2024
James Shafer, Attorney at Law
cta academy
A legal blog for small business explaining the Corporate Transparency Act
PART I - INTRODUCTION
What is “CTA Academy” and who is it intended for?
CTA Academy is a blog authored by business attorney James Shafer (“Attorney Author”) and is intended to provide information to small businesses to help them navigate the Corporate Transparency Act, whether they choose to make their own filings or seek professional assistance. While this blog was written by a business attorney, it is intended for general informational purposes only and cannot be relied upon as legal advice and the author does not take any responsibility for any use of this information or its accuracy. Furthermore, some details of the law which are unlikely to affect small businesses have been omitted in the interest of brevity. If you would like specific legal advice and assistance applicable to your company, please contact competent corporate counsel. James Shafer also offers his legal services to help companies comply with the CTA and in preparing and filing FinCEN BOI Reports, with relatively modest flat fees available for most small businesses. If you are interested in learning more about his services, please click above on “Attorney Assistance”. Accordingly, this blog may be considered an advertisement for the legal services of James Shafer under the law of some states. Please note that no attorney-client relationship will exist until such time as a client and Attorney Author sign a formal written retainer agreement.
What is the Corporate Transparency Act and why should I care?
The Corporate Transparency Act (“CTA”) is a statute (written law) passed by the U.S. federal government that took effect on January 1, 2024. It requires nearly all small and medium sized companies formed or doing business in the United States to file and update Beneficial Ownership Information Reports (“BOI Reports”) with FinCEN’s new Beneficial Ownership Secure System (“BOSS”). The potential penalties for willful failure to comply with the CTA requirements can be severe. BOI Reports contain certain required information relating to the Reporting Company, certain individuals (“Beneficial Owners”) who either “exercise substantial control” over or own or control at least 25% of the Reporting Company’s “ownership interests” and, for companies formed or registered in 2024 and thereafter, certain individuals who were responsible for forming the Reporting Company (“Company Applicants”). The Financial Crimes Enforcement Network of the U.S. Department of the Treasury (“FinCEN”) is the federal regulator which oversees implementation and enforcement of the CTA. The stated purpose of the CTA is to help the government uncover money laundering and other illegal activity carried out and hidden through the use of shell companies or other opaque legal structures. The law is designed to look through complex ownership structures and ascertain who is really controlling and benefiting financially from business entities operating in the United States.
What can happen if I don’t file my required BOI Reports or such reports don’t contain the required information?
Willful violations of the CTA may result in significant civil penalties of up to $591 per day of the violation and potential criminal penalties of imprisonment of up to two years and fines of up to $10,000 being imposed on the Reporting Company, any person willfully causing such violation and the Reporting Company’s Senior Officers. Hence, company management and its Beneficial Owners need to be proactive in making sure accurate BOI Reports are filed in a timely manner or they may even face personal liability under the CTA. The penalties can apply to anyone who willfully files a false BOI Report, fails to file a BOI Report, fails to update or correct a BOI Report when required, withholds necessary information or provides incomplete or false information for a BOI Report. If a Beneficial Owner or Company Applicant refuses to provide the personal information required to file a BOI Report or willfully provides false or incomplete information, such Beneficial Owner or Company Applicant may be held liable under the CTA. It remains to be seen how aggressive FinCEN will be in coming after violations of the CTA. While the CTA only provides for penalties for “willful” violations of the law, it would appear that liability could be imposed not only in clear cases of knowingly “blowing off” a required report or knowingly providing false information, but also in cases where a BOI Report was prepared and filed carelessly to the point that such noncompliance could be deemed to be “willful”. The CTA defines the term “willfully” to mean the voluntary, intentional violation of a known legal duty. The CTA provides that if a person has reason to believe that a filed BOI Report contains inaccurate information and voluntarily submits a report correcting the information within 30 days of discovery of the error and 90 days of the deadline for the original report, then the person should not incur liability for such inaccurate information, unless the inaccuracy was willful at the time it was filed.
Is the CTA unconstitutional and invalid?
Several lawsuits have been filed asserting that Congress exceeded its lawmaking authority in passing the CTA and it should therefore be declared null and void. One district court in Alabama has agreed with this argument, but its decision is only applicable to the limited named plaintiffs in the lawsuit. As it stands today, the CTA remains the law of the land for most people and the majority of lawyers believe it will ultimately be upheld. Given the stiff potential penalties for noncompliance, it is recommended that people comply with the law and meet its deadlines until such time as the CTA may be declared to be void in a court decision with general applicability.
Who will have access to the information contained in my BOI Reports?
FinCEN will allow certain domestic and foreign law enforcement and intelligence and other government agencies to have access to the information contained in its BOSS database of BOI Reports. FinCEN will also allow certain financial institutions to access your BOI Report as well if you provide your consent to such release of information. It is currently not known whether banks and other financial institutions will require Reporting Companies to provide such consent in the future as a condition of maintaining an account with them, but this would seem to be a likely development in the future. FinCEN has stated that beneficial ownership information reported to FinCEN will be stored in a secure, non-public database using rigorous information security methods and controls typically used in the Federal government to protect non-classified yet sensitive information systems at the highest security level. Still, some observers have expressed concern that the sensitive information contained in the database could be hacked and compromised at some point.
