Overview and Summary of The Corporate Transparency Act

The Corporate Transparency Act

Congress adopted the Corporate Transparency Act (CTA) in late 2020.  The CTA includes some of the most significant changes to the Bank Secrecy Act (BSA) and U.S. anti-money laundering (AML) laws in recent years. Those changes will require business owners to adopt new practices to ensure compliance.

Overview of The Corporate Transparency Act

The CTA requires companies that are formed or registered to do business in the U.S. to file a beneficial ownership information (BOI) report with FinCEN – the Financial Crimes Enforcement Network of the U.S. Treasury Department. FinCEN will assemble the BOI reports into a massive database of BOI data.  FinCEN is legally required to keep the BOI database confidential and secure, but it may share data from the BOI database to law enforcement and financial institutions under certain requirements.

FinCEN Adopts Regulations to Implement the CTA

FinCEN has adopted regulations to implement the CTA and to govern how reporting companies will file BOI reports. You can find the current version of those regulations here: 31 CFR 1010.380 .

The law requires FinCEN to use that database to fight money laundering in cooperation with other U.S. law enforcement agencies. Although the FinCEN database will not be publicly available, FinCEN will make the database accessible to U.S. law enforcement agencies, U.S. financial institutions and some non-U.S. law enforcement agencies pursuant to FinCEN’s Access Rule at 31 CFR 1010.955 .

Summary of CTA BOI Reporting Regulations

The CTA BOI regulations require any reporting company created or registered on or after January 1, 2024 to file an initial BOI report within 30 calendar days after its formation or registration. 31 CFR 1010.380(a)(i).

Entities formed or registered on or after January 1, 2024 but before January 1, 2025, have 90 days to file an initial BOI report.

Reporting companies existing before January 1, 2024 must file an initial report not later than January 1, 2025 .

What Is Contained in a CTA BOI Report?

Each CTA BOI report must contain the names of its beneficial owners and provide five pieces of personally identifiable information about each of those beneficial owners.

The initial BOI report must also disclose the reporting company’s full legal name, any trade name or “doing business as” name, a complete current address, the state or jurisdictions of the reporting company’s formation, and the reporting company’s taxpayer identification number (TIN) (including an Employer Identification Number (EIN) or, where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of that jurisdiction.

For each beneficial owner of the reporting company, the reporting company must disclose in its initial report each beneficial owner’s (A) full legal name, (B) date of birth, (C) residential street address, (D) a unique identifying number (which may be a non-expired U.S. passport, a non-expired identification document, such as a driver’s license, issued by a state, local government or Indian tribe, or a non-expired passport issued by a foreign government iv the individual does not possess any of the other document types listed), and (E) an image file of the document that provides the unique identifying number.

When Should a BOI Report Include the Company Applicant?

A BOI report only needs to include the entity’s “company applicant” if the entity was formed on or after January 1, 2024.

FinCEN’s regulations define “company applicant” as (a) with respect to a domestic reporting company, “the individual who directly files the document that creates the domestic reporting company,” and (b) with respect to a foreign reporting company, the individual who directly files the document that first registers the foreign reporting company.”

If there is more than one individual responsible for the filing of the document that forms the domestic reporting company (or that registers the foreign reporting company to do business in the U.S.), the “ company applicant ” is the individual “who is primarily responsible.”

When Must a Reporting Company Amend its BOI Report?

A reporting company must amend its BOI report within 30 calendar days after there is any change to the information contained in a prior BOI report.

A change in information could include when an individual previously reported ceases to be a beneficial owner, when a new individual becomes a beneficial owner, or when there is a change in an item of PII previously reported for a beneficial owner.

How Can a Reporting Company Identify its Beneficial Owners?

A reporting company can identify its beneficial owners by following the process laid out in Section 380(d) of FinCEN’s regulations.

Section 380(d) of the regulations defines “beneficial owner” as “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.”

An individual who would otherwise be included as a beneficial owner may be omitted if they fall into one of the following categories (i) a minor child, (ii) an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual, (iii) an employee of a reporting company, acting solely as an employee (other than a senior employee), (iv) an individual whose only interest in a reporting company is a future interest through a right of inheritance, or (v) a creditor of a reporting company.

Which Companies are Exempt from Filing a BOI Report?

A company is exempt from filing a BOI report if its falls into one of the 23 exempt categories.

The exemption categories in Section 380(c)(2) cover several classes of entity that are the subject of extensive regulation or that are otherwise required by law to disclose their ownership information to the government.

Definition of “Reporting Company”

To determine whether it must file a report under the CTA, a company must first determine if it is a “reporting company.”

FinCEN’s regulations define “reporting company” as either a “domestic reporting company” or a “foreign reporting company.”

• A “domestic reporting company” means any entity that is “(A) a corporation, (B) a limited liability company, or (C) created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.”
• A “foreign reporting company” means any entity that is “(A) a corporation, limited liability company or other entity, (B) formed under the law of a foreign country, and (C) registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.”

FinCEN’s Regulations Determine Who is a Beneficial Owner

FinCEN’s regulations define “beneficial owner” as any individual who, directly or indirectly, either (a) exercises substantial control over the reporting company or (b) owns or controls at least 25 percent of the ownership interests of the reporting company.

As a result, an individual is a beneficial owner if the individual satisfies either of these two tests.

Attributing Beneficial Ownership to Individuals

Importantly, the definition of "beneficial owner" is limited to “any individual” and does not include legal entities. Any interest in a reporting company held by a legal entity will be calculated with respect to the individual natural person who has the ultimate beneficial ownership of that interest.

