTA”) requires a wide range of business entities to provide personal information about their owners and managers to the Financial Crimes Enforcement Network (“FinCEN”).

Enacted by Congress to promote transparency and combat financial crimes, the CTA requires certain legal entities (“Reporting Companies”) to report information about individual owners and managers (“Beneficial Owners”) and individuals involved in the entity’s formation (“Company Applicants”) to FinCEN. FinCEN issued the Beneficial Ownership Information Reporting Requirements final rule on September 30, 2022, and has also published a Small Entity Compliance Guide and a list of Frequently Asked Questions.

At Scholten Fant, our attorneys are well-versed in the intricacies of corporate compliance. We have developed the following list of common questions and answers regarding the CTA, and we are ready to guide you through its requirements.

Which entities are subject to the reporting requirements?

Unless an exemption applies, the following are Reporting Companies:

  • Corporations, limited liability companies, or other entities created under the laws of a U.S. state or Indian tribe by the filing of a document with a secretary of state or similar office.
  • Entities created under the laws of a foreign jurisdiction and registered to do business in any U.S. State or tribal jurisdiction by filing of a document with a secretary of state or similar office.

Which entities are exempt from the reporting requirements?

A Reporting Company is only exempt if it falls under one of twenty-three exemptions. The exemptions include insurance companies, financial institutions, broker-dealers, investment companies and advisors, SEC reporting companies, and other publicly registered entities.

Exemptions that may apply to privately held companies include:

  • Large operating companies that have operations at a physical office in the U.S., directly employ more than 20 full time employees in the U.S., and have filed a federal income tax return or information return showing more than $5 million in gross receipts or sales from sources within the U.S.;
  • Subsidiaries of certain exempt entities;
  • Inactive entities formed prior to January 1, 2020, which are not engaged in active business, not owned by a foreign person, have not undergone a recent change in control, and do not own any assets.

Exemptions for tax-exempt entities include IRC 501(c) organizations (not limited to IRC 501(c)(3) organizations) and certain political organizations. Not all tax-exempt entities are exempt from the reporting requirements. For example, condominium associations and other homeowners associations covered by IRC 528 are not exempt.

Notably, there is no exemption for holding or parent companies. If a holding company owns an exempt large operating company, for example, the holding company may be subject to the reporting requirements even though its subsidiary is exempt.

What information are Reporting Companies required to report?

A nonexempt Reporting Company is required to submit a report to FinCEN containing information about the company itself, its Beneficial Owners, and certain Company Applicants:

  • The Reporting Company: full legal name, trade/DBA names, current address for its principal place of business, jurisdiction of formation or registration, and taxpayer ID number.
  • Beneficial Owners and Company Applicants: full legal name, date of birth, residential address, and information from (along with an image of) a U.S. passport, state driver’s license or other government-issued identification.

A Beneficial Owner is defined as any individual who, directly or indirectly, 1) exercises “substantial control” over a reporting company (including senior officers and anyone with substantial influence over important decisions), or 2) owns or controls at least 25% of the ownership interests of a reporting company.

When are these reports due?

For Reporting Companies formed or registered before January 1, 2024, the deadline is January 1, 2025. For Reporting Companies formed or registered during the calendar year 2024, the deadline is 90 calendar days after receiving notice of the company’s creation or registration. For Reporting Companies formed or registered after January 1, 2025, the deadline is 30 days after receiving notice of the company’s creation or registration. Changes in beneficial ownership or other reported information must be reported within 30 days.

What are the penalties for failure to comply with the CTA?

The failure to report complete or updated beneficial ownership information to FinCEN may result in civil or criminal penalties, including fines of $500 per day up to $10,000, and imprisonment for up to two years. Senior officers of a Reporting Company that fails to file a required BOI report may be held accountable for that failure.

What is the status of the constitutional challenge to the CTA?

On March 1, 2024, a federal court in Alabama held that the CTA is unconstitutional. Pursuant to that decision, which is pending appeal, enforcement of the CTA is currently enjoined only as to the plaintiffs in that action, including existing members of the National Small Business Association. FinCEN has noted that all others must “comply with the law and file beneficial ownership reports.” Scholten Fant will continue to monitor developments closely.

This newsletter was prepared by Benjamin P. Stoep. If you have any questions or would like assistance with Corporate Transparency Act compliance, please contact your Scholten Fant attorney or any member of the Scholten Fant Business Practice Group.