In January 2021, Congress passed the Corporate Transparency Act (CTA), which introduced federal reporting obligations for countless private companies that had previously been exempt from disclosing ownership information. Regulations implementing the CTA came into effect as of January 1, 2024.

With some notable exceptions, most legal entities incorporated, organized, or registered to do business in the United States are now considered to be “reporting companies” that must disclose information relating to their owners, officers and controlling persons with the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury Department.

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The consequences for failing to adhere to the reporting obligations outlined in the CTA can be severe, encompassing hefty fines of up to $10,000 (accruing at a rate of $500 per day that a reporting violation continues) and potential incarceration for a term of up to two years. As such, it is of utmost importance for all business owners to comply with the ongoing reporting obligations under the CTA.

Congress passed the CTA to curb the use of anonymous shell and front companies for illicit activities such as money laundering, terrorist financing, and tax fraud, while also aligning the United States with international standards. To achieve these goals, the CTA mandates that reporting companies disclose all “beneficial owners,” which term encompasses all individuals who, directly or indirectly (i) control or own at least 25% of the ownership interests in a reporting company, or (ii) exercise substantial control over the reporting company.

The CTA reporting requirements are anticipated to impact approximately 30 million existing business entities and will apply to an additional 3-4 million new entities each year. Whether you are establishing a company to start a new business venture, serve as a holding company, acquire assets of an existing entity, or any other reason, it is likely that the CTA will impose reporting obligations on your enterprise. The CTA is likely to present challenges for private funds, family offices, and angel investors who have traditionally favored keeping their private investments shielded from public disclosure.

Who Must Comply:

Under the CTA, the obligation to file Beneficial Ownership Information Reports (BOIRs) with FinCEN applies exclusively to “reporting companies,” which term encompasses domestic privately-held US entities as well as foreign entities registered to transact business in one or more US states or tribal jurisdictions. Absent an exemption, under the CTA, the definition of “reporting companies” includes U.S. corporations, limited liability companies, and any other entities established through the submission of documents to the secretary of state or a comparable authority (including tribal authorities) in accordance with state or tribal law. Foreign entities that have registered to transact business with a U.S. state or tribal government are also subject to CTA reporting requirements, subject to the various exemptions in the CTA.

Exemptions:

The CTA excludes 23 categories of entities that are exempt from reporting company requirements, and which are not required to file BOIRs with FinCEN. Illustrative exemptions include public companies registered with the SEC, certain insurance companies, various tax-exempt entities under Section 501(c) of the Internal Revenue Code, and subsidiaries of exempt entities. Notably, a “large operating company” is exempt if it meets the following criteria: the entity employs over 20 full-time employees in the United States, has submitted federal U.S. income tax returns for the previous year demonstrating more than $5 million in gross receipts or sales in the aggregate (excluding receipts and sales from sources outside of the U.S.), and has an operating presence at a physical office within the U.S. This exemption primarily benefits established enterprises, as new entities (including many startups) will find it challenging or impossible to fulfill the prerequisites, particularly those related to prior-year tax filings.

What Must “Reporting Companies” Disclose?

Reporting companies will need to provide FinCEN with information about the reporting company and the company’s “beneficial owners” as part of their BOIRs. Reporting companies formed on or after January 1, 2024 (or foreign entities registered in a U.S. jurisdiction on or after January 1, 2024) are also required to disclose information regarding their “company applicants” who are, essentially, the individuals who directly filed (or were primarily responsible for filing) the first document creating or registering the reporting company. The information included in the initial BOIR must include the full legal name, date of birth, current street address, and a unique identification number (passport number, driver’s license number, etc.) for each beneficial owner and each company applicant.

When are the CTA Filing Deadlines?

The deadlines for reporting companies are as follows:

  1. Domestic or foreign reporting companies created or registered to do business in the United States prior to January 1, 2024 have until January 1, 2025 to file an initial BOIR with FinCEN.
  2. Domestic or foreign reporting companies created or registered to do business in the United States on or after January 1, 2024 (and before January 1, 2025) have 90 calendar days from their formation or registration to do business in the United States to file an initial BOIR with FinCEN.
  3. Domestic or foreign reporting companies created or registered to do business in the United States on or after January 1, 2025 will have 30 calendar days from their formation or registration to do business in the United States to file an initial BOIR with FinCEN.

BOIR filings may be made with FinCEN through the BOI E-Filing System available at https://boiefiling.fincen.gov/. For the avoidance of doubt (and to the relief of many), CTA reporting is not managed by the IRS. With that said, filers should be careful to ensure that their tax returns and other IRS filings are consistent with both their filed BOIRs as well as their reporting company organizational documents.

A reporting company will also need to update its information on file with FinCEN within a year of any change to its beneficial ownership information. Finally, if a reporting company has submitted inaccurate information, it must file a corrected report within 14 calendar days of the date it became aware or should have reasonably become aware of the inaccurate information.

Some reporting companies may find it advantageous to wait until closer to the initial BOIR filing deadline to make their initial report to FinCEN to potentially avoid the necessity of filing updated information if beneficial ownership information of the reporting company changes prior to the applicable initial filing deadline.

Penalties for Noncompliance:

Failure to comply with CTA requirements (including by submitting false information) may result in civil or criminal penalties, including fines of up to $10,000 and a maximum prison term of 2 years, or both. Inaccurate or late reports will accrue civil fines of $500 per day for as long as the reports remain inaccurate or late, up to a maximum of $10,000. Additional penalties will apply to anyone who knowingly uses or discloses BOIR information submitted to FinCEN.

Get Ready Now:

The deadlines to comply with the CTA are fast approaching. If you have questions about how the CTA will affect your business, or whether you will need to report under the CTA, you can contact Tim Forsman or Chris Raddatz in the Corporate & Finance Practice Group at Gammage & Burnham.

Authors: Timothy Forsman and Christopher Raddatz are part of the Corporate & Finance Practice Group at Gammage & Burnham. This article contains general information only and does not constitute legal advice. Readers are encouraged to consult with legal and accounting professionals regarding the subject matter hereof.