Understanding the Corporate Transparency Act’s Company Reporting Obligations

IN DEPTH

“REPORTING COMPANIES” AND THE INFORMATION THEY HAVE TO REPORT

Only “reporting companies” are subject to the CTA’s reporting requirements. A “reporting company” includes (1) any corporation, LLC, limited partnership or similar entity created by filing a document with any US state, territory or Indian tribe (domestic reporting companies), and (2) any non-US entity that registers to do business with any US state, territory or Indian tribe (foreign reporting companies). Trusts (other than trusts created by a filing, such as statutory or business trusts) are themselves not reporting companies.

On September 30, 2022, the US Department of the Treasury (Treasury) issued final regulations detailing what information must be reported to FinCEN. Generally, reporting companies must provide information on the reporting company itself, its “beneficial owners” and its “company applicants” (with the company applicant reporting only relevant for entities formed on or after January 1, 2024).

1. Reporting Company: Each reporting company must provide the company’s legal name, trade name or “doing business as” name, current address, the company’s jurisdiction of formation (or, for a foreign reporting company, the state, territory or tribal jurisdiction where it first registers) and the company’s EIN. Foreign reporting companies must provide a foreign tax identification number if they do not have an EIN.
2. Beneficial Ownership Information (BOI): 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). The regulations provide guidance for “substantial control” and “owns or controls.” For example, an individual has substantial control if such individual exercises a certain degree of power over a reporting company, like serving as a senior officer (e.g., president, chief executive officer, chief financial officer or general counsel) for the company. This definition is broad and can include anyone who has the authority to appoint or remove certain officers or a majority of directors or who has direction or substantial influence over important matters at the reporting company, such as compensation schemes and incentive programs for senior officers. A reporting company can have multiple beneficial owners and will always have at least one person that is reportable under the “substantial control” prong of the beneficial owner tests.
3. Company Applicants: Up to two “company applicants” must be identified for reporting companies formed on or after January 1, 2024. The two company applicants include (1) the individual who directly files the document to create or register the reporting company, and (2) the individual who is primarily responsible for directing or controlling such filing (if more than one individual participates in the filing). For example, Individual A, who wants to create a company, prepares the necessary formation documents and directs Individual B to file the documents with the relevant state office. Individuals A and B are both company applicants—Individual B directly filed the documents, and Individual A was primarily responsible for directing or controlling the filing.

For every beneficial owner and company applicant, the report must include the individual’s full legal name, date of birth, current residential address (or business address for a company applicant if in the business of forming entities), and an “identifying number” and “image” from documents like a US passport, US driver’s license, US identification card or, if no US-issued document is available, a foreign passport.

Reporting companies may in certain instances report a “FinCEN identifier” instead of the information for an individual beneficial owner or company applicant. A FinCEN identifier is a unique identifying number that FinCEN will issue to individuals or entities upon request. A FinCEN identifier could facilitate easier reporting for reporting companies and additional privacy/protection for individuals and allow for fewer updated reports to be filed by reporting companies (which are generally required for changes in reporting company information or BOI within 30 days of the change).

EXCEPTIONS TO THE CTA REPORTING REQUIREMENTS

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

• Banks: Banks, as defined in the regulations, are excluded from the reporting company definition. Some other bank-type entities are also excluded, such as regulated private trust companies.
• Large Operating Companies: The regulations generally define large operating companies as companies that (1) have more than 20 full-time employees in the US, (2) have an operating presence at a physical office within the US, AND (3) have filed a federal income tax or information return in the US for the previous year demonstrating more than $5,000,000 in gross receipts or sales (excluding gross receipts or sales from sources outside the US). 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.
• 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).

PENALTIES

The CTA applies civil and criminal penalties for willfully (1) failing to report or update a reporting company’s BOI and (2) providing false or fraudulent BOI. Civil penalties include a daily $500 fine for a continuing violation, up to a maximum of $10,000. Criminal penalties include up to two years’ imprisonment. The CTA does not contain any provision for non-willful or negligence penalties.