The Corporate Transparency Act (CTA) – Requirement and Rationale

Every entity required to report will have to disclose its beneficial owners. A beneficial owner is defined as either of the following:

• A natural person who exercises substantial control over the entity; or
• A natural person who owns or controls at least 25% of the ownership interest in the entity.

A person with substantial control over an entity is someone who (i) serves as a senior officer, (ii) has authority to appoint or remove a senior officer, or (iii) can direct or make substantial decisions over important matters.  If the ownership or control of a reporting entity is held in a trust, a trustee or any person who has the right to revoke the trust or withdraw its assets (such as a grantor or settlor) could be a beneficial owner, as could a beneficiary who has the right to demand distributions.

For entities created after January 1, 2024, the person forming the entity, including attorneys and legal assistants, will also be subject to the CTA’s disclosure requirements.

Exemptions

There are a total of 23 exemptions from this law, but most of them are limited to a few industries (such as banks, credit unions, accounting firms, investment firms, public utilities, insurance companies). The potentially relevant general exemptions are as follows:

Large Operating Company – A company is exempt if it:

• Employs more than 20 full time employees in the U.S.; AND
• Has a physical office in the U.S.; AND
• Filed a federal tax return in the last year that showed $5 million or more in gross sales/receipts.

A business must meet all three criteria to qualify for this exemption.

Inactive Entity – A company is exempt if it:

• Was in existence on or before January 1, 2020; AND
• It is not engaged in active business now; AND
• It is not owned by a foreign person, either in whole or in part; AND
• There has been no change in ownership in the preceding 12-month period; AND
• It has not sent or received any funds in an amount greater than $1,000 (even indirectly) in the preceding 12-month period; AND
• It does not otherwise hold any assets.

A business must meet all of these criteria to qualify for this exemption.

Tax-exempt entity – A company is exempt if it:

• Falls under IRC section 501(c) and is exempt under IRC section 501(a); OR
• Is a political organization exempt under IRC section 527(a); OR
• Is a charitable or split-interest trust under IRC section 4947(a)(1) or 4947(a)(2).

A business must meet just one of these criteria to qualify for the exemption.

Subsidiary of an Exempt Entity – If an entity is wholly owned by one or more exempt entities (with certain limited exceptions), it is also exempt.

Disclosure – Information and Timing

If a business is not exempt, and if it existed on December 31, 2023, it will need to fulfill its disclosure obligations in 2024. Companies created in 2024 will have just 90 days from the date of organization to comply, and companies created in 2025 or later will have just 30 days from the date of organization to comply.

The required disclosure consists of information about the business itself (the legal name of the entity, its trade name or DBA if any, its address, jurisdiction, and federal taxpayer number) and the following information for each beneficial owner:

• Name
• Date of Birth
• Home address
• A unique government identifier (US passport number or state driver’s license number)
• An uploaded image of the government-issued document showing the identifier

How Does Reporting Work?

Non-exempt businesses will need to submit reports to FinCEN through a portal at https://www.fincen.gov/boi, and any changes in information reported to FinCEN must be disclosed within 30 days.

Companies should first determine whether they qualify for an exemption or whether they will need to file a report in 2024. For reporting companies, the next step is to identify the beneficial owners of the company whose data will need to be disclosed. For many reporting entities, and trusts holding beneficial or controlling interests in reporting entities, the list may be short and straightforward. However, this step may require further analysis for companies with numerous directors or owners or companies with complex ownership structures.

Penalties

Businesses that fail to comply or that report inaccurate or false information can receive a civil fine of $500 per day for as long as the violation continues, and non-complying individuals may be subject to a fine of up to $10,000 and two years in prison.

What If You Still Don’t Want to Report?

Reporting is not optional. If a business is on the cusp of an exemption, there may be steps that can be taken to push the business toward an exemption. In addition, transitioning a person away from having an interest or a level of control that would make the person a beneficial owner might also be an option. However, a person who retains controlling authority over a business after having sold it on paper remains a beneficial owner under this law.

Beware of Fraudulent Solicitations

Many businesses will be contacted by persons offering to assist in complying with the CTA. Beware of retaining or providing any information to any such persons until their legitimacy is verified.

Please don’t hesitate to reach out to Kelly Rowland or Lynn Ma in our firm with any questions.