Corporate Transparency Act
Client Alert: Corporate Transparency Act
The Corporate Transparency Act (31 USC 5336) (the “Act”), which went into effect on January 1, 2024, is intended to counter money laundering, the financing of terrorism, and other illicit activity by requiring the reporting of the beneficial ownership of entities operating in the United States. Under the Act, all “reporting companies” are required to report beneficial ownership via the Financial Crimes Enforcement Network (“FinCEN”) BOI E-Filing System available at https://boiefiling.fincen.gov.
This landmark legislation was intentionally drafted to have broad applicability and affects a wide swath of legal entities, and therefore, we are recommending that all of our clients take note to ensure compliance.
What is a reporting company?
A reporting company is any entity (1) created by the filing of a document with a secretary of state or other similar office under state law or Indian Tribe (such as an LLC, LP or corporation) or (2) formed under the laws of a foreign county and registered to do business in the United States.
Who is a beneficial owner?
A beneficial owner is any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company.
For purposes of determining the percentage of ownership interests, convertible instruments and warrants (even if characterized as debt) and any puts, calls, or other similar rights are included (even if such instruments and rights have not been converted or exercised).
Substantial control can be exerted by: (1) serving as a senior officer (i.e., any individual holding authority of President, Chief Financial Officer, General Counsel, Chief Executive Officer, Chief Operating Officer, or other officers performing similar functions), (2) having authority over appointment or removal of any senior officer or a majority of the board of directors (or similar body), (3) directing, determining, or having substantial influence over important decisions made by the reporting company (e.g., the sale, lease, mortgage of principal assets), or (4) having any other form of substantial control over the company.
When is the filing due?
The following table sets forth the deadline for making an initial filing depending on when the reporting entity was formed:
All reporting companies, once their initial ownership report is filed, must also file any changes to beneficial ownership or the information pertaining to any beneficial owner within 30 days of the applicable change.
Reporting companies that need to file may do so by going to FinCEN’s BOI E-Filing website (https://boiefiling.fincen.gov) and selecting “File BOIR.” While FinCEN expects that many reporting companies will be able to make filings directly based on guidance and instructions provided, it is permitted that reporting companies may consult with and receive assistance from professional service providers in making their filings.
What is required to be filed?
The report requires disclosure of:
1. Reporting Company
a. Name
b. Address
c. DBAs
d. Jurisdiction of Formation
e. EIN
2. Beneficial Owner
a. Name
b. Date of Birth
c. Address
d. Identification Card Number (Passport or Driver’s License)
e. A scanned copy of such Identification Card
Note that domestic reporting companies formed on or after January 1, 2024, and foreign reporting companies first registered to do business in the United States on or after January 1, 2024, must also report up to two “Company Applicants” to FinCEN. At a minimum, the individual who directly files the document that creates or registers the company must be reported as a Company Applicant. If more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing must also be reported (to the extent different from the individual directly making the filing). The Company Applicant(s) may be an employee or employees of a service provider rather than an employee or employees of the reporting company.
Are there exemptions?
The Act identifies 23 exemptions for reporting companies, which generally cover entities that are separately regulated by other federal agencies (e.g., securities reporting issuer, banks, publicly traded companies). Of note is the exemption for a large operating company, which is an entity that (1) employs at least 20 full time employees in the United States, (2) has a physical office in the United States, and (3) filed a federal income tax or information return in the prior year demonstrating more than $5,000,000 in gross receipts or sales. Each exemption has requirements that must be satisfied by the reporting company in order to qualify for the exemption.
Note that under the “subsidiary exemption”, a reporting company may report a parent company’s name in lieu of information about its beneficial owners if the reporting company’s ultimate beneficial owners only hold their ownership interest in the reporting company through the parent company and the parent company is an exempt entity. For clarity, a subsidiary’s ownership interests must be 100% owned and controlled by an exempt parent entity to qualify for this exemption.
In addition, the Act exempts from the definition of beneficial owner: (1) minor children (so long as the information of a parent or legal guardian is reported instead), (2) individuals acting as a nominee, intermediary, custodian or agent, (3) individuals acting solely as an employee of an entity and whose control or economic benefits is derived solely from employment status, (4) individuals whose only interest in an entity is through a right of inheritance, and (5) creditors of entities (unless such creditors otherwise meet the substantial control or ownership threshold for beneficial owners).
What is the penalty for failure to comply with the Act?
The failure to comply with the reporting requirements of the Act can result in penalties of $500/day, a fine of up to $10,000, and up to two (2) years of imprisonment.
Is the reported information publicly available?
Information reported to FinCEN is not available publicly, but can be disclosed to certain limited entities including (1) federal agencies engaged in national security, intelligence, and law enforcement, (2) state law enforcement agencies with a court order, (3) the Treasury Department, (4) financial institutions (with the reporting company’s consent), (5) government regulators of financial institutions, and (6) certain foreign authorities requesting information through a United States agency for limited permitted purposes such as law enforcement.
Next Steps
Companies should carefully review the Act and determine whether reporting is required or whether an exemption may apply to them. FinCEN will continue to provide guidance, information, and updates related to the BOI reporting requirements on its BOI webpage, https://www.fincen.gov/boi.
In addition to federal legislation, a number of states are moving towards enacting their own legislation. In what appears to be the first instance of this, in December 2023, Governor Kathy Hochul of New York signed the New York LLC Transparency Act (“NYLTA”), which contains requirements similar to the federal Corporate Transparency Act, albeit with certain important differences. One of these differences is that the NYLTA will apply only to limited liability companies formed or doing business in New York, and not, for example, to other entities such as corporations and limited partnerships. Another difference is that beneficial ownership information will need to be provided at the time of formation of new entities in New York rather than within 90 or 30 days of such formation. Finally, under the NYLTA, entities that qualify for a reporting exemption must affirmatively certify that they are exempt, whereas under the Corporate Transparency Act, the federal government does not require an exempt entity to make any filing or affirmative certification (except in the instance an entity previously not exempt later takes the position that it has become exempt).
We will continue to monitor when the NYLTA becomes fully effective and reporting requirements under the NYLTA begin, as well as other state laws that may affect our clients such as those under consideration in California and Massachusetts. These state laws would apply in addition to, and not in lieu of, federal requirements, and therefore, depending on a newly-formed entity’s state of formation and where it is engaged in doing business, it may eventually be required to satisfy both state and federal beneficial ownership reporting obligations.
If you have questions about these developments, please feel free to contact us at CTA@cleanenergycounsel.com.
The purpose of this client alert is for general educational and informational purposes only and should not be treated as legal advice. This communication may be considered advertising under law. No attorney-client relationship attaches merely as a result of any exchange of information, including this communication. Please do not send us confidential information or sensitive materials. Prior results do not guarantee a similar outcome.