Attorneys assisting clients in determining the beneficial owners of a reporting company will need to attribute the beneficial ownership of any non-natural person to the individuals who, in turn, are the beneficial owners of the non-natural person.

While this process could become complicated in situations where a reporting company is owned by several non-natural persons who, in turn, are owned by other non-natural persons, FinCEN’s regulations provide some guidance on the logical process to follow when attributing beneficial ownership to individuals.

FinCEN’s regulations provide that “an individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship, or otherwise . . .”

The regulation lists several examples of indirectly ownership, including:

(A)       Joint ownership with one or more other persons of an undivided interest in such ownership interest, and

(B)       Through another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual.

Where an interest in a reporting company is owned by more than one non-natural person, determining those natural persons who will be attributed ownership in the reporting company requires the reporting company to look “through ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the reporting company.”

With respect to ownership interests in a reporting company owned by a trust “or similar arrangement”, FinCEN’s regulations determine which natural person should be treated as the natural person with attributed ownership.

Under the trust rules (1) the trustee of the trust has ownership of an interest in a reporting company held by the trust if the trustee has “the authority to dispose of trust assets,” (2) a beneficiary of the trust has ownership of an interest in a reporting company held by the trust if the beneficiary (i) is the sole permissible recipient of income and principal from the trust, or (ii) has the right to demand a distribution of or withdraw substantially all of the assets from the trust,” and(3) the grantor or settlor of a trust has ownership of an interest in a reporting company held by the trust “has the right to revoke the trust or otherwise withdraw the assets of the trust.”

Excluded Individuals

FinCEN’s regulations exclude certain individuals from the definition of “beneficial owner” notwithstanding the other provisions that would otherwise include them.

The regulations exclude:

(i) A minor child

(ii) An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual

(iii) An employee of a reporting company, acting solely as an employee (not including senior officer), whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee

(iv) An individual whose only interest in a reporting company is a future interest through a right of inheritance

(v) A creditor of a reporting company

Individuals whose only interest in the reporting company is described these categories are excluded from the definition of "beneficial owner."

Special Rules Affecting Beneficial Ownership Information Reports

Reporting Company Owned by Exempt Entity . If a reporting company is owned, in part, by an entity that itself is exempt from beneficial ownership reporting, and an individual would have a direct or indirectly ownership interest in the reporting company exclusively by virtue of the individual’s ownership interest in such exempt entities, the non-exempt reporting company may include the names of the exempt entities in lieu of the information that would otherwise have been required in respect of such individual.

Minor Child . If a reporting company reports the information required to be reported in respect of the parent or legal guardian of a minor child, the reporting company’s beneficial information report must indicate that such information relates to a parent or legal guardian.

Foreign pooled investment vehicle . If an entity would be a reporting company but for the exemption provided for pooled investment vehicles in Section 380(c)(2)(xviii) and is formed under the laws of a foreign country, such entity shall be deemed a reporting company for purposes of beneficial ownership reporting, except the initial beneficial ownership report shall include otherwise required information solely with respect to an individual who exercises substantial control over the entity. If more than one individual exercises substantial control over the entity, the entity shall report information with respect to the individual who has the greatest authority over the strategic management of the entity.

FinCEN Identifiers

The CTA contemplated that some individuals might need to be included in so many beneficial ownership reports that they might prefer to obtain a unique FinCEN identification number that could be substituted for such individual’s personal information in beneficial ownership reports.

FinCEN’s regulations allow an individual to obtain a FinCEN identifier by completing the following FinCENID application that provides the same information as a reporting company would be required to disclose in a beneficial ownership report in which such individual was a beneficial owner.

If your company was formed by Harvard Business Services, Harvard Business Services will make available the FinCEN Identifier of the HBS employee who directly filed the document that formed your entity.  That individual will be one of the company applicants for your company that you will need to include in the company’s initial BOI report.

CTA Enforcement and Penalties

Because the purpose of the CTA is to enable FinCEN to develop and maintain a database of beneficial ownership data, Congress included penalties in the CTA to encourage compliance and to punish violators.

The CTA provides that it is unlawful for any person to willfully provided, or attempt to provide, false or fraudulent beneficial ownership information or to willfully fail to report complete or updated beneficial ownership information to FinCEN as required by the CTA.

The CTA provides for a civil penalty of not more than $500 for each day a reporting violation occurs.

An individual who willfully files false information or willfully fails to file information required to be filed may be fined not more than $10,000 or imprisoned for not more than 2 years or both.

The FinCEN Report Company

Harvard Business Services, Inc has partnered with FinCEN Report Company to provide BOI filing services to its customers.

The FinCEN Report Company’s online filing system:

• Allows each individual person to keep their PII confidential and secure;
• Allows individual users to create “company accounts” through which they can connect to the personal accounts of beneficial owners and company applicants:
• Allows the attorneys, paralegals and other advisors who advise reporting companies also to connect with their client companies;
• Automatically notifies a subscribing reporting company when any beneficial owner’s PII changes, so that the reporting company can timely file an amendment; and
• Electronically files BOI reports and amendments easily, creating a permanent record that will assist in compliance and due diligence in the future.

Individuals can create accounts in the FinCEN Report Company system for free .  The only charge is the subscription fee paid by the reporting company itself at the time of its initial BOI report.  Necessary amendments are also free during the subscription period.

For more information here is a helpful Webinar .

This content was originally written by Jonathan B. Wilson , Chief Executive Officer and Co-Founder of FinCEN Report Company, LLC. Jonathan is a partner of Atlanta lawfirm Taylor English Duma LLP, and is the author of The Corporate Transparency Act Compliance Guide Book. This content is for your general knowledge and is not considered to be legal advice.