Do I need an attorney or accountant to prepare and file my FinCEN Beneficial Ownership Information Reports?
FinCEN has stated that it expects that many, if not most, reporting companies will be able to submit their BOI Reports on their own using the guidance FinCEN has issued, but that companies that need help with compliance can consult with professionals such as attorneys or accountants. Some commentors have expressed the opinion that this may be unrealistic and that the CTA imposes significant and unjustified red tape on small business. This Website is intended to help those companies that wish to file by themselves by providing useful information in a relatively easy to understand format. Each company will need to weigh the costs and benefits of either learning and applying the CTA rules and making its own filings or engaging professionals such as lawyers or accountants to help them to do so. In particular, companies will need to weigh the cost of hiring such professionals against the convenience and peace of mind of having professional assistance in preparing such filings and the time and energy that will be expended in learning and applying the CTA rules.
PART II – WHAT COMPANIES MUST COMPLY WITH THE CTA?
What companies are required to file BOI Reports?
Companies that are required to file BOI Reports are called “Reporting Companies”. Nearly all small businesses operating in the United States other than sole proprietorships and certain general partnerships will be Reporting Companies. If your company is not a Reporting Company or if it qualifies for an exemption, it is not required to file BOI Reports and it is not required to make a filing to claim its non-filer status. There are two types of Reporting Companies called “Domestic Reporting Companies” and “Foreign Reporting Companies”.
“Domestic Reporting Companies” are legal entities such as corporations, limited liability companies, limited partnerships, etc. that are formed by filing a document with the Secretary of State or other similar office in the United States or one of its territories or in certain Tribal jurisdictions.
“Foreign Reporting Companies” are legal entities formed under the law of a foreign country that have registered to do business in the United States or one of its territories by filing a document with the Secretary of State or other similar office of a U.S. state or territory. U.S. territories are the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, and the U.S. Virgin Islands.
There are 23 types of entities that are exempted from having to file BOI Reports and are thus not Reporting Companies, which are discussed below in more detail, including certain larger operating companies, certain highly regulated companies, certain non-profit companies and certain inactive companies. S-corporations are not exempt as a result of such status. See below under “What types of companies are exempt from the CTA reporting requirements?”
Are sole proprietorships, general partnerships and trusts Reporting Companies that are required to file BOI Reports?
Sole proprietorships and most general partnerships and trusts (other than those formed by means of government filings) are not Reporting Companies and do not have to submit BOI Reports. However, even freelancers or solo entrepreneurs that operate through a single member LLC or corporation will need to file for such Reporting Companies. Most common law trusts and general partnerships (but not limited partnerships) which do not require a government filing to come into existence are not Reporting Companies. Government filings with respect to tax identification numbers, fictitious business names or business licenses are not considered to be filings that create the entity and do not by themselves trigger CTA reporting requirements. There are some uncommon types of legal entities in some states with names such as a statutory trust, business trust or foundation that will be considered a Reporting Company if they are created by means of a government filing.
What types of companies are exempt from the CTA reporting requirements?
There are 23 types of entities that are exempt from filing BOI Reports summarized below (“Exempt Entities”). Most of these types of businesses are in highly regulated businesses and won’t be discussed here for the sake of brevity. These companies are likely to have sophisticated legal counsel who can help them to determine if the exemption applies to them. If you think that any of these exceptions might apply to your company, you should consult with your legal counsel.
1. Securities reporting issuer (the Company is required to file periodic reports as a public company with the SEC)
2. Governmental authority
3. Bank
4. Credit union
5. Depository institution holding company
6. Money services business
7. Broker or dealer in securities
8. Securities exchange or clearing agency
9. Other Exchange Act registered entity (applies to certain companies in the securities industry)
10. Investment company or investment adviser
11. Venture capital fund adviser
12. Insurance company
13. State-licensed insurance producer
14. Commodity Exchange Act registered entity
15. Public Accounting firm
16. Public utility
17. Financial market utility
18. Pooled investment vehicle (investment companies)
19. Tax-exempt entities (only IRC s. 501(c) exempt entities, s. 527(e)(1) political organizations and s. 4947(a)(1) or (2) charitable and split interest trusts), does NOT include S corporations or other nonprofits)
20. Entity assisting a tax-exempt entity
21. Large operating company (see below)
22. Subsidiary of certain exempt entities (see below)
23. Inactive entity (see below)
What is an exempt “Large Operating Company”?
A “Large Operating Company” may roughly be defined as a company that: (a) employs more than 20 full time employees (averaging at least 30 hours of service per week) in the United States, (b) has an operating presence at its own physical office within the United States, (c) filed federal income tax returns for the prior year demonstrating more than $5 million in domestic gross receipts or sales. The $5 million may include gross receipts or sales from certain affiliated entities included in a consolidated tax return. If the company has not filed a tax return for the previous year at the time when the BOI Report is due, then it should look back to its most recently filed tax return. The exemption requires the entity itself employ more than 20 full-time employees, and does not permit consolidation of the employee count across multiple entities. If you believe your company might meet the definition of a Large Operating Company, you should consult with your legal counsel to confirm whether the exemption applies, as the rules are somewhat complicated.
