The Corporate Transparency Act (CTA) took effect on January 1, 2024, requiring many small and mid-sized businesses to file a beneficial ownership information (BOI) report with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). This act is a part of the US government’s efforts to fight against illicit financial activities, such as money laundering, terrorist financing, and tax fraud.
On March 1, 2024, however, the U.S. District Court of the Northern District of Alabama ruled the CTA unconstitutional because it cannot be justified as exercising Congress’s enumerated powers. Note, however, that the court’s final judgment states the enforcement against the “Plaintiffs” is enjoined. Then FinCEN announced on its website that while it complies with the court order, the US Justice Department has filed a Notice of Appeal on March 11, 2024, and that the CTA continues to be effective for businesses other than the plaintiffs of the case. Yet, another case challenging the constitutionality of the CTA is underway in the US District Court for the Northern District of Ohio, and more similar cases are predicted to follow in other jurisdictions. On the other hand, some states are moving toward adopting their own laws similar to the CTA. Businesses should pay close attention to further developments related to the CTA and be aware that FinCEN considers businesses other than the “Plaintiffs” of the Alabama federal district court case to still be subject to the filing requirements under the CTA.
1. Entities Subject to the CTA (Reporting Companies)
Unless qualified for an exemption (see “2. Exempt Entities”), the following entities, defined as “reporting companies” under the CTA, must file a ROI report:
- Domestic companies (including corporations and limited liability companies)
- Foreign companies legally formed in a foreign country and registered with a secretary of state or any similar office in the United States
2. Exempt Entities
Many publicly traded companies, tax-exempt nonprofit organizations, and certain large operating companies are exempt from the CTA’s reporting requirements. Specifically, there are 23 types of entities that are exempt as follows: (1) securities reporting issuers, (2) governmental authorities, (3) banks, (4) credit unions, (5) depository institution holding companies, (6) money services businesses, (7) brokers or dealers in securities, (8) securities exchange or clearing agencies, (9) other Exchange Act registered entities, (10) investment companies or investment advisers, (11) venture capital fund advisers, (12) insurance companies, (13) state-licensed insurance producers, (14) Commodity Exchange Act registered entities, (15) accounting firms, (16) public utilities, (17) financial market utilities, (18) pooled investment vehicles, (19) tax-exempt entities, (20) entities assisting a tax-exempt entity, (21) large operating companies, (22) subsidiaries of certain BOI-reporting exempt entities, and (23) inactive entities.
FinCEN provides detailed criteria for each exemption in its guidelines.
For example, an entity qualifies for (21) “large operating companies” if all six of the following criteria are met:
1) The entity employs more than 20 full-time employees as provided in 26 CFR 54.4980H-1(a) and 54.4980H-3. In general, a “full-time employee” means, with respect to a calendar month, an employee who is employed on average at least 30 hours per week or 130 hours per month with an employer.
2) More than 20 full-time employees are employed in the United States.
3) The entity has a physical office, leased or owned, to conduct its business within the United States.
4) The entity filed a federal income tax or information return in the United States for the previous year for more than $5,000,000 in gross receipts or sales.
5) The entity reported greater than $5,000,000 gross receipts or sales (net of returns and allowances) on Form 1120, consolidated Form 1120, Form 1120-S, Form 1065, or other applicable IRS form.
6) When gross receipts or sales from sources outside the United States are excluded, the amount remains greater than $5,000,000.
Also, an entity qualifies for (23) “inactive entities” if all six of the following criteria are met:
1) The entity was in existence on or before January 1, 2020.
2) The entity is not engaged in active business.
3) The entity is not owned by a foreign person or entity, whether directly or indirectly, wholly or partially.
4) The entity has not experienced any change in ownership in the preceding 12-month period.
5) The entity has not sent or received any funds of more than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period.
6) The entity does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.
3. Deadlines to File a BOI Report
The following deadlines apply to file a BOI report:
- Entities created or registered by December 31 2023: January 1, 2025
- Entities created or registered in 2024: within 90 calendar days either the earlier of (i) from the time the reporting company receives actual notice of creation or registration, or (ii) after a secretary of state first provides public notice of creation or registration.
- Entities created or registered on or after January 1, 2025: within 30 calendar days either the earlier of (i) from the time the reporting company receives actual notice of creation or registration, or (ii) after a secretary of state first provides public notice of creation or registration.
4. What to Report
A reporting company needs to submit the information/documentation about itself and each of its beneficial owner(s) and company applicant(s) (if any) as follows:
4.1. Reporting Company
1) Full legal name
2) Any trade names or “doing business as” names (DBAs)
3) Current US street address of its principal place of business. If the principal place of business is outside the United States, the street address from which the entity conducts business in the United States.
4) Jurisdiction of formation or registration
5) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)). If a foreign entity does not have a TIN issued by the US Internal Revenue Service, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction).
4.2. Beneficial Owner and Company Applicant
1) Full legal name
2) Date of birth
3) Street address
・Beneficial Owner: Residential address
・Company Applicant: Business address if a company applicant works in corporate formation in the course of the company applicant’s business; otherwise, residential address must be reported.
