The Corporate Transparency Act Is Now in Effect – Here’s Everything You Need to Know

The Corporate Transparency Act (“CTA”), codified under 31 U.S.C. § 5336, was enacted to prevent the use of anonymous shell companies to engage in illicit activity, such as tax fraud, money laundering, financing for terrorism, etc. As of January 1, 2024, the CTA is in effect. Because of the broad reach of this new law, businesses everywhere must understand whether the CTA applies to them and, if so, how to comply. As your local law office with expertise in business law, Thakur Law Firm is here to help you understand how these changes may affect your operations.

Traditionally, companies that enjoy some form of limited liability are required by the law of their state to file documentation with their Secretary of State. Although this has not changed, the CTA now requires that these companies, subject to certain exemptions discussed below, file documentation called a beneficial ownership information (“BOI”) report with the Financial Crimes Enforcement Network (“FinCEN”).

Deadlines

The following deadlines apply:

• “Reporting companies” (defined below) registered before January 1, 2024, must submit a BOI report to FinCEN by January 1, 2025;

•  Reporting companies registered during the calendar year 2024 must submit their BOI report within 90 days after registration;

•  Reporting companies registered on or after January 1, 2025, must submit their BOI report within 30 days after registration; and

• When the information provided within the BOI report is no longer accurate, corrections must be made within 30 days of the report becoming inaccurate.  

Reporting Companies

Reporting companies subject to the CTA include domestic and foreign reporting companies, but this article will only focus on domestic reporting companies.  Subject to several exemptions, a domestic company is a reporting company if it is a (i) corporation, (ii) limited liability company, or (iii) any other entity that was created by the filing of a document with a Secretary of State or comparable office.  Again, nearly all companies that enjoy some form of limited liability have documents filed with their Secretary of State, meaning that the CTA is far-reaching.  

Exemptions

There are numerous categories of express exemptions to the reporting requirements.  The exemptions include (i) securities reporting issuers, (ii) governmental authorities, (iii) banks, (iv) credit unions, (v) depository institution holding companies, (vi) money services businesses, (vii) brokers or dealers in securities, (viii) securities exchange or clearing agencies, (ix) other Exchange Act registered entities, (x) investment companies and investment advisors, (xi) venture capital fund advisors, (xii) insurance companies, (xiii) accounting firms, (ix) public utilities, (x) financial market utilities, (xi) pooled investment vehicles, (xii) tax-exempt entities, (xiii) entities assisting tax-exempt entities, (xiv) larger operating companies (i.e., with 20 or more full-time employees in the United States, more than $5 million in revenue in the previous year, and a physical operating presence in the United States), (xv) subsidiaries of certain exempt entities, and (xvi) inactive entities.  

It is highly advised to seek legal counsel to help determine whether one of these exemptions applies, especially because violators of the CTA may incur civil penalties of up to $500 per day and criminal penalties of up to $10,000 and/or two years of imprisonment. At Thakur Law Firm, we specialize in business and corporate law and are here to help determine whether your business falls under these exemptions. Don’t wait until the deadline is up, get in touch with our team to get started!  

BOI Reports

This section will focus on the information that must be disclosed in the BOI report.  First, BOI reports must provide general information about the reporting company, including its full legal name, any trade or “doing business as” (DBA) name, complete current United States address, its State or Tribal territory, and its Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including Employer Identification Number (EIN)).  

Additionally, BOI reports must disclose certain information about the reporting company’s “beneficial owners” and “company applicants.”  Please see below for a discussion of these terms and their applicability.  Beneficial owners and company applicants must provide their full legal name, date of birth, complete current address (meaning residential address, except for company applicants who register the company in the course of their business, in which case the business address applies), and the unique identifying number and image from a non-expired United States passport or State identification documents, such as a driver’s license.  A foreign passport may be used if the beneficial owner or company applicant does not have any of the previously mentioned documents.  

Alternatively, where an individual has obtained a “FinCEN identifier” and provided it to a reporting company, the reporting company may include such FinCEN identifier in lieu of reporting the individual’s information.  A FinCEN identifier is a unique identifying number that FinCEN will issue to an individual or reporting company upon request after such individual or reporting company provides certain information to FinCEN.  To obtain a FinCEN identifier, individuals must electronically apply, but reporting companies need only check the applicable box in the BOI report.  Although FinCEN identifiers can be useful, they are not required.     

What Is a Beneficial Owner?

A beneficial owner is one who either (i) exercises substantial control over a reporting company, or (ii) owns or controls at least 25 percent of the ownership interest of a reporting company.  

The following individuals exercise substantial control: (a) senior officers; (b) those with authority to appoint or remove certain officers or a majority of directors of the reporting company; (c) important decision-makers; and (d) those with any other form of substantial control over the reporting company.  Reporting companies must identify all individuals who exercise substantial control, without limitation.  

Concerning the 25-percent ownership interest metric, it is important to understand that “ownership interest” includes the following: (a) equity, stock, or voting rights; (b) capital and profit interests; (c) convertible instruments; (d) options and other non-binding privileges to buy or sell any of the foregoing interests; and (e) any other instrument, contract, or other mechanism used to establish ownership.  

Finally, specific rules apply to trusts that qualify as a reporting company.  Individuals are deemed to hold an ownership interest in the company and thus must be reported if they are: (a) a trustee or otherwise have the authority to dispose of trust assets; (b) a beneficiary who is the sole permissible recipient of trust income and principal or who has the right to demand a distribution of or withdraw substantially all the trust assets; and (c) a grantor or settlor with the right to revoke or otherwise withdraw trust assets.  

What Is a Company Applicant?

Domestic reporting companies created on or after January 1, 2024, must report company applicants.  Companies created before January 1, 2024, need not report company applicants.  Companies that must report company applicants will report either one or two company applicants.  

Company applicants are always individuals.  There are two types – (i) direct filers, and (ii) those who direct or control the filing action.  All companies that must report company applicants must identify a direct filer – the individual who directly filed the document that created the domestic reporting company.  However, individuals who direct or control the filing action must only be identified where applicable.  Such individuals are those primarily responsible for directing or controlling the filing of the creation or first registration document, even though they did not actually file such document.  

Please note that professional service providers involved in the formation of the reporting company, including attorneys, paralegals, certified public accountants (CPAs), and other similar professionals constitute company applicants if they meet the foregoing criteria.  

Conclusion

As mentioned above, the CTA is widely applicable to businesses in California and throughout the United States, and substantial penalties are attached to those companies that fail to comply.  It would be unwise to conclude without legal counsel that the CTA does not apply to your business.  Thakur Law Firm is proud to be your local expert in corporate and business law, offering the services you need to determine whether or not these changes will impact your operations. Contact our experts to get started today!    

Written by: Benjamin Skelton