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What to Know About the Corporate Transparency Act

By Robert Garner, Levenfeld Pearlstein LLC

Effective January 1, 2024, the Corporate Transparency Act (CTA) requires approximately 32 million existing corporations, limited liability companies, and other business entities formed or registered to do business in the United States, as well as many of the approximately 5 million such entities newly formed each year, to electronically file a beneficial ownership information report (BOI Report) with the US Department of Treasury’s Financial Crime Enforcement Network (FinCEN). Most businesses will be required to file an initial BOI Report.

The CTA and the disclosure obligations it imposes upon reporting companies is designed to help safeguard national security and provide US law enforcement agencies with an additional tool to fight financial crimes, such as money laundering, trafficking, tax fraud, and other illicit activities. Willful failure to comply with these new reporting requirements can result in fines up to $10,000 and up to two years in prison.

There are several exemptions to these new reporting requirements, including an exemption for operating businesses (i.e., 20+ employees at the same FEIN and $5,000,000+ of revenue) and exemptions for other businesses that already have substantial regulatory requirements (e.g., accounting firms, SEC registered businesses, insurance companies, and publicly traded corporations). It is important to note that holding companies and most small operating businesses are not generally exempt from these BOI reporting requirements.

The rationale for the CTA’s disparate treatment is that larger, operating businesses are already subject to several existing laws and regulations designed to prevent money laundering, such as SEC filing requirements, FINRA, banking regulations, and insurance regulations. The CTA seeks to pull smaller shell companies and holding companies into the regulatory framework, which means the brunt of CTA compliance falls on smaller businesses.

Existing companies will have until January 1, 2025 to file their initial BOI Report. However, any new entities formed during 2024 will only have 90 days from formation to file their required BOI Report and must also report the company applicant information, which is the person that formed or directed formation of the entity. If the information from the initial BOI Report changes, the reporting company must update the BOI Report within 30 days.

The CTA’s reporting rule requires each legal entity, absent an exemption, to file an initial report disclosing information about the reporting company itself and the company’s “beneficial owners” to FinCEN. There is no cost to filing the BOI Report, which is available via a portal on the FinCEN website. The determination of who is a “beneficial owner” covers both equity holders with ownership of 25% or more as well as individuals who exercise “substantial control” over the reporting company. The “substantial control” requirement is rather complicated because it covers all types of control. According to FinCEN, “substantial control” parties include C-suite executives, trustees, certain board of director positions, and managers of limited liability companies. In distilling the ultimate beneficial owners of a reporting company, the analysis should end with individuals who ultimately control or own (or both control and own) a given legal entity.

When preparing the filing, it is important to note the obligation is on the reporting company itself and its fiduciaries, not on its third-party advisors or attorneys. Many “beneficial owners” choose to obtain something called a “FinCEN ID,” which is a unique identifying number issued to an individual by FinCEN. Although there is no requirement to obtain a FinCEN ID, doing so can simplify the reporting process if there are multiple filings to process. To obtain a FinCEN ID, the “beneficial owners” of your holding company clients should go to https://fincenid.fincen.gov, click the Create Account button to create an account and begin the application for a FinCEN ID, or if you already have an account, login in to enter the identifying information on the FinCEN ID application.

LP has formed the CTA Task Force to consult on these burgeoning issues of FinCEN compliance and complexities of beneficial ownership. For more information, here are some links to the FinCEN website that contains FAQs Beneficial Ownership Information Reporting | FinCEN.gov and a detailed compliance guide which provides a lot of great practical guidance.

Note: We are aware that on March 1, 2024, the United States District Court for the Northern District of Alabama declared the federal Corporate Transparency Act (CTA) “unconstitutional because it exceeds the Constitution’s limits on Congress’s power.” We anticipate that the US Department of Treasury will appeal to the US Court of Appeals for the 11th Circuit. FinCEN indicated it will not enforce the CTA at this time against the plaintiffs in that action, namely, members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.

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Robert Garner, a partner in LP’s Corporate and Tax Planning Practice Groups, advises clients on tax planning in connection with a wide variety of transactions. He works closely with private equity firms, real estate investors, strategists, and entrepreneurs on tax structuring related to acquisitions, dispositions, reorganizations, restructurings, recapitalizations, and other tax matters.
Additionally, Rob assists clients with a broad range of general corporate matters, including business formation, review of mergers and acquisitions agreements, and contract negotiation. He also has extensive experience in conducting all aspects of federal/state tax due diligence on potential acquisition targets and in transactional tax modeling.

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