New Reporting Requirements for Private Companies and Other Entities Established or Operating within the United States

On January 1, 2024, the Corporate Transparency Act (“CTA”) went into effect in the US, bringing with it significant new reporting requirements for entities in the US, including certain foreign entities that have established a presence in the US.

Starting on January 1, 2024, all “reporting companies” need to make filings of their beneficial ownership information (“BOI”) with the Financial Crimes Enforcement Network (“FinCEN”), a department of the US Treasury, unless they fit into an applicable exemption. FinCEN's filing platform is now live at https://boiefiling.fincen.gov.

What is the purpose of the CTA?

According to FinCEN, the CTA will enhance the ability of FinCEN and other agencies to protect US national security and the US financial system from illicit use and provide essential information to national security, intelligence and law enforcement agencies, state, local and Tribal officials and financial institutions to help prevent drug traffickers, fraudsters, corrupt actors such as oligarchs and proliferators from laundering or hiding money and other assets in the US.

What is a “reporting company”?

Under the CTA, “reporting companies” are corporations, limited liability companies or other similar entities that are either created by filing a document with a secretary of state or formed under the law of a foreign country and registered to do business in the US. Certain entities, such as most trusts, are excluded from the definition of a "reporting company" to the extent they are not created by a filing with a secretary of state or similar office.

The CTA exempts 23 enumerated entities from the definition of a "reporting company," including governmental authorities, banks, depository institution holding companies, money services businesses, brokers or dealers in securities and accounting firms. Certain large operating companies with at least 20 full-time employees, more than $5,000,000 in annual gross receipts or sales and an operating presence at a physical office within the US are exempt, as well as publicly traded companies that are issuers of securities that are registered under the Securities Exchange Act of 1934 (the “Exchange Act”) or are otherwise required to file supplementary and periodic information under the Exchange Act.

What needs to be reported on a BOI filing?

The CTA requires reporting companies to identify and provide information about a company's "beneficial owners" as well as its "company applicants." For the company, the following information must be included in the report:

• full legal name
• any trade name
• current address
• the jurisdiction of formation
• the Internal Revenue Service Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company (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 such jurisdiction)

Reporting companies with a principal place of business in the US must provide the street address of that principal place of business, and reporting companies with a principal place of business outside the US must provide the street address of the primary location in the US where their business is conducted. The following information must be disclosed for each beneficial owner and company applicant:

• the individual's full legal name
• date of birth
• current residential or business street address
• a unique identifying number from an acceptable identification document, such as a passport (and the image of such document) or the individual's FinCEN identifier. Note that for an individual who does not have a US identification document, the only acceptable form of identification for such individual will be his or her passport (and not, for example, a non-US driver’s license). Individuals can apply for a FinCEN identifier at https://fincenid.fincen.gov/la....

What is a “beneficial owner”?

A beneficial owner is an individual who directly or indirectly exercises substantial control over the company or owns or controls 25% or more of the ownership interests in the company. The CTA requires the identification of each beneficial owner of the reporting company. As such, all individuals that exercise substantial control and own or control at least 25 percent of the reporting company (including through equity, stock, capital or profit interests) must be identified.

An individual exercises substantial control over a reporting company if the individual:

serves as a senior officer of the reporting company;

has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar governing body) of the reporting company;

directs, determines or has substantial influence over important matters for the reporting company, including (as examples), the reorganization, dissolution or merger of the reporting company; the selection or termination of business lines or ventures of the reporting company; and the amendment of any governance documents of the reporting company; or

has any other form of substantial control over the reporting company (note that typical protective voting provisions and/or similar voting rights are likely to cause the beneficiary of those protections to be considered a beneficial owner in many cases).

With the CTA focused on beneficial ownership information about individuals, note that it requires looking through any beneficial owners that are entities to the individual at the top of the applicable ownership structure. For example, if Reporting Company XYZ has two shareholders, Sonny Stockholder, an individual, and Entity Owner B, a corporation, and each is a “beneficial owner,” information for Sonny Stockholder will need to be reported as well as information for the individual or individuals that are the beneficial owners of Entity Owner B.

What is a “company applicant”?

The CTA requires the identification of company applicants who are primarily responsible for directing or controlling the filing of the formation documents for the reporting company. The "company applicant" is either:

the individual who directly files the document creating the reporting company or registering the foreign reporting company with a U.S. jurisdiction; and/or

has primary responsibility for directing or controlling that filing if more than one individual is involved. Depending on the circumstances, this could include the “incorporator” or similar advisor or agent reflected in the applicable entity formation documents, as well as officers, directors or other authorized individuals who authorize or direct such filings.

Note that entities formed or registered prior to January 1, 2024 will not be required to report company applicants.

When are BOI reports due?

For reporting companies created or registered before January 1, 2024, initial BOI reports will not be due until January 1, 2025, so they will have the balance of this year to make their initial reports.

Any reporting companies created or registered after January 1, 2024 and during the balance of 2024 will have 90 days after receiving confirmation of their creation or registration to file their initial reports, but this timeframe will shorten to 30 days after creation or registration for reporting companies formed or registered on or after January 1, 2025. If a company was initially exempt from having to file but somehow ceases to meet the criteria for an exemption, a report must be made within 30 days of the date the company no longer meets an applicable exemption.

After the initial BOI reports have been submitted, additional reports will be required whenever there is a relevant correction (if there was an error in a previous report) or change (e.g., a financing is completed where new owners acquire interests in a reporting company making them “beneficial owners” or there is a change at the senior officer level, etc.). The corrected and/or updated report must be filed within 30 days of the reporting company becoming aware of a mistake or within 30 days of the event that triggers a required update.

What are the consequences of failing to comply with the CTA?

As a practical matter, companies can now almost certainly expect CTA compliance to be a routine item on every due diligence and auditor’s checklist.

More importantly, wilful violations of the CTA can have serious consequences, including criminal prosecution. The CTA provides that any person who either wilfully provides false or fraudulent beneficial ownership information or wilfully fails to report complete or updated beneficial ownership information to FinCEN in accordance with the requirements of the CTA is liable for a civil penalty of not more than $500 per day and may be fined up to $10,000 and sentenced to a prison term of up to two years.

Note that a person will have been deemed to have failed to report complete or updated beneficial ownership information if such person causes a reporting company’s failure to report required information or is a senior officer of the reporting company at the time of such failure. As such, CTA reporting failures can result in serious consequences for any senior officer of the reporting company.

What now?

If you are an existing reporting company that was formed prior to January 1, 2024, you should reach out to your legal advisors to ensure the filing of a timely initial BOI report on or before January 1, 2025.

If you are forming a US entity or registering a foreign entity to do business in the US during calendar year 2024, you should reach out to your legal advisors to ensure CTA compliance occurs within 90 days following formation (and 30 days after any change that would require an update to your initial filing).

It will also make sense for you to implement processes and procedures to gather all necessary information from beneficial owners (current and future) to ensure your reporting entity has the necessary information to make the required filings.