The Corporate Transparency Act
On January 1, 2024, the Corporate Transparency Act (CTA) will go into effect. The CTA is designed to combat fraud, corruption, money laundering, terrorism, and other financial crimes by the creation of a new federal database of beneficial ownership information (BOI). This new reporting system will require corporations, limited liability companies, and other entities to furnish BOI reports to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
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While many businesses are accustomed to filing annual reports, these new reporting requirements are quite expansive and include information beyond the scope of disclosure typically required by state regulators.
Am I obligated to provide reports under the CTA?
Unless an exemption applies, domestic entities such as a corporation, limited liability company, or other entity created by the filing of a document with a Secretary of State or similar State or Tribal office is considered a “reporting company” for purposes of the CTA. Foreign entities that have registered to do business in the United States by the filing of an application for authority to do business, or similar instrument are also subject to the CTA reporting requirements. FinCEN has yet to provide guidance on how it will address foreign entities that should have registered in a U.S. jurisdiction but fail to do so.
What are the exemptions under the CTA?
The CTA offers over 20 exemptions which include: highly regulated entities such as banks, insurance companies, and reporting issuers registered under the Securities Exchange Act of 1934, as amended; “large operating companies” which the CTA defines as entities that have more than 20 full-time employees in the U.S., an operating presence at a physical office in the U.S. and filed a tax return for the previous year showing more than $5 million in gross receipts or sales from a U.S. source; government authorities and certain tax-exempt entities; and certain subsidiaries of CTA exempt entities.
We note that for purposes of the large operating company test, gross receipts or sales from sources outside the United States are excluded. For example, a large Canadian corporation (worldwide annual revenue of over $5 million in the aggregate) has registered to do business in New York. However, when foreign revenue is excluded, U.S. source income is less than $1 million. Under the CTA, the Canadian company would likely be considered a reporting company obligated to file BOI reports with FinCEN, unless a different exemption is available. Similarly, if instead of being registered in the U.S. itself, the Canadian entity did business through a wholly-owned subsidiary incorporated in New York, that U.S. subsidiary would be considered a reporting company and obligated to file BOI reports about itself and its beneficial owners.
What Information must be reported to FinCEN?
Companies that are not exempt from reporting must provide information regarding their “beneficial owners.” For purposes of the CTA, beneficial owners are (i) individuals who own, directly or indirectly, 25% or more of the entity or (ii) individuals who exercise a significant degree of control over the company, such as senior officers.
Reporting companies are obligated to report the following information about itself and its beneficial owners:
- Reporting Companies: basic information about the entity itself, such as its full legal name, any d/b/a used, physical address, employer identification number etc. The physical address must be a street address and cannot be the address of a third party (such as a company formation agent).
- Beneficial Owner: full legal name, date of birth, address, a unique ID number and the issuing jurisdiction of an acceptable ID document, such as a current driver's license or passport, and an image of the document from which the unique ID number was obtained. For U.S. individuals, acceptable ID documents include a driver’s license or U.S. passport. Non-U.S. persons that do not have a U.S. issued ID must furnish a foreign passport. In addition, the party that formed the reporting entity, referred to as the "applicant", has his/her/its own reporting requirements.
When Should Reports be Filed?
- Initial Reports.
- Entities in existence prior to January 1, 2024 must file their initial report with FinCEN no later than January 1, 2025.
- Entities formed or registered between January 1, 2024 and December 31, 2024 will need to file initial reports within 90 days of formation/registration.
- Entities formed or registered on or after January 1, 2025 will be required to file initial reports within 30 days of formation/registration.
- Ongoing Reporting. The obligation to update/correct reports is continuous. If there is any change to a report that has already been filed with FinCEN (such as new address, new contact information, change in control or correction of information), such changes must be reported within 30 days after the triggering event.
- Formerly Exempt Entities. If an entity that had previously qualified for an exemption but no longer qualifies, that entity must file a report within 30 days.
What are the Penalties for Failure to File Required Reports?
Failure to file required reports could result in a civil penalty of up to $500 for each day that the violation continues and criminal penalties, including a fine of up to $10,000 and/or up to 2 years imprisonment.
Will BOI be Public?
BOI will be accessible only to federal agencies engaged in national security, intelligence and enforcement, state and local law enforcement, foreign law enforcement, and financial regulators. Financial institutions may have access to BOI reports for due diligence matters if consented to by the reporting company.
What Should Businesses Do to Prepare for the CTA?
Determine if the entity is a reporting company or exempt. As a threshold matter, every business should review the list of exemptions to determine what, if any, reporting obligations they have under the CTA.
- Review Corporate Structure and Management
- Entities may want to revisit organizational documents to ensure ongoing compliance from beneficial owners. For example, limited liability companies may want to update their operating agreements to include provisions that require members to provide necessary information for BOI reports, and impose liability for failure to provide the required information.
- Review and update information on its beneficial owners, officers and managers.
- Entities may want to revisit organizational documents to ensure ongoing compliance from beneficial owners. For example, limited liability companies may want to update their operating agreements to include provisions that require members to provide necessary information for BOI reports, and impose liability for failure to provide the required information.
- Implement Monitoring Systems. Because reporting obligations under the CTA are continuous, businesses should take steps to ensure that they have and maintain up-to-date personal information of management and ownership.
- FinCEN Identifiers. In order to streamline the reporting process, beginning in January, 2024, FinCEN will issue unique IDs to individuals and reporting companies. In lieu of providing personally identifiable information, individuals can provide reporting companies with their FinCEN ID.
Some Questions We Anticipate:
→ We are a large Canadian company (assets and annual revenue over $5 million) with a wholly-owned subsidiary that is registered to do business in New York State.
- Does the subsidiary have to submit a FinCEN disclosure filing?
- Does the Canadian parent corporation have to submit a FinCEN disclosure filing?
- Does the ownership of the Canadian parent company have to submit a FinCEN disclosure filing?
- If so, all of the owners? Some of the owners?
→ We are a Canadian company that has a wholly-owned subsidiary company in the United States but that company is not registered in any state.
→ We are a Canadian company that makes material sales in the United States and we have a salesperson in the United States, but we are not registered in the United States.
→ We are a Canadian company whose shares trade on the TSX in Canada. We have a wholly owned United States subsidiary. How do we show beneficial ownership given that we are a “public” company in Canada?
→ What form of identification is required for Canadian citizens disclosed in a FinCEN report?
FinCEN requires government photo ID. We recommend a form of government photo ID be provided by all non-U.S. persons disclosed in a report.
→ We have multiple special purpose entities that own a single property. Must every entity file separately or can we do a group filing? Do the principal individuals who control the subsidiaries indirectly have to be disclosed?
→ Our business entity has multiple passive family members as shareholders. Must we identify all of them in the filing? What about children and family trusts?
→ My company has shares outstanding that are owned by a family trust. Must I identify the beneficiaries of the trust or can I identify the trustee only?
→ We are a foreign company owned entirely by one or more United States citizens. Ancillary question – we are a foreign company controlled by one or more United States citizens.
→We are a United States company with foreign investors who have no meaningful control of the company but may have a substantial investment.
Please note, the discussion of the CTA contained herein is based on regulations and guidance published to date and should not be construed as legal advice. No attorney-client relationship is created by our offering information through this website. You should seek legal counsel regarding your own obligations based on your specific circumstances.
