Corporate Transparency Act Mandates New Reporting Requirements for Most Small Businesses
By: Shannon C. Sprinkel, Esq.

On Sept. 29, 2022, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule (Final Rule) implementing the beneficial ownership information (BOI) reporting provisions of the Corporate Transparency Act (CTA). The CTA is part of the Anti-Money Laundering Act of 2020 (AML Act) and through the Final Rule, establishes BOI reporting requirements for certain types of corporations, limited liability companies, and other similar entities created or registered to do business in the United States. Although the CTA was enacted as an important step in reducing terrorist financing, money laundering, and other illicit activities, this sweeping law will require many private funds, family entities, and certain investors to make personal disclosures regarding their private investments.

WHEN IS THE RULE EFFECTIVE?
Effective January 1, 2024, most legal entities incorporated, organized, or registered to do business in a state must disclose information relating to its owners, officers, and controlling persons with FinCEN pursuant to the CTA.

WHICH COMPANIES ARE EXEMPT?
There are 23 specific exemptions that generally apply to heavily regulated entities such as banks, brokerage companies and companies registered with the Securities Exchange Commission. There are a few important exemptions to note specifically including: (1) an entity with an operating presence at a physical office in the United States that employs more than 20 full time employees and having more than $5,000,000 of annual reported gross income (e.g. a large operating company); (2) a public accounting firm registered under Sarbanes-Oxley Act of 2002, (3) certain types of inactive entities that were in existence on or before January 1, 2020, and (4) most tax-exempt entities. Furthermore, most subsidiaries that are wholly owned or controlled by companies that are exempt are also exempt from filing. Affiliates with common ownership are not exempt unless they independently qualify as exempt.

WHEN DO I HAVE TO COMPLY BY?
For reporting companies currently in existence, BOI will need to be provided to FinCEN prior to January 1, 2025. For reporting companies that are formed in 2024, reporting is required within 90 days of the acceptance of the reporting company’s formation or registration filing. For reporting companies formed on or after January 1, 2025, reporting is required within 30 days of the acceptance of the reporting company’s formation or registration filing. In addition, a trust that is a beneficial owner of a reporting company will also need to file a report with FinCEN for the trustee and, potentially, a grantor or beneficiary, depending on what is included in that person’s fiduciary responsibilities and actual powers. After the initial report, there is no annual or quarterly filing requirement except reporting companies must file an amendment within 30 days after any change to their beneficial information.

WHERE DO I FILE MY INITIAL REPORT?
Each reporting company will be required to submit BOI reports to FinCEN electronically through a secure filing system via FinCEN’s website. The system is currently being developed and is not yet live. There is no fee for submitting the BOI report.

WHAT INFORMATION MUST BE REPORTED?
For the reporting company:
• The full name of the reporting company;
• Any trade name or ‘‘DBA” name of the reporting company;
• The business address of the reporting company;
• The State or Tribal jurisdiction of formation of the reporting company (or for a foreign reporting company, the State or Tribal jurisdiction where the foreign reporting company first registers); and
• A unique identifier associated with the reporting company, such as an IRS TIN or EIN.

For every individual who is a beneficial owner and every individual who is a company applicant:
• The full legal name of the individual;
• The date of birth of the individual;
• A complete current address consisting of (i) the street address of the business in the case of company applicants, or (ii) the individual’s residential street address for all other cases;
• A unique identifying number and issuing jurisdiction from (i) a non-expired photo identification document issued to the individual by the United States government, State, local government or Indian tribe (e.g., a passport or driver’s license) or (ii) a non-expired passport issued by a foreign government if the individual does not possess any of the foregoing documents; and
• An image of the identification document described above.

WHAT IS A FINCEN IDENTIFIER?
An individual, trust or entity may submit an application for a FinCEN identifier that contains all of the information that otherwise has to be set forth in the initial report about that individual, trust or entity. An individual, trust or entity who has obtained a FinCEN identifier may provide it to the reporting company and the reporting company can include the FinCEN identifier in lieu of the information otherwise required. If there is any change with respect to required information previously submitted to FinCEN in the application for the FinCEN identifier, the party obtaining the FinCEN Identifier must file an amendment reflecting the change within 30 calendar days after the date on which the change occurs.

WHO IS A BENEFICIAL OWNER?
“Beneficial Owner” is defined to include any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company. “Ownership Interest” is broadly defined to include, but not be limited to, equity or stock instruments, any capital or profit interest in an entity, convertible and futures, puts, calls, straddles, and other options for buying and selling such instruments, and “any other instrument, contract, arrangement, understanding, relationship, or mechanism use to establish ownership.” (31 C.F.R. § 1010.380(d)(2)(i)).

HOW IS SUBSTANTIAL CONTROL DETERMINED?
There are a range of activities that could trigger the “substantial control” reporting requirement for any beneficial owner. Such activities are broadly defined to include, without limitation, (i) serving as a senior officer of the reporting company; (ii) having the authority to remove senior officers or a majority of the board of directors; and/or (iii) directing, determining, or having substantial influence over important decisions made by the reporting company such as the scope of the reporting company’s business, the ability to sell or mortgage company assets, the ability to reorganize dissolve or merge the company, the ability to authorize major expenditures, investments or the issuance of equity, and the ability to amend corporate governance documents. The CTA also includes a catch-all definition of “substantial control” to include anyone having “any other form of substantial control over the reporting company.” (31 C.F.R. § 1010.380(d)(1)(i)(D)).