When are Subsidiaries of Exempt Entities also themselves exempt?
Certain wholly-owned subsidiaries of certain other exempt entities, including tax-exempt entities and Large Operating Companies, are also exempt, provided that all of the entity’s Ownership Interests are wholly controlled or wholly owned, directly or indirectly, by the exempt entity. If you believe this exemption might apply to your company, you should consult with your legal counsel to confirm whether the exemption applies.
What is an “Inactive Entity?”
Certain inactive business entities may qualify for an exemption as an “Inactive Entity” if they: (a) were in existence on or before January 1, 2020; (b) are not engaged in active business; (c) are not owned by a foreign person, whether directly or indirectly, wholly or in part; (d) have not experienced any change in ownership in the preceding 12-month period; (e) have not sent nor received more than $1,000 directly or indirectly during the preceding 12-month period; and (f) do not otherwise hold any assets, including any ownership interest in other entities. If you believe your company might meet the definition of an “Inactive Entity”, you should consult with your legal counsel to confirm whether the exemption applies, as the rules are complicated.
Is a homeowner association (HOA) exempt from the CTA reporting requirements?
An HOA may or may not be exempt, depending on if it would otherwise be a Reporting Company and its tax status with the IRS. An incorporated HOA may be exempt if it is an IRC Section 501(c)(4) social welfare organization. Most HOAs will not be exempt, including HOAs subject to taxation under IRC Section 528.
PART III – WHEN MUST A REPORTING COMPANY FILE A BOI REPORT?
When must a Reporting Company file its initial BOI Report?
A Reporting Company formed or registered in the United States prior to 2024 has until January 1, 2025 to file its initial BOI Report.
A Reporting Company formed or registered in the United States during 2024 has 90 calendar days to file its initial BOI Report after receiving actual or public notice that its creation or registration is effective.
A Reporting Company formed or registered in the United States after 2024 has 30 calendar days to file its initial BOI Report after receiving actual or public notice that its creation or registration is effective.
What is “actual or public notice” of creation or registration of an entity that begins the 90 or 30 day period for filing an initial BOI Report?
“Actual or public notice” means notification, either direct or to the public, that the entity’s creation or registration is effective, whichever is earlier. In many cases, the Secretary of State or other government office that files business formation documents may take days or even weeks to process formation documents and confirm that an entity has been formed, even though the official date of incorporation or formation may be the date the document was submitted. The date of actual or public notice would not be the official date of formation, but the date that the agency first notified the filer or published to the public notice that the entity has been formed. For example, if a filer submitted for filing a certificate of incorporation for a new corporation on January 2, 2024, and on January 16, 2024 the Secretary of State processed the filing and sent notice of the filing to the filer and posted this information on its public Website or a public registry, the new corporation would have 90 calendar days from January 16, 2024 to file its BOI Report, even if the formal date of incorporation related back to the date the filing was submitted, which was January 2, 2024.
What if a Reporting Company becomes exempt or a previously exempt company loses such exemption?
A Reporting Company that was previously exempt from filing but ceases to qualify for such exemption must file its initial BOI Report within 30 days of the termination of its exemption, except that a Reporting Company that loses its exempt status during 2024 will not be required to file its initial BOI Report until January 1, 2025. Conversely, if a Reporting Company has filed a BOI Report and later qualifies for an exemption, the Reporting Company should file an updated BOI Report within 30 days to indicate that it is newly exempt from the reporting requirements. An updated BOI Report for a newly exempt entity will only require that the entity identify itself and check a box noting its newly exempt status.
When must a Reporting Company update a previously filed BOI Report?
There is no requirement to file annual or other periodic updates to BOI Reports if there is no change to the required information. If there is any change to the required information about a Reporting Company or its Beneficial Owners contained in the most recent BOI Report of a Reporting Company, then the Reporting Company must file an updated BOI Report no later than 30 days after the date on which such change occurred. Some examples of changes that would require the filing of an updated BOI Report include: a change of the business address of the Reporting Company; the Reporting Company adopting a new DBA or dropping a current one; a change in the identity of the Reporting Company’s Beneficial Owners, including a change in the identity of its Senior Officers or other persons with Substantial Control or an equity issuance by the Reporting Company or transfer by a current equity owner that results in a different set of Beneficial Owners with 25% or greater Ownership Interests; a change of current residential address of a Beneficial Owner; the death of a Beneficial Owner; a name change of a Beneficial Owner; or a change in the unique identifying number provided for a Beneficial Owner in a BOI Report. If a Beneficial Owner obtains a new passport, driver’s license or other identifying document that includes the changed name, address, or identifying number, the Reporting Company also would have to file an updated BOI Report, including an image of the new identifying document. Note that any passport renewal will result in a new unique identifying number, while the renewal of a driver’s license or other state identification may or may not, depending on the state. A Reporting Company is not required to file an updated BOI Report for any changes to previously reported personal information about a Company Applicant.
When must a Reporting Company correct a previously filed BOI Report?
