New Beneficial Ownership Reporting for Closely Held Businesses

December 12, 2023

The Corporate Transparency Act (“CTA”) was enacted January 1, 2021, as part of the National Defense Authorization Act, representing the most significant reformation of the Bank Secrecy Act and related anti–money laundering rules since the U.S. Patriot Act.

The CTA is intended to address and guard against money laundering, terrorism financing, and other forms of illegal financing by mandating certain entities (primarily small and medium size businesses) to report “beneficial owner” information to the Financial Crimes Enforcement Network (“FinCEN”).

The CTA authorizes FinCEN, a bureau of the U.S. Treasury Department, to collect, protect, and disclose this information to authorized governmental authorities and to financial institutions in certain circumstances.

As an update to our prior article on the CTA - Additional business financial reporting requirements on the horizon - the following is a current summary of the Business Ownership Information (BOI) reporting requirements:

Who is required to file a report?

Entities required to comply with the CTA (“Reporting Companies”) include corporations, limited liability companies (LLCs), and other types of companies that are created by a filing with a secretary of state or equivalent official. The CTA also applies to non-U.S. companies that register to do business in the U.S. through a filing with a secretary of state or equivalent official. Since the definition of a domestic entity under the CTA is extremely broad, additional entity types could be subject to CTA reporting requirements based on individual state law formation practices.

There are 23 exceptions to who is required to file under the CTA. Entities that meet the filing exception include publicly traded companies, nonprofits, and certain large operating companies. Many of the exceptions are entities already regulated by federal or state governments and as such already disclose their beneficial ownership information to governmental authorities. A complete list of exemptions can be found in FinCEN’s Small Entity Compliance Guide.

Who are the beneficial owners and company applicants?

A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” or owns or controls at least 25% of the ownership interests of a reporting company.

An individual exercises “substantial control” if the individual (i) serves as a senior officer of the company; (ii) has authority over the appointment or removal of any senior officer or a majority of the board; or (iii) directs, determines, or has substantial influence over important decisions made by the Reporting Company. Thus, senior officers and other individuals with control over the company are beneficial owners under the CTA, even if they have no equity interest in the company.

Reporting companies created on or after January 1, 2024, must identify at least one but no more than two company applicants. All company applicants must be individuals and there are two categories of company applicants to be reported:

Category 1: Direct filer is the individual who directly filed the document creating the domestic reporting company or registering the foreign reporting company. Direct filers must be reported as a company applicant.
Category 2: The individual who directs or controls the filing action – the individual primarily responsible for directing or controlling the filing of the creation or registration document. This category of company applicants is only required to be filed when more than one individual participates in the filing of the creation or registration document.

What information needs to be filed?

The following information on the reporting company must be reported:

Full legal name and any trade names or “doing business as” names.
U.S. address of the principal place of business
Jurisdiction of formation
IRS taxpayer identification number (TIN)

The following information must be reported for each required beneficial owner and company applicant:

Full legal name
Date of birth
Complete residential address (except for individual who acts as a company applicant during the individual’s business, these individuals may provide their business address)
Unique identifying number from a non-expired passport, government-issued ID document, or driver’s license.

When to file - Phase-in of reporting requirements:

As currently promulgated, the CTA’s reporting requirements will be phased-in in two stages:

All new Reporting Companies — those formed (or, in the case of non-U.S. companies, registered) on or after January 1, 2024 — must report required information within 90 days after their formation or registration.
All existing Reporting Companies — those formed or registered before January 1, 2024 — must report required information no later than January 1, 2025.

How to prepare for the CTA

With the CTA introducing a new and expansive reporting regime, now is the time to assess the new rules’ implications on your organization. Some questions and comments for your company to consider now, although not meant to be all inclusive, include:

Is your company subject to the CTA or do you qualify for any of the exemptions?
If your company is not exempt, how should you calculate percentages of “ownership interests” to determine whether any owners meet the 25%-ownership threshold? In many companies with simple capital structures, the answer will be obvious. It may be much less obvious, however, for companies with complicated capital structures (given the expansive definition of “ownership interest”), or companies in which some ownership interests are held indirectly — for example, through upper-tier investment entities, holding companies, or trusts.
How do you assess and determine each person who exercises “substantial control” over the company? There may well be multiple people who qualify, given the expansiveness (and vagueness) of the “substantial control” definition.
What new processes and procedures should the company put in place to monitor future changes in its beneficial owners and reportable changes on existing beneficial owners that will require timely updated reports to FinCEN? Note that the types of information that must be provided to FinCEN (and kept current) for these beneficial owners include the owner’s legal name, residential address, date of birth, and unique identifier number from a non-expired passport, driver’s license, or state identification card (including an image of the unique-identifier documentation). A word of caution, this is going to be a trap for Reporting Companies, as you will need to rely on beneficial owners to timely update you on reportable changes to their information (e.g., ownership changes, moves, marriages, divorces, etc.). As a result, a company’s operative documents may need to be revised to include provisions related to the CTA such as representations, covenants, indemnifications, and consent clauses. For example, the operating agreement may require:
- A representation by each shareholder, member, or partner, as applicable, that it will be in compliance with or exempt from the CTA; \
- covenant by each shareholder, member, or partner, as applicable, requiring continued compliance with and disclosure under the CTA or to provide evidence of exemption from its requirements;
- An indemnification by each shareholder, member, or partner, as applicable, to the company and its other shareholders, members, or partners, as applicable, for its failure to comply with the CTA or for providing false information; and
- A consent by each disclosing party for the company to disclose identifying information to FinCEN, to the extent required by law.

Fines and Penalties:

Note that penalties for willfully violating the CTA’s reporting requirements include (1) civil penalties of up to $500 per day that a violation is not remedied, (2) a criminal fine of up to $10,000, and/or (3) imprisonment of up to two years.

Take immediate action now!

As the CTA is not a part of the tax code, the assessment and application of many of the requirements set forth in the regulations, including but not limited to the determination of beneficial ownership interest, necessitate the need for legal guidance and direction. As such, since we are not attorneys, our firm is not able to provide you with any legal determination as to whether an exemption applies to the nature of your entity or whether legal relationships constitute beneficial ownership.

We strongly encourage you to reach out as soon as possible to legal counsel with expertise in this area to assist your organization with the steps you need to take to ensure compliance with the CTA, if applicable.

For additional information regarding the beneficial ownership reporting requirements under the CTA, refer to the current FinCEN’s Frequently Asked Questions document at Beneficial Ownership Information Reporting.

Please contact your Herbein advisor if you have questions regarding this article.

Article contributed by Molly O'Toole