In addition, an individual may directly or indirectly exercise substantial control over a reporting company, including as a trustee of a trust or similar arrangement, through: board representation; ownership or control of the majority of the voting power or voting rights of the reporting company; rights associated with a financing arrangement or interest in a company; control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company; arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or any other contract, arrangement, understanding, relationship, or otherwise.

WHO IS NOT CONSIDERED A BENEFICIAL OWNER?
The following individuals are exempt from the definition of “Beneficial Owner”:

• A minor child (as defined under state law or Indian tribe laws where the reporting company is formed or first registered; provided the reporting company reports the required information regarding a parent or legal guardian of the minor child);
• An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
• An individual acting solely as an employee of a reporting company (excluding senior officers);
• An individual whose only interest in a reporting company is a future interest through a right of inheritance; and
• Creditors of a reporting company.

WHO IS A COMPANY APPLICANT?
In addition to disclosing beneficial owners, the CTA also requires companies formed after January 1, 2024 to disclose “company applicants” to FinCEN. For a domestic reporting company, this includes the individual who directly files the document that creates the domestic reporting company. For a foreign reporting company, this means the individual who directly files the document that first registers the foreign reporting company. If more than one individual is involved in the filing of the document, the individual who is primarily responsible for directing or controlling such filing is also considered a company applicant and required to file a BOI report.

WHO IS RESPONSIBLE FOR FILING THE INFORMATION?
While an individual may file a report on behalf of a reporting company, the reporting company is ultimately responsible for the filing. The same is true of the certification. The reporting company will be required to make the certification, and any individual who files the report as an agent of the reporting company will certify on the reporting company's behalf.

IS THERE ANY SPECIFIC GUIDANCE FOR TRUSTS? 
Trusts, except for those formed under a specific state statute that required a filing with the state to be formed, are not reporting companies. Specifically, if the trust only has a Federal Tax ID number and not a state filing number, then it is likely exempt from filing a BOI report. However, a trust that is a beneficial owner of a reporting company will need to file a BOI report for the trustee and, potentially, a grantor or beneficiary, depending on what is included in that person’s fiduciary responsibilities and actual powers. A beneficiary is considered a beneficial owner if the beneficiary is the sole permissible recipient of income and principal from the trust, or if the beneficiary has the right to demand a distribution of, or substantially withdraw all of the trust assets. This may include (i) a special power of appointment trust where a powerholder has a special power of appointment to appoint assets to a particular person (e.g. to the settlor); (ii) annual demand (e.g. Crummey powers) used to qualify gifts to a trust of a present interest for gift tax purposes; (iii) a person holding a power to loan assets to the settlor; (iv) those exercising control over the trusts that owns separate or special voting interests to remove from the taxpayer’s purview control over liquidation of or distribution from an entity; or (v) a settlor of a trust who has the right to revoke the trust or otherwise withdraw the assets of the trust. Likewise, a grantor is considered a beneficial owner if the grantor has the right to revoke the trust or withdraw its assets.

If a trust has several trustees, each with different powers, then multiple trustees may be required to file a BOI report. For example, if one trustee can sell the interest but another trustee can transfer or distribute that interest to a beneficiary, then both can “dispose of the interest” and should be included in a BOI report. Under the CTA, the word “dispose” is broadly construed and any trustee with the power to dispose of trust assets must be reported. To understand the reporting requirements under a trust, it is important to identify and analyze the powers and interests granted under the trust and then determine whether the powerholder/interest holder must report.

WHAT ARE THE PENALTIES FOR FAILURE TO FILE?
If a person willfully fails to file a complete or updated report with FinCEN or willfully provides false or fraudulent information to a reporting company, they may be subject to a penalty of $500 per day for each day the violation continues; and a fine of up to $10,000 and imprisonment up to two years, or both. These penalties may apply to the reporting company, to the officers of the reporting company, or to any individual or entity supplying information to a reporting entity.

CONCLUSIONS:
While the CTA imposes significant new burdens on entities formed or operating in the United States, there are some proactive steps reporting companies can initiate now to address the future requirements. All reporting companies should consider implementing a process to gather, store and update BOI. Reporting companies will also likely need to review and update their operating agreements, subscription agreements, employment agreements and similar documents to require BOI be provided. In addition, ongoing monitoring of an entity’s operations and ownership should be implemented to report future changes in operations and/or ownership.

We hope this information is helpful. If you have specific questions regarding a particular fact situation, we urge you to consult your Busch Firm representative or other competent legal counsel.

Information contained in this bulletin is intended as a brief overview of the Corporate Transparency Act and not a complete summary of the subject matter. This bulletin should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This bulletin is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and it is not designed to be, and should not be substitutes for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. You are urged to consult an attorney concerning any particular situation and any specific legal question you may have. This alert does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by The Busch Firm shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.