Corporate Transparency Act: New Reporting Rules for 2024

As of January 1, 2024, the Corporate Transparency Act (CTA) is in effect, mandating many U.S. entities, along with foreign entities operating in the U.S., to report detailed information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau within the U.S. Treasury Department. This requirement also extends to entities formed on or after January 1, 2024, which must report information about their “company applicants” who create or register them. Collectively, these mandates are known as the “BOI Reporting Rule.” The information provided is stored in a secure, non-public government database.

The CTA aims to enhance transparency and combat activities like money laundering, fraud, corruption, tax evasion, organized crime, and other illicit actions. Noncompliant entities, along with their owners and officers, face severe penalties, including civil fines, criminal charges, and even imprisonment.

Additionally, several states have begun proposing legislation that mirrors the CTA’s provisions, aiming to establish their own state-level databases of beneficial ownership information.

With the federal beneficial ownership reporting requirements now in effect, the following outlines the CTA’s key requirements and suggested action steps. For more comprehensive details, refer to FinCEN’s Small Entity Compliance Guide.

The BOI Reporting Rule applies to both U.S. and non-U.S. entities. A “reporting company” — an entity required to comply with the BOI Reporting Rule — includes the following:

Domestic Reporting Companies

• Corporations
• Limited Liability Companies (LLCs)
• Any other entity created by filing a document with a secretary of state or similar office under the law of a U.S. state or American Indian tribe

Foreign Reporting Companies

• Corporations, limited liability companies, or other entities formed under the laws of a foreign (non-U.S.) country and registered to do business in any U.S. state or American Indian tribe jurisdiction by filing a document with a secretary of state or similar office under the law of a U.S. state or American Indian tribe

If your entity qualifies as a reporting company, you must comply with the BOI Reporting Rule unless it falls under one of the 23 exemption categories. Some of the broad exemptions include:

Broad-Based Exemptions

• Issuers of Public Securities: Entities registered under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)
• Securities Filers: Entities required to file supplementary and periodic information under the Exchange Act
• Banks and Credit Unions
• Insurance Companies
• Tax-Exempt Entities: Including Section 501(c)(3) organizations
• Registered Broker-Dealers: And other entities registered under the Exchange Act
• Commodity Entities: Such as commodity pool operators and commodity trading advisors registered under the Commodity Exchange Act
• U.S. Government Entities and Public Utilities

Large Operating Companies

A “large operating company” is exempt if it meets the following criteria:

1. Employment: Employs more than 20 full-time employees in the United States;
2. Physical Presence: Has an operating presence at a physical office within the United States;
3. Tax Filing: Filed a federal income tax return in the United States for the previous year showing more than $5 million in gross receipts or sales (net of returns and allowances), excluding receipts or sales from outside the United States

Newly formed entities that have not yet filed a U.S. tax return are not exempt, even if they meet the employment and physical presence criteria. Additionally, the tax return must show $5 million derived solely from U.S.-sourced receipts or sales.

Subsidiaries of Exempt Entities

Except for certain cases such as money services businesses and pooled investment vehicles, if a parent entity is exempt from the BOI Reporting Rule, its subsidiary is also exempt from reporting.

Investment Advisors and Pooled Investment Vehicles

• SEC-Registered Investment Advisors
• Venture Capital Fund Advisors
• Pooled Investment Vehicles

Reporting Company Information

Each reporting company is required to provide:

• Full legal name (including any trade or “doing business as” names)
• Address
• Jurisdiction of creation/registration
• Taxpayer identification number
• Details about all beneficial owners

Beneficial Ownership Information (BOI)

A beneficial owner is any individual who directly or indirectly exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests. The required information for each beneficial owner includes:

• Full legal name
• Date of birth
• Complete current residential street address
• Unique identifying number, issuing jurisdiction, and an image of a non-expired U.S. passport, state driver’s license, foreign passport, or other identification document issued by a state or local government or an American Indian tribe

Company Applicants

Reporting companies created or registered on or after January 1, 2024, must also provide information about the “company applicant.” The company applicant is the individual who physically or electronically filed the document that initially created or registered the reporting company with the secretary of state or similar office. Key points include:

Each reporting company can have no more than two company applicants.

The person who directly files the document that creates the reporting company (or registers a foreign reporting company) is considered the company applicant.

If multiple individuals are involved, the person primarily responsible for directing or controlling the filing must also be reported as a company applicant.

Continuous Reporting Requirements

After the initial filing, reporting companies must submit any updates or revisions to the Beneficial Ownership Information (BOI) within 30 calendar days of any change. This requirement also applies to entities that were previously exempt but no longer qualify for exemption. Failure to comply with these reporting requirements can result in civil or criminal penalties.

Furthermore, if a reporting company or individual obtains a FinCEN identifier number, they must ensure that the information provided to FinCEN remains current.

The Corporate Transparency Act (CTA) defines a “beneficial owner” as any individual who, directly or indirectly, exercises “substantial control” over a reporting company or owns or controls at least 25% of its ownership interests.

FinCEN expects every reporting company to identify at least one beneficial owner, though there is no limit on the number of beneficial owners that may be reported, unlike the restriction for Company Applicants.

Substantial Control

An individual is deemed to exercise “substantial control” over a reporting company if they:

• Serve as a senior officer: This includes roles such as president, CFO, COO, general counsel, or any other officer with similar responsibilities, regardless of title.
• Have authority over appointments or removals: This includes having control over the appointment or removal of any senior officer or a majority of the board of directors (or similar governing body).
• Influence important decisions: This encompasses directing, determining, or having substantial influence over significant decisions made by the company.
• Exert other forms of control: Any other manner of substantial control over the reporting company also qualifies.

Means of Control

An individual may exercise “substantial control” over a reporting company through various means, including:

• Board representation

• Ownership or control of a majority of voting power or rights

• Rights linked to financing arrangements or interests in the company

• Control over intermediary entities: Entities that themselves exercise substantial control over the reporting company.
• Business or financial relationships: Formal or informal arrangements or relationships, including those involving nominees.
• Contracts and agreements: Any other contract, arrangement, understanding, or relationship that confers control.

Next Steps

• Consider forming new entities before January 1, 2024: If you plan to create a new entity, doing so before this date can simplify compliance with initial reporting requirements.
• Amend governing documents: Ensure that beneficial owners are required to provide timely and accurate personal information to facilitate compliance with the BOI Reporting Rule.
• Establish protocols for PII: Develop policies for handling personally identifiable information (PII) that will be sent to FinCEN.
• Track changes in beneficial ownership: Create a process for monitoring and reporting any changes in beneficial ownership information promptly to FinCEN.

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