If an inaccuracy is identified in a currently effective BOI Report, the Reporting Company must correct it no later than 30 days after the date it became aware of the inaccuracy or had reason to know of it. This includes any inaccuracy at the time the BOI Report was filed in the required information provided about the Reporting Company, its Beneficial Owners or its Company Applicants. The CTA provides that if a person has reason to believe that a filed BOI Report contains inaccurate information and voluntarily submits a report correcting the information within 30 days of discovery of the error and 90 days of the deadline for the original report, then the person should not incur liability for such inaccurate information, unless the inaccuracy was willful at the time it was filed.
PART IV – HOW TO FILE A BOI REPORT AND WHAT INFORMATION MUST BE INCLUDED?
How do I file my BOI Report with FinCEN?
All BOI Reports must be filed with FinCEN electronically through FinCEN’s secure online portal by selecting “File BOIR” on the Web page located at https://boiefiling.fincen.gov/fileboir. A BOI Report may be filed by officers or employees of the Reporting Company, or any other person authorized by the Reporting Company such as an attorney, accountant or third-party filer service. FinCEN does not charge any fee for the submission of BOI Reports to FinCEN or for obtaining a FinCEN Identifier. Of course, third-party filer services or professionals may charge for their services in connection with such filings. BOI Reports may be submitted by means of filling out the required fields of FinCEN’s web-based application, or by completing and submitting a fillable pdf file downloaded from FinCEN’s Website. The latter option may be preferable in that future updated BOI Filings will be easier to generate since much of the required information will still be populated in the fillable pdf document and only the changed information will need to be updated. In contrast, all of the fields in FinCEN’s web-based application will need to be filled out again from scratch to create an updated BOI Filing. FinCEN’s filing application provides acknowledgement of submission success or failure, and the submitter will be able to download a transcript of the filed BOI Report. The filer of the BOI Report and the Reporting Company will need to obtain and save this confirmation and transcript as evidence of filing and for future reference. It is likely that Reporting Companies will be asked to provide such transcripts in the future as part of the due diligence process to potential providers of financing or potential acquirors of the business, who will want to ensure that the Reporting Company has been in compliance with the requirements of the CTA.
What information must be contained in a company’s BOI Report?
Reporting Companies must provide certain information in their BOI Reports with respect to the Reporting Company itself, all of its Beneficial Owners and, in the case of Reporting Companies formed or first registered in 2024 or thereafter, its Company Applicants. The BOI Report should contain only current beneficial ownership information, and not any historical information or anticipated changes. The most challenging part of preparing the BOI Report will typically be identifying all of the Beneficial Owners and, in some cases, Company Applicants. The person submitting a BOI Report must provide their name and email address or phone number, and certify that the BOI Report is true, correct and complete. The following information is required to be included in a BOI Report, which should also indicate if the filing is an initial report or a correction or update of a prior report:
(a) The exact legal name of Reporting Company as contained in its current charter or formation document, as amended.
(b) Any “trading as” names or “doing business as” names (DBAs).
(c) The complete current address of the principal place of business of the Reporting Company in the United States, or if the Reporting Business’ principal place of business is not in the United States, the primary place in the United States where the Reporting Company conducts business. If a Reporting Company has no principal place of business in the United States and conducts business at more than one location within the United States, then the reporting company may report as its primary location the address of any of those locations where the Reporting Company receives important correspondence. If a Reporting Company has no principal place of business in the United States and does not conduct business functions at any location in the United States, then its primary location is the address in the United States of the person that the Reporting Company, under State or other applicable law, has designated to accept service of legal process on its behalf. The address must be a street address and not a P.O. Box.
(d) The jurisdiction of formation of the Reporting Company.
(e) For Foreign Reporting Companies only, the jurisdiction of first registration in the United States.
(f) The Reporting Company’s IRS Taxpayer Identification Number (TIN) (typically, an Employer Identification Number (EIN)). If a Foreign Reporting Company has not been issued a TIN, report a taxpayer identification number issued by a foreign jurisdiction and the name of such jurisdiction. A disregarded entity such as a single-member LLC may report its own EIN or an EIN, Social Security Number or Individual Taxpayer Identification Number (ITIN) of its sole owner as its TIN in certain situations. See Question F.13. in FinCEN's Beneficial Ownership Information Frequently Asked Questions for further details.
The following information is required to be included with respect to each Beneficial Owner and Company Applicant included in the BOI Report:
(a) Full legal name, including middle names and suffixes such as Jr., III, etc.
(b) Date of birth.
(c) Complete current address. For Beneficial Owners, this is their current primary residential address. For Company Applicants who form businesses in the course of their business, this is their current business address. For other Company Applicants, this is their current primary residential address.
(d) The unique identifying number and issuing jurisdiction from, and an image of, a U.S. passport, a domestic driver's license or other state identification document, or if an individual does not have any of the foregoing, a foreign passport. The identifying document may not be expired. The image must be in JPG/JPEG, PNG or PDF format and may not exceed 4 MB in size.
Note that if a Beneficial Owner or Company Applicant has obtained a FinCEN Identifier and provided it to the Reporting Company, the Reporting Company may include such FinCEN Identifier in its BOI Report instead of the information about the individual. Hence individuals who may need to be included in numerous BOI Reports or who wish to keep their personal information private from the Reporting Company and its agents may want to file for a FinCEN Identifier, as described below. However, they will need to keep the FinCEN Identifier information updated in the future to reflect any changes to the information provided when they received the FinCEN Identifier.
