The Corporate Transparency Act: – Beneficial Ownership Information of “Reporting Companies”

What is the Corporate Transparency Act (CTA)

 

The CTA was enacted in 2021 to enhance the transparency in entity structures and ownership in an effort to combat money laundering, tax fraud, and other illegal activities. One of its key elements, beginning in 2024, will require all “reporting companies” to disclose certain beneficial ownership information (BOI) to the U.S. Treasury’s Financial Crimes and Enforcement Network (FinCEN). Beginning January 1, 2024, “reporting companies” will need to submit a report to FinCEN which contains personal information about the reporting company’s “beneficial owners.”

 

Reporting Company

 

A “reporting company” can include a domestic reporting company or a foreign reporting company. A domestic reporting company is any corporation, including C corporations and S corporations, limited liability company (LLC), including a single member LLC, limited partnership or similar entity (e.g., LLPs and LLLPs) created by filing a document with any U.S. state, territory or Indian tribe (domestic reporting companies). A foreign reporting company is any non-U.S. entity that registers to do business with any U.S. state, territory or Indian tribe (foreign reporting companies).

 

Trusts (other than trusts created by a filing, such as statutory or business trusts, e.g., Delaware Statutory Trust) are themselves not reporting companies. Similarly, a sole proprietorship would not be a reporting entity.

 

Exempt Companies

 

The CTA and the regulations provide 23 exemptions from the reporting company definition. These exemptions generally apply to highly regulated businesses, including:

 

• Large Operating Companies

  • For the large operating company exemption, the entity must have:

    • 20 or more full-time employees in the U.S.;
    • Operating presence at a physical office in the U.S. (not including a residence or shared space, except spaces shared with affiliates); and
    • Filed a tax return in previous year showing more than $5 million in U.S.-sourced gross receipts or sales.

  • Meeting the 20 full-time employees requirement is tested on a per-entity basis, but the gross receipts or sales reported on the tax return requirement can be measured based on the reported gross receipts or sales of a consolidated group on a consolidated tax return.

   

• Publicly Traded Companies

  • The regulations exempt issuers of securities registered under Section 12 of the Securities Exchange Act of 1934 and issuers of securities required to file supplementary or periodic information under Section 15(d) of the Securities Exchange Act of 1934.

   

• Banks

  • As defined in the regulations, banks are excluded from the reporting company definition.
  • Some other bank-type entities are also excluded, such as regulated private trust companies.

   

• Tax-Exempt Entities

  • Tax-exempt entities, as defined in the regulations, generally include organizations described in Internal Revenue Code (IRC) Section 501(c) and exempt from tax under IRC section 501(a).

   

• Other Exempt Entities

  • Domestic governmental authorities;
  • Registered money transmitting businesses;
  • Broker-dealers;
  • Securities exchange or clearing agents;
  • Other exchange act registered entities;
  • Registered investment companies and advisers;
  • Venture capital fund advisers;
  • State-regulated insurance companies and state-licensed insurance producers;
  • Commodity exchange act registered entities;
  • Public accounting firms;
  • Public utilities;
  • Financial market utilities;
  • Pooled investment vehicles;
  • Entities assisting tax exempt entities;
  • Subsidiaries of exempt entities (i.e., subsidiaries of the above listed exceptions); and
  • Inactive entities.

   

Information Required to be Reported

 

Reporting companies must identify each of their “beneficial owners.” A “beneficial owner” is any individual who, directly or indirectly, exercises “substantial control” over the reporting company OR who “owns” or “controls” at least 25% of the “ownership interests” in a reporting company (ownership interests include equity, stock, or voting rights, capital or profit interests, convertible instruments, options, and any other instrument, contract, or other mechanism used to establish ownership).

 

Once the beneficial owner individual(s) is/are identified, each reporting company will be required to submit its BOI reports to FinCEN. A reporting company will be required to identify itself and report four pieces of information about each of its beneficial owners:

• Name,
• Birthdate,
• Address, and
• A unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such document).

 

If an individual provides the four pieces of information to FinCEN directly, the individual may obtain a “FinCEN identifier,” which can then be provided to FinCEN on a BOI report in lieu of the required information about the individual. The information submitted is only to be disclosed to federal and state law enforcement agencies in specified circumstances, and to financial institutions in connection with their know-your-customer obligations with the reporting company’s consent.

 

Timing

 

Existing entities formed prior to Jan. 1, 2024, will have one year from that date to file their initial BOI report.

 

New entities formed after Jan. 1, 2024, must file their initial BOI report within 30 days after their formation. However, on Sept. 28, 2023, FinCEN proposed extending this deadline to 90 days for entities formed in calendar year 2024.

 

Procedures/Penalties

 

The submission process has not been finalized, but the reports are expected to be filed electronically through an online interface. Reports will not be accepted until January 1, 2024.

 

The CTA provides for both civil and criminal penalties (up to $10,000 and two years’ imprisonment) for willfully providing false information, failing to provide complete information or failing to update information. An individual may be held liable under the CTA if they caused the failure or were a senior officer at the time of the failure.

 

Forthcoming submission and filing instructions, as well as additional guidance, is expected to be issued by FinCEN as the 2024 reporting year nears.

 

 

The summary information in this document is being provided for education purposes only. Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.

 

About FGMK

 

FGMK is a leading professional services firm providing assurance, tax and advisory services to privately held businesses, global public companies, entrepreneurs, high-net-worth individuals and not-for-profit organizations. FGMK is among the largest accounting firms in Chicago and one of the top ranked accounting firms in the United States. For over 50 years, FGMK has recommended strategies that give our clients a competitive edge. Our value proposition is to offer clients a hands-on operating model, with our most senior professionals actively involved in client service delivery.