BUSINESS OWNERS AND MANAGERS SHOULD BE AWARE OF THE REQUIREMENTS OF THE CORPORATE TRANSPARENCY ACT (CTA) AND ASSOCIATED REGULATIONS THAT HAVE TAKEN EFFECT AS OF JANUARY 1, 2024.
Under these laws, entities that meet the definition of a “reporting company” are required to file Beneficial Ownership Information Reports (BOI Reports) identifying their beneficial owners to the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN), and keep them up to date, within strict deadlines.
The CTA is intended to impede money laundering and other illegal activities through shell companies and so primarily affects small to medium businesses and holding companies. Even if an entity has only one owner and limited activities, such as holding real estate, it may still have to report.
What is a reporting company? Generally, any corporation, limited liability company, or other entity created by filing with a state is a reporting company unless otherwise exempt. The CTA and its regulations currently describe 23 exemptions, primarily for entities already subject to other significant reporting requirements, like publicly traded companies, banks, and insurance companies. FinCEN estimates that only approximately 11% of existing entities are exempt from reporting.
Are large companies required to report? Most companies with more than 20 full-time employees, more than $5 million in gross receipts in the prior year, and a physical office in the U.S. are exempt from reporting requirements.
Are nonprofits required to report? Entities exempt from taxation under Section 501(c) of the Internal Revenue Code and their wholly owned or controlled subsidiaries, generally, are exempt from reporting requirements. There is some debate about whether newly formed nonprofits must report while their tax-exempt status is pending.
When are reports due? Deadlines depend on the date the entity is formed (barring further legislation):
- Reporting companies existing before January 1, 2024 must file before January 1, 2025.
- Reporting companies formed during 2024 must file within 90 days after formation.
- Reporting companies formed on or after January 1, 2025 will have 30 calendar days to file.
Additionally, reporting companies must update or correct their BOI Reports within 30 days after the date on which the change occurs. These entities will need to carefully track the information they submit, such as the addresses of their beneficial owners, to promptly determine when an update may be necessary.
What is included in a BOI Report? BOI Reports include certain biographical information for every “beneficial owner” and “applicant.” These categories include most individuals who “exercise substantial control” over the entity, who own more than 25% of the entity, or who form an entity on or after January 1, 2024, which may encompass more individuals than you might expect.
Are BOI Reports public? Information on BOI Reports may be disclosed to certain governmental agencies and financial institutions. These recipients are subject to certain security and confidentiality protocols and are prohibited from re-disclosing the information except in specific circumstances.
What should I do? If you might directly or indirectly own any interest in an entity, such as an LLC, corporation, or limited partnership, that is not publicly traded, or if you are a senior officer or otherwise exert significant control or substantial influence over any such entity, then you should promptly determine whether it is a “reporting company” and whether you or someone else is obligated or willing to assume these reporting responsibilities. There are strict deadlines and substantial civil and criminal penalties for failure to properly file BOI Reports on time.
Plan to spend some time on compliance and consult professional advisors. FinCEN has estimated that each initial filing will take 1.5 to 10+ hours to complete and that an additional five hours of legal and other professional expertise could be required. Public commenters have been critical of FinCEN’s estimates and only time will tell whether these obligations are more burdensome than FinCEN has asserted.
Consider whether to update your corporate and organizational documents, such as operating agreements, bylaws, and shareholder agreements, to encourage and coordinate cooperation among any individuals impacted by these requirements. Infrequently used entities might be dissolved and corporate structures simplified before the end of 2024 to limit the number of BOI Reports that must be filed.
Continue to monitor rules and regulations under the CTA as these will likely be updated—and may have changed between the date of this publication and when you are reading it. As recently as December 12, 2023, the House of Representatives passed legislation to extend certain deadlines, and it is uncertain whether the Senate will pass the same legislation. Additionally, at least one court case brought by the National Small Business Association challenging the CTA is ongoing.
About the Authors
Mike Doversberger leads Smith Haughey’s business and real estate group. He works closely with businesses to design, negotiate, and execute documents and transactions impacting their operations, assets, and third-party relationships.
Matthew Wiebe crafts corporate policies, negotiates significant transactions, and drafts contracts for a variety of business relationships. He also guides organizations through mergers and acquisitions, ownership structuring, and regulatory compliance.
If you have questions about how to comply with the CTA or its effects on you, Smith Haughey’s attorneys are a great resource for your compliance questions.