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Publication

12.11.23

The Corporate Transparency Act ("CTA") that was enacted in 2021 becomes effective on January 1, 2024. The CTA provides for collection by the Financial Crimes Enforcement Network of the Department of the Treasury ("FinCEN") of certain beneficial ownership information ("BOI") from corporations, limited liability companies and other business entities formed or doing business in the United States. The purpose is to prevent illegal financing activities and combat the use of shell companies for criminal purposes such as bribery, money laundering, terrorism financing, tax fraud and other illegal activities.

FRAUD ALERT: Companies should be aware that fraudulent attempts to unlawfully collect BOI have been reported. FinCEN's Beneficial Ownership Secure System ("BOSS") online portal, through which BOI will be reported, is not yet available to the public for BOI reporting. FinCEN has indicated it will not begin collecting BOI until January 2024.

FinCEN has issued regulations to implement the collection of and to maintain a database of BOI as provided by the CTA. Certain key provisions of those regulations are outlined below.

Who Must Report BOI Under the CTA?

Every entity, unless specifically exempted, will be deemed a "reporting company" and required to file a beneficial ownership information report ("BOI Report"). As an initial matter, each entity should determine whether it qualifies for an exemption under the CTA. Key exemptions include:

  1. Publicly traded entities.
  2. Banks and federal or state credit unions, bank holding companies, and "money transmitters."
  3. Entities that employ more than 20 employees on a full-time basis in the United States, filed in previous year tax returns demonstrating more than $5 million in gross receipts or sales, and have an operating presence at a physical office in the United States.
  4. Subsidiaries controlled or wholly owned, directly or indirectly, by certain exempt entities. (Note, however, that not all subsidiaries of exempt entities are exempt from BOI Report filing requirements.)

What Is Required in a BOI Report?

For each reporting entity, the BOI Report must include identifying information (e.g., full name, date of formation or birth, addresses, passport ((or driver's license or other government issued identification)), etc.) for (a) each "beneficial owner" and (b) each "company applicant."

A beneficial owner is an individual who, directly or indirectly, (a) exercises "substantial control" over the entity or (b) owns or controls not less than 25 percent of the ownership interests of the entity.

A company applicant is (1) the individual who files the document to create the entity and (2) the individual who directs or controls such filing if more than one individual is involved in the filing. Accordingly, not only will the personal information of 25 percent equity owners be required to be collected and reported but also that of officers of the entity with authority to make certain decisions with respect to operations of the entity.

What Are the Deadlines?

Entities in existence as of December 31, 2023, have until January 1, 2025, to file their initial BOI Reports.

Entities formed between January 1, 2024, and December 31, 2024, must file an initial BOI Report within ninety (90) days after formation. Entities formed on or after January 1, 2025, must file an initial BOI Report within thirty (30) days after formation.

Note that the CTA also requires that updates to BOI Reports be submitted within 30 calendar days after the date on which there is any change with respect to BOI previously submitted.

What Happens If a BOI Report Is Not Timely Filed?

A willful failure to comply with the reporting requirements for both initial filings and update filings, or the reporting of false or fraudulent information, may lead to civil and/or criminal penalties. Civil penalties may include a monetary fine of $500 per day, up to a $10,000 maximum. Criminal penalties may include imprisonment of up to two years.

However, if incorrect information is inadvertently submitted, there is a safe harbor from such penalties if a corrected BOI report is voluntarily and promptly filed no later than ninety (90) days after the submission of the incorrect information.

What Should Be Done in Preparation?

 As an initial matter, all entities should determine whether such entity constitutes a "reporting company" that is required to file a BOI Report.

Existing entities that are required to file a BOI Report prior to January 1, 2025, should consider taking the following actions:

  • Review ownership structures and begin to track down BOI in preparation for reporting.
  • In corporate governance documents, consider adding provisions facilitating the ongoing collection and reporting of BOI from equity holders, including provisions that require each beneficial owner to report actions by such owner which may trigger any BOI Report update requirements.
  • Take steps to ensure ongoing compliance with applicable data privacy laws in connection with BOI collection and records maintenance.

Entities newly formed on or after January 1, 2024, should collect all information necessary for filing of a BOI report concurrently with the formation process.

This alert is being sent for informational purposes only regarding upcoming compliance requirements. As noted above, FinCEN is still in the process of launching the BOSS website, which will not be publicly available prior to January 1, 2024. We are monitoring the launch process and will provide an update as more information with respect to the filing process becomes available.

Please note that the foregoing is not legal advice. If you would like more information about the Corporate Transparency Act, please contact William Loesch (william.loesch@goldbergkohn.com), Colby Gifford (colby.gifford@goldbergkohn.com) or Jennifer Chiang (jennifer.chiang@goldbergkohn.com) at Goldberg Kohn.