4) (i) An identifying number and (ii) issuing jurisdiction from, and (iii) image of, one of the following non-expired documents:
・U.S. passport
・State driver’s license
・State driver’s license
・If an individual does not have any of the above documents, foreign passport
If an individual has obtained a FinCEN identifier, the entity may include the FinCEN identifier (see “8. FinCEN Identifier”) in its report instead of the above information about the individual.
5. Beneficial Owner
A beneficial owner is an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests.
5.1. Substantial Control
An individual is exercising substantial control if the individual (1) is a senior officer (e.g., president, chief executive officer, chief financial officer, chief operating officer, or any other officer with a similar function), (2) has an authority to appoint or remove certain officers or a majority of directors (or similar body), (3) is an important decision-maker (e.g., decisions on business, finances, and structure), or (4) has any other form of substantial control over the reporting company (e.g., a new and unique ways of controlling the reporting company).
A mere status as a member of the board of directors does not automatically make the member a beneficial owner of the reporting company. Whether a particular director is a beneficial owner needs a director-by-director analysis under the above criteria.
5.2. Ownership or Control of at Least 25%
An individual who directly or indirectly owns or controls at least 25% of the reporting company’s ownership interests is a beneficial owner of the reporting company. This means an individual who owns an interest in the parent company of the reporting company may also be a beneficial owner of the reporting company if all conditions are met. For example, an individual, who owns 70% interest in a parent company with a 50% ownership interest of the reporting company, is a beneficial owner of the reporting company, because the individual indirectly has a 35% ownership interest of the reporting company (50% x 70% = 35%).
If a reporting company is owned by a parent (intermediate) company with 25% or more ownership interests, the reporting company should not report the parent company but only the individuals under the above-mentioned criteria. However, there are two exceptions when the reporting company may submit the intermediate entity in lieu of an individual beneficial owner: (1) the intermediate entity is an exempt entity; and (2) the beneficial owners of the reporting company and the intermediate company are the same individuals.
Also, there are five exceptions to a beneficial owner, and they are: (1) a minor child, (2) a beneficial owner’s nominee, intermediary, custodian, or agent, (3) the entity’s employee unless the employee has substantial control over or economic benefits from the entity, (4) an inheritor who has a future interest in the entity, and (5) the entity’s creditor.
6. Company Applicant
Reporting companies created or registered on or after January 1, 2024 need to report their company applicants. Reporting companies must report up to two company applicants who (1) directly files the document that creates or registers the reporting company with a secretary of state or similar office and, (2) if more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing. The reporting company’s accountant or lawyer could be a company applicant if they meet the above criteria.
7. How to File a BOI Report
7.1. Initial Report
Reporting companies can file an initial BOI report electronically through online or PDF form via FinCEN’s e-Filing website (select “File BOIR”).
7.2. Changes and Corrections to BOI Report
Any change to the previously reported information about a reporting company or its beneficial owner(s) must be updated within 30 days after the date of the change (e.g., new CEO, name change due to marriage, an updated driver’s license number and image). Changes to the information of a company applicant do not need to be reported.
Any inaccuracy of the information about the reporting company, its beneficial owners, or its company applicants in the submitted BOI report must be corrected within 30 days after the date the reporting company became aware of the inaccuracy or had reason to know of it.
Updated BOI reports require all fields to be submitted, including the updated information and previously submitted, unchanged information. Entities may want to consider using a fillable PDF version, a copy of which can be saved and resubmit to FinCEN, or FinCEN identifier to simplify its preparation for refiling.
8. FinCEN Identifier
8.1. FinCEN Identifier Generally
A “FinCEN identifier” is a unique identifying number that FinCEN issues to an individual or an entity upon request. When a beneficial owner or company applicant has obtained a FinCEN identifier, reporting companies may submit the FinCEN identifier instead of the information required about the individual. An individual and an entity may only receive one FinCEN identifier. However, a FinCEN identifier is not required for a BOI report.
8.2. How to Apply FinCEN Identifier
Beneficial owners and company applicants may request a FinCEN identifier by submitting required information (see “4.2. Beneficial Owner and Company Applicant”) via a web form.
Reporting companies may request a FinCEN identifier by checking a box on the BOI report upon submission. If a reporting company wishes to obtain a FinCEN identifier after submitting its initial BOI report, it may do so by submitting an updated BOI report along with its request for a FinCEN identifier, even if the reporting company does not otherwise need to update its information.
A FinCEN Identifier will be issued immediately after the submission of required information.
8.3. Changes and Corrections to FinCEN Identifier
Any changes to the information reported to obtain a FinCEN identifier need to be updated no later than 30 days after the date of such changes. Any inaccuracies to the reported information need to be corrected within 30 days after the individual or the entity became aware of the inaccuracy or had reason to know of it.
Changes to a company applicant’s information previously reported do not need to be updated.
9. Penalty
An individual who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. That individual may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000. Both individuals and entities can be held liable for willful violations.
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