PART V – DETERMINING A COMPANY’S BENEFICIAL OWNERS
Who are the Beneficial Owners that must be reported in a BOI Report?
A Beneficial Owner is an individual who either, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, either exercises “Substantial Control” over the Reporting Company or owns or controls at least 25% of the Reporting Company’s “Ownership Interests”, subject to certain exceptions. These terms are discussed in detail below. A Reporting Company may have only one or several Beneficial Owners. Reporting Companies are not required to report the reason for any Beneficial Owner’s status as such.
What constitutes “Substantial Control” resulting in Beneficial Owner status?
The first group of individuals who are Beneficial Owners are those who exercise “Substantial Control” over the Reporting Company, directly or indirectly, in any one of four ways:
(1) They are a “Senior Officer” of the Reporting Company (the company’s president, chief financial officer, general counsel, chief executive office, chief operating officer, or any other officer who performs a similar function);
(2) They have authority to appoint or remove any Senor Officer or a majority of directors (or similar body) of the Reporting Company;
(3) They are an “Important Decision-Maker” for the Reporting Company (see below); or
(4) They have any other form of substantial control over the Reporting Company.
Substantial Control is very broadly defined and is clearly meant to include anyone with significant influence over the management of the Company. Individuals can exercise Substantial Control through contracts, formal or informal arrangements, understandings, relationships or otherwise. What is key is the reality of who has the ability to influence important decisions. Some examples of direct ways to exercise Substantial Control are having Board representation, ownership or control of a majority of voting rights, or having certain contractual rights associated with providing equity financing. A trustee of a trust with significant ownership in a Reporting Company may have Substantial Control. Where a Reporting Company is owned by other legal entities or nominees, the identification of the ultimate indirect Beneficial Owners will likely be complicated and you will probably want to work with legal counsel to determine who are the ultimate Beneficial Owners. Normally, attorneys and accountants for the Reporting Companies are not considered to exercise Substantial Control as a result of such positions, except in the case of a Reporting Company’s general counsel, who is included in the definition of “Senior Officer”.
Who is an “Important Decision-Maker” resulting in Substantial Control?
An individual will be an “Important Decision-Maker” of the Reporting Company if they have the power to direct, determine or substantially influence important decisions of the Reporting Company, including decisions regarding the company’s business, finances or structure, such as: (1) the nature, scope, and attributes of the business, (2) the selection or termination of business lines or ventures, or geographic focus; (3) the entry into or termination, or the fulfillment or non-fulfillment, of significant contracts; (4) the sale, lease, mortgage, or other transfer of its principal assets; (5) major expenditures or investments, issuances of any equity, incurrence of significant debt, or approval of the operating budget; (6) compensation schemes and incentive programs for senior officers; (7) reorganization, dissolution, or merger of the company; or (7) amendments to any substantial governance documents of the company, including the certificate of incorporation, bylaws, articles of organization, operating agreement or similar documents, or significant policies or procedures. However, as discussed below, an employee of a Reporting Company who is not a Senior Officer or equity owner will likely be exempt from the definition of Beneficial Owner. FinCEN has stated that members of a Board of Directors will not necessarily be an Important Decision-Maker or Beneficial Owner and must be considered on a case-by-case basis, although it would seem likely in many cases, especially with companies with small boards. Likewise, a Reporting Company’s “partnership representative” or “tax matters partner” as defined in the tax laws may, but need not be, a Beneficial Owner. It is currently a matter of debate whether an investor with a blocking right as to important decisions would be considered an Important Decision-Maker.
What if an employee of the Reporting Company (other than a Senior Officer or equity owner in the Reporting Company) exercises Substantial Control over the Reporting Company?
A person will not be considered to be Beneficial Owner who must be disclosed in BOI Reports, even if they otherwise meet the definition of a Beneficial Owner, if they are an employee of the Reporting Company (other than a Senior Officer) and the individual’s Substantial Control over and economic benefits from the Reporting Company are derived solely from their employment status.
What constitutes an “Ownership Interest” in determining Beneficial Owner status?
The second reason an individual may be considered a Beneficial Owner is if they own or control at least 25% of the Reporting Company’s “Ownership Interests.” An “Ownership Interest” is generally what people consider to be equity in a company, such as shares, stock, voting rights or other ownership rights in the Reporting Company, as well as any other instrument, contract, arrangement, understanding, relationship or mechanism used to establish ownership. Examples of ownership interests include shares of equity, stock, LLC interests or units, partnership interests, voting rights, and capital or profits interests or rights. Also included within Ownership Interests are any instruments representing, convertible into or exercisable for equity, stock or voting rights or capital or profits interests, including options, warrants, SAFEs, futures, subscriptions for equity, voting trust certificates and convertible debt instruments.
How do I calculate who holds Ownership Interests of 25% or more of the Reporting Company?
It the Reporting Company has any outstanding options, privileges or convertible instruments related to its equity, assume they have been exercised or converted in all calculations.
(a) If the Reporting Company has issued shares of stock, is a corporation or is treated as a corporation for federal income tax purposes, calculate each individual’s ownership interest as a percentage of the total shares of stock issued. If there are more than one class or series of stock with different voting or ownership rights, then you will need to make two calculations for ownership interest value and voting power and the individual’s Ownership Interest percentage will be the larger of the two percentages. In each case, the percentage will be based on all shares owned and outstanding, including all options and convertible securities as if they were exercised or converted.
