CLIENT ALERT
By Attorneys Alexander Pyle, Andrew Newcombe, and Kaitlin Murphy
The Corporate Transparency Act (CTA) has recently taken effect. The CTA is an important new Federal reporting requirement that may affect your company beginning in 2024.
Overview
The CTA was enacted as part of the Federal Anti-Money Laundering Act of 2020. Under the CTA, the Department of the Treasury has enacted regulations that became effective on January 1, 2024. The vast majority of private companies formed or registered to do business in the United States, if not exempted (Reporting Companies), will now be required to file a new report with the Financial Crimes Enforcement Network (FinCEN). Willful failure to submit this filing, or the willful submission of incorrect or fraudulent information, could subject a company and its senior officers to potential civil and criminal liability, including significant fines and/or up to two years’ imprisonment.
Reporting Requirements
For Reporting Companies formed or registered prior to January 1, 2024, the initial filing must be completed before January 1, 2025. However, any new Reporting Company formed between January 1, 2024 and December 31, 2024 must submit its initial report within 90 days after formation. Reporting Companies formed on or after January 1, 2025 will have 30 days from formation to submit an initial report.
In addition to the initial reports, the CTA requires Reporting Companies to provide supplemental reports within 30 days of a change to previously reported information. Consequently, companies will need to view the CTA as an ongoing obligation and will need to establish internal oversight mechanisms to ensure and maintain compliance.
These reports must be submitted via the secure Beneficial Ownership Information (BOI) E-Filing System accessible at boiefiling.fincen.gov. Companies may either use a fillable PDF that can be uploaded to the BOI E-Filing System or file directly through a web application on the site. There are also a number of service companies that are able to assist with the filing process. While the CTA reporting requirement is intended to be relatively straightforward, Reporting Companies with more complicated ownership or control structures may need to make more nuanced determinations about the information to be reported. Sheehan Phinney can work with clients to help with these determinations.
Report Information
The CTA requires Reporting Companies to submit the following information to FinCEN:
- The Reporting Company’s full legal name and any trade name(s), address, and jurisdiction of formation;
- Identifying information (including names, residential addresses, and a copy of a government-issued ID) for all of the Reporting Company’s “Beneficial Owners” (see below for information about identifying Beneficial Owners); and
- For entities formed on or after January 1, 2024, identifying information for “Company Applicants” – the individual who primarily directed or controlled preparation of the formation or registration documents for the entity and the individual who submitted the filings.
Identifying Beneficial Owners
The most significant and potentially challenging aspect of this new reporting requirement will be the identification of Beneficial Owners and the collection of their personally identifying information for filing purposes. Beneficial Owners are the individuals who directly or indirectly: (1) own or control at least 25% of the ownership interests of a Reporting Company; or (2) exercise substantial control over a Reporting Company.
For purposes of identifying individuals who meet the 25% ownership threshold, Reporting Companies must consider all ownership interests, whether owned directly or indirectly, including options, warrants, convertible securities, etc. Further, Reporting Companies must calculate an individual’s ownership percentage by assuming that all of that individual’s warrants and options have been exercised and all of that individual’s convertible debt or other securities have been converted into equity. Note that Beneficial Owners must always be individuals, so if a Reporting Company’s ownership interests are held through another entity, it is necessary to identify the owners of that other entity to determine if their indirect ownership of the Reporting Company through the other entity (combined with any direct interest they hold) is 25% or more.
With respect to the substantial control test, Beneficial Owners include individuals who are senior officers; hold appointment and/or removal authority over senior officers or a majority of the board of directors (or similar body) of the company; are important decision-makers with respect to the company’s business, finances, and/or structure; or have any other form of substantial control over the Reporting Company.
Further Information
This Client Alert is just a high-level overview of the CTA. Further information about the CTA and its requirements, including a Small Entity Compliance Guide, Frequently Asked Questions, and other reference materials, is available at FinCEN’s website, https://www.fincen.gov/boi. In addition, Sheehan Phinney is ready to answer your questions and to help you understand how the filing requirements apply to your company.
Conclusion
The CTA creates an entirely new reporting system which will take time to understand and comply with. There are still uncertainties about how some situations will be handled, and it is likely that FinCEN will issue additional guidance in the coming months.
While companies formed prior to January 1, 2024 will have until the end of 2024 to submit their initial filings, we encourage our clients to begin gathering information and documents for this new reporting requirement as soon as possible. Subject to compliance timelines, however, it may be prudent to allow a period of time before making any required filings in order to determine what issues may be identified or addressed.
At this time, Sheehan Phinney does not plan to file FinCEN reports for clients, but we are available to assist our clients in evaluating reporting obligations and developing compliance strategies.