Alert
10.10.24
The federal Corporate Transparency Act (CTA) became effective on January 1, 2024, and set a deadline of January 1, 2025, for entities existing on the effective date to file an initial report. As we enter the fourth quarter of 2024, that deadline is fast approaching. Many entities have waited to see if the statute would be invalidated, the rules further clarified, or the deadline postponed, or have decided to wait until the deadline is at hand. It now may be time for entities formed or qualified to do business in the United States to determine if they are required to file and, if so, to determine who are the “beneficial owners” whose name and personal information needs to be collected, and to begin to collect this information.
The CTA requires millions of limited liability companies, corporations, limited partnerships and other entities formed or registered in the United States to submit detailed information about their beneficial owners and, for those formed on or after January 1, 2024, the individuals (company applicants) who participated in formation or registration to the federal Financial Crimes Enforcement Network (FinCEN), an arm of the United States Department of the Treasury. Foreign entities that are registered to do business in the United States and their American subsidiaries will also need to submit information about their beneficial owners. The rules apply to many small entities and some large ones. They apply to parent companies and subsidiaries. Joint ventures may be particularly complex. The rules are complicated, ambiguous and intrusive, and there are numerous exemptions that may be applicable.
Several challenges to the CTA have been brought in federal courts. Only one case (National Small Business United v. Yellen, in the Northern District of Alabama) has resulted in a decision, holding that the CTA is unconstitutional, but that case has been appealed and, by its terms, would only apply to the named plaintiffs. In addition, legislation has been introduced in Congress to postpone the January 1, 2025, deadline to January 1, 2026. Whether any of these will delay the deadline is a speculative matter. Other than the particular individuals and entities subject to the Alabama court’s injunction, FinCEN’s position is that reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s current regulations.
Here is a brief introduction to the CTA and the Beneficial Ownership Information (BOI) reporting process:
Entities that were formed before January 1, 2024, must file a BOI report no later than December 31, 2024. Entities formed or registered in 2024 must file (or have filed) the BOI report within 90 days of formation. Entities formed or first registered after December 31, 2024, will have 30 days to file. The reports are filed electronically through FinCEN.
BOI reports require reporting companies to submit personal information about their beneficial owners—their home address, date of birth, and license or passport copy (and photograph), as well as EIN or Social Security Number. Alternately, an individual’s FinCEN ID (see below) can be submitted in lieu of this personal information. The reporting company must collect this information from anyone who is a beneficial owner. The CTA has a very broad definition of “beneficial owner,” which includes: (1) any individual directly or indirectly owning or controlling at least 25% of the reporting company’s ownership, and (2) any individual with “substantial control” over the reporting company (even if the individual has no ownership). The CTA has published extensive regulations and FAQs that give the CTA an extensive and intrusive reach and make the process of determining whether a BOI report is required complicated.
Some exemptions to the CTA reporting requirements apply. A company may qualify for a large operating company exemption if it has, among other things, more than 20 full-time employees and reported more than $5 million in gross receipts or sales on its prior year tax return. Some types of regulated entities and nonprofits are also exempt. The CTA rules are technical in nature and require careful analysis.
We recommend that individuals who need to be reported as beneficial owners or company applicants apply for a FinCEN ID number. When a person applies for the ID, they will have to upload to FinCEN a copy of their driver’s license or passport (with photograph) and provide their home address and date of birth. FinCEN will then provide a 12-digit unique identifying number. An individual with a FinCEN ID only needs to provide the FinCEN ID number, thereby avoiding the need to provide the company with personal information to include in the BOI report. FinCEN has provided step-by-step instructions for how to apply.
Stiff penalties of $500 per day and possible jail sentences apply for willful failure to comply with the CTA.
While information disclosed under the CTA is not accessible by the public, it is accessible by the United States Treasury Department and federal law enforcement, and on request may be provided to state, local and foreign governmental (including tax) agencies and (if the reporting company consents) to lenders.
Pillsbury has created a CTA Resource Center with additional information concerning the CTA’s requirements. FinCEN has also created a page with CTA resources, FAQs and a compliance guide.
You may have one or more entities that require filing a BOI report. Please check your records to confirm. You can access the portal to file a BOI report here. You may also use third-party vendors, such as CSC or CT Corporation, to submit your reports.
If you would like Pillsbury to assist you with your filings, please email your attorney contact promptly. Given that the CTA rules are very technical in nature and that it may take time to gather all the information necessary to file BOI reports, we highly recommend that clients evaluate their reporting obligations and gather information now rather than wait until later in the year, which may make it difficult to submit the report by the December 31, 2024, deadline.