(b) If the Reporting Company is taxed as a partnership for federal income tax purposes or issues capital or profit interests, which includes many limited liability companies and partnerships, then you add an individual’s capital and profit percentages and divide that by the Reporting Company’s total capital and profit percentages to get the individual’s Ownership Interest percentage.
(c) If neither of the preceding two calculations apply, then you include as a Beneficial Owner any individual who owns or controls 25% or more of any class or type of Ownership Interest in the Reporting Company.
What if a parent company owns or controls 25% or more of the Reporting Company’s Ownership Interests?
Normally, a business entity cannot be a Beneficial Owner even if it owns 25% of the Ownership Interests of a Reporting Company because only individuals can be Beneficial Owners, so we must analyze which individuals meet the Substantial Control or Ownership Interests tests with respect to the Reporting Company indirectly through the parent entity. However, there are two specific exceptions to this rule relating to certain exempt entities and where the Beneficial Owners of the Reporting Company and the intermediate company are the same individuals. When calculating the percentage Ownership Interest of an individual owner of a parent entity of the Reporting Company, you multiply the percentage Ownership Interest of the individual in the parent entity by the percentage Ownership Interest of the parent entity in the Reporting Company to see if you reach the 25% Ownership Interest threshold for Beneficial Owner status. For example, if Individual A owned 50% of Parent Corporation and Parent Corporation owned 50% of the Reporting Company, Individual A would own a 25% Ownership Interest in, and therefore be a Beneficial Owner of, the Reporting Company, even if Individual A had no management role or other Substantial Control over the Reporting Company. If there is any complexity in the capital structure of your Reporting Company, you may want to consult with legal counsel to help you apply these rules correctly.
What if an Exempt Entity owns or controls at least 25% of the Ownership Interests in a Reporting Company?
The BOI Report for a Reporting Company does not need to report information about any Beneficial Owner whose Ownership Interests in a Reporting Company are held though one or more entities, all of which are themselves Exempt Entities. If this rule applies, then the Reporting Company may report the name of all such Exempt Entities instead of the individual who is a Beneficial Owner in the Reporting Company through ownership in those Exempt Entities. If an individual owns or controls Ownership Interests through both exempt and non-exempt entities, then the individual must be reported as a Beneficial Owner, but the exempt entities do not need to be listed.
What if a trust owns or controls at least 25% of the Ownership Interests in a Reporting Company?
When a trust holds sufficient Ownership Interests in a Reporting Company, the Beneficial Owner(s) would normally be trustee(s) of the trust or other individuals with the authority to dispose of trust assets or replace the trustee(s), a beneficiary who is the sole permissible recipient of income and principal from the trust or who, as a beneficiary, has the right to demand a distribution of or withdrawal of substantially all of the assets from the trust, or a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets from the trust. There could be other situations where individuals associated with a trust would be considered Beneficial Owners, depending on the facts and circumstances. Questions with respect to who are the Beneficial Owners of Ownership Interests owned by trusts, especially in cases of corporate trustees, are typically complicated and legal counsel should be consulted in most cases.
What about community property and joint ownership – are spouses with community property interests and other joint owners also Beneficial Owners?
Where more than one person jointly own Ownership Interests of at least 25% of a Reporting Company, normally all such persons will be Beneficial Owners as beneficial ownership includes joint ownership with one or more other persons of an undivided interest in an Ownership Interest. Thus, it would appear that a community property interest in a 25% Ownership Interest would trigger Beneficial Owner status in the spouse or registered domestic partner of a person who holds formal title in such Ownership Interests. Only a minority of states have community property systems and determining what property owned by spouses in such states constitutes community property can be complicated. As a result, Reporting Companies may want to keep written certifications from Beneficial Owners regarding the community property status of their Ownership Interests and confirm that such Beneficial Owners use due diligence in making this determination. As of the time or writing, the following states had community property systems: Arizona, Texas, California, Idaho, Louisiana, Nevada, New Mexico, Washington and Wisconsin. In addition, each of Alaska, Tennessee, Kentucky and Florida had optional community property trust schemes.
What if a minor would be a Beneficial Owner?
An individual is not considered to be a Beneficial Owners who must be disclosed in BOI Reports if he or she is a minor child as defined in the jurisdiction where the Reporting Company is created or first registered. In this case, a parent or legal guardian of the minor should be reported as a Beneficial Owner, including indicating their status as a parent or legal guardian in the BOI Report. When the minor reaches the age of majority, the exception ceases to apply and the BOI Report for the Reporting Company should be updated within 30 days updating the Beneficial Owner information accordingly.
What if a nominee, intermediary, custodian or agent would be a Beneficial Owner?
An individual is not considered to be Beneficial Owners who must be disclosed in BOI Reports if he or she merely acts on behalf of an actual beneficial owner as its nominee, intermediary, custodian or agent. This may apply where certain professionals perform financial or advisory services for the beneficial owner. The beneficial owner, however, must be included in the BOI Report as a Beneficial Owner.
What if a creditor of the Reporting Company would be a Beneficial Owner?
A person will not be considered to be a Beneficial Owner, even if they otherwise meet the definition of a Beneficial Owner, if their only interest in the Reporting Company is as a “creditor”, namely an individual who would meet the definition of a Beneficial Owner solely through rights or interests for the payment of a predetermined sum of money, such as a debt incurred by the Reporting Company, or a loan covenant or other similar right associated with such debt.
PART VI – WHO ARE COMPANY APPLICANTS WHO MUST BE REPORTED?
Which Reporting Companies must include information regarding their Company Applicants?
No information with respect to Company Applicants needs to be reported for Reporting Companies formed or first registered to do business in the U.S. prior to 2024. All Reporting Companies formed or first registered during 2024 or thereafter must include information with respect to their Company Applicant(s), but there is no duty to update information about Company Applicants after the initial BOI Report if it changes.
Who is a Company Applicant?
A “Company Applicant” is an individual (and not a company or entity) who directly files (a “direct filer”) or is primarily responsible for directing or controlling the filing of (a “controlling filer”) the document that creates or registers a Reporting Company. Every Reporting Company has at least one, and no more than two, Company Applicants.
Every Reporting Company has a direct filer, who directly files the formation or registration document with the government authority, and this typically may be an employee of a corporate filing service or an attorney or other person who submits a filing in person or online to the government office. However, if an individual hires a courier to deliver a filing and that is the only role of the courier and their employer in the process, the person hiring the courier will be considered the direct filer, and not the courier. In contrast, if the courier is employed by a corporate filing service or law firm or other entity that plays a role in the creation or registration of the Reporting Company, then the courier will be considered the direct filer and a Company Applicant.
Not all Reporting Companies will have a controlling filer apart from the direct filer, but many will. For example, an attorney or entrepreneur tasked with forming a company who prepares and forwards a formation document to a corporate filing service will be a controlling filer. Where multiple attorneys, paralegals or other service providers are involved, determining the controlling filer can become a more difficult call. Status as a formal “incorporator” who signs a certificate of incorporation or similar document does not indicate status as a controlling filer. Rather, it is necessary to look at who is primarily responsible for making the decisions about the filing, such as how the filing is managed, what content the document includes, and when and where the filing occurs.
PART VII – FINCEN IDENTIFIERS
What is a FinCEN Identifier and how do I obtain one?
Beneficial Owners, Company Applicants and Reporting Companies can obtain a “FinCEN Identifier”, a unique identifying number assigned to such person by FinCEN electronically through FinCEN’s online portal located at https://fincenid.fincen.gov. Anyone authorized to act on behalf of an individual may request a FinCEN Identifier on their behalf. Obtaining a FinCEN Identifier for an individual requires the requesting party to create a Login.gov account, which is tied to the individual receiving the FinCEN Identifier. Individuals who receive a FinCEN Identifier should ensure their login credentials, including email address and related multi-factor information associated with their Login.gov account, are saved for future reference. To get a FinCEN identifier, a Beneficial Owner applicant must upload to the BOSS system their personal information that would otherwise be contained in the BOI Report, including full legal name, date of birth, current primary residential address, and identifying number and jurisdiction of an acceptable identification document and an image thereof in JPG/JPEG, PNG or PDF format. Reporting Companies can check a box on their BOI Reports to receive a FinCEN Identifier for the Reporting Company at the time of filing their BOI Report, although there may be little reason to do so since the use of a FinCEN Identifier by a Reporting Company is very limited to a specific circumstance where the Reporting Company has a wholly-owned subsidiary. Beneficial Owners and Company Applicants can provide their FinCEN Identifiers to Reporting Companies in lieu of providing such individuals’ personal information and the Reporting Company can include a FinCEN Identifier of a Beneficial Owner or Company Filer in their BOI Report instead of their personal information. However, it is incumbent upon such persons using FinCEN Identifiers to keep all of their personal information submitted with respect to such FinCEN Identifiers correct and up to date at all times and a Reporting Company should get contractual commitments from Beneficial Owners to do so by updating or correcting their information with FinCEN whenever required and within the permitted time period. Individuals and Reporting Companies may only receive one FinCEN Identifier. An individual may provide both their residential address as a Beneficial Owner and their business address as a Company Applicant if they wish to use their FinCEN Identifier in reporting both roles.
When must a recipient of a FinCEN Identifier update information provided to obtain the FinCEN Identifier?
If there is any change to the information submitted to obtain a FinCEN Identifier, the holder of the FinCEN Identifier must update such information no later than 30 days after the date on which such change occurred. Some examples of changes that would require updating such information include: a change of name or current address of the holder of the FinCEN Identifier or a change in the identification number of their identifying document, including an image of the new identifying document. Note that any passport renewal will result in a new unique identifying number, while the renewal of a driver’s license or other state identification may or may not, depending on the state. Individuals and companies must update any information through the FinCEN Identifier application that is also used to request a FinCEN Identifier.
When must a recipient of a FinCEN Identifier correct information previously provided to obtain a FinCEN Identifier?
If an inaccuracy is identified in information submitted in order to obtain a FinCEN Identifier, it must be corrected no later than 30 days after the date the holder of the FinCEN Identifier became aware of the inaccuracy or had reason to know of it. Individuals and companies must correct any inaccurate information through the FinCEN online portal.
When can a Reporting Company report another entity’s FinCEN Identifier and full legal name instead of information about its Beneficial Owners?
A Reporting Company may report another entity’s FinCEN Identifier and full legal name in place of information about its Beneficial Owners when three conditions are met: (1) the other entity obtains a FinCEN identifier and provides it to the Reporting Company; (2) the Beneficial Owners hold interests in the Reporting Company through Ownership Interests in the other entity; and (3) the Beneficial Owners of the Reporting Company and the other entity are the exact same individuals.
PART VIII – MISCELLANEOUS TOPICS
What should a Reporting Company do upon dissolution or termination?
There is no requirement to report the termination or dissolution of a Reporting Company. However, any changes to the identity of its Beneficial Owners due to factors such as resignations of Senior Officers and directors or changes in outstanding Ownership Interests in connection with a dissolution may need to be reported in an updated BOI Report. A Reporting Company that ceased to exist as a legal entity prior to 2024 is not required to file a BOI Report, provided that it entirely completed the process of formally and irrevocably dissolving by such time. FinCEN has stated that a company typically completes the process of formally and irrevocably dissolving by, for example, filing dissolution paperwork with its jurisdiction of creation or registration, receiving written confirmation of dissolution, paying related taxes or fees, ceasing to conduct any business, and winding up its affairs (e.g., fully liquidating itself and closing all bank accounts). Thus, the concept of dissolution of the company appears to include more than the formal dissolution, which is normally completed upon filing of a certificate of dissolution or termination or similar document with a Secretary of State, but also includes the winding up process which can extend for months or even years after the formal dissolution is achieved. If a company is formed or registered during 2024 or thereafter, it must file a BOI Report even if it is completely dissolved and ceases to exist prior to the BOI Report filing deadline. A company that is administratively dissolved or suspended, for example, because of failure to pay franchise taxes or fees or file required reports, normally does not cease to exist as a legal entity unless the dissolution or suspension becomes permanent. Typically, a company that is administratively suspended or dissolved for failure to pay annual taxes or fees may be revived by paying past due amounts and penalties and filing the required reports. A Reporting Company may authorize any person, including its officers, employees or third-party service providers, to file a BOI Report or update post-dissolution, and thus it should make such arrangement to ensure compliance with any filing requirements. If a Reporting Company formed or registered in 2024 or later ceases to exist prior to the deadline for its initial BOI Filing and no initial BOI Filing is made before the Reporting Company ceases to exist, then the Beneficial Ownership information in the BOI Filing should reflect the beneficial ownership accurate as of the moment prior to the reporting company ceasing to exist.
Is a Reporting Company responsible if a Beneficial Owner or Company Applicant fails to supply the required information for a BOI Report?
FinCEN has stated that Reporting Companies are “responsible” for ensuring that they submit complete and accurate beneficial ownership information to FinCEN. It is unclear how this statement will be reconciled with the principle that penalties apply to “willful” violations of the CTA, for example where a Beneficial Owner refuses to supply the required information. It would seem that Reporting Companies will be expected to put in place compliance procedures and mechanisms for collecting the required information and being informed of any changes that would require an updated filing. This could include contract provisions in various company documents and contracts, as well as periodic reminders and inquiries about the need to report updated information. FinCEN has stated, “existing reporting companies should engage with their beneficial owners to advise them of this requirement, obtain required information, and revise or consider putting in place mechanisms to ensure that beneficial owners will keep reporting companies apprised of changes in reported information, if necessary. Beneficial owners and company applicants should also be aware that they may face penalties if they willfully cause a reporting company to fail to report complete or updated beneficial ownership information. Persons considering creating or registering legal entities that will be reporting companies should take steps to ensure that they have access to the beneficial ownership information required to be reported to FinCEN, and that they have mechanisms in place to ensure that the reporting company is kept apprised of changes in that information.”
What should a Reporting Company do if ownership of the company is in dispute?
If ownership of the Reporting Company is the subject of active litigation and an initial BOI Report has not been filed, a BOI Report should be filed including as Beneficial Owners all individuals who exercise Substantial Control and who own or control, or claim to own or control, 25% of the Ownership Interests of the company. If the Reporting Company has previously filed a BOI Report and litigation is resolved in a way resulting in the Beneficial Owners of the company being different from those reported in the prior BOI Report, the Reporting Company must file an updated BOI Report within 30 calendar days of the resolution of such litigation.
PART IX – WHERE TO FIND FURTHER INFORMATION
Where can I find more information about the CTA reporting requirements?
Official Guidance from FinCEN:
Beneficial Ownership Information Reporting | FinCEN.gov
https://www.fincen.gov/boi/small-entity-compliance-guide
https://www.fincen.gov/boi-faqs
Statutory and Regulatory Sources of Law:
31 U.S.C. 5336 (Beneficial ownership information reporting requirements)
31 CFR 1010.380 (excerpt from Beneficial Ownership information Reporting Requirements Final Rule)
Use of FinCEN Identifiers for Reporting Beneficial Ownership Information of Entities
Beneficial Ownership Information Reporting Requirements Final Rule
Beneficial Ownership Information Access and Safeguards Final Rule
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