Corporate Transparency Act: Report card and year-end steps

With four months remaining in 2024, it makes sense to evaluate the changes to the Corporate Transparency Act (CTA) since January and to provide a strategic roadmap for those entity owners who still must comply with the new law.

Refresh on the Rules

Recall that the CTA requires privately owned entities, including corporations, LLCs, partnerships, and other entities formed under state law, to disclose information about the entity and its beneficial owners. The federal law defines beneficial owners as individuals who own or control at least 25% of the company or exercise substantial control over the entity.

The required information must be reported on a Beneficial Ownership Information Report (BOI Report) and uploaded to a secure portal maintained by the federal government. This information includes:

· Company Information: The legal name, trade names or "doing business as" (DBA) names, street address, state of formation, and Taxpayer Identification Number.

· Beneficial Owner Information: The full legal name, date of birth, residential or business address, and a scanned copy of either a passport or state driver's license of each beneficial owner.

Entities formed between Jan. 1, 2024 and Dec. 31, 2024 must report this information within 90 days of formation, while entities established before this date have until Jan. 1, 2025, to file their initial BOI Report.

Failure to report or providing false information can lead to civil and criminal penalties, including a maximum prison sentence of two years for those who willfully provide false or fraudulent information or fail to report complete or updated information.

FinCEN Report Card

While the required beneficial owner information is straightforward, the application of the law to ownership structures has caused confusion and delay. The government agency administering the CTA - the Financial Crimes Enforcement Network (FinCEN) -- has provided clarity on some issues by publishing Frequently Asked Questions (FAQ) on its website. Yet, other issues remain murky.

· Subsidiary Exemption: Initially, business owners were confused about the applicability of the subsidiary exemption. This exemption pertains to an entity whose ownership interests are "controlled or wholly owned," either directly or indirectly, by one or more entities. The CTA's intentional use of "controlled or wholly owned," rather than "wholly controlled or wholly owned," led to debate about whether all of a subsidiary's ownership interests needed to be controlled by an exempt entity in order to qualify for the subsidiary exemption. FinCEN clarified that the subsidiary exemption only applies if another entity owns all of the entity's ownership interests.

· Substantial Control: There is still ambiguity about exercising "substantial control" over an entity. Identifying substantial control requires a thorough review of corporate documents, agreements, and the roles of senior officers, managers, and anyone involved in major decision-making.

· Dissolved Entities: FinCEN has clarified that an entity formed in one year and dissolved in the same year is still required to file a BOI Report.

On balance, FinCEN's published guidance during 2024 has alleviated some confusion. But there is still work to be done and FinCEN would be wise to issue additional guidance soon. States are beginning to mirror the federal CTA. New York passed its version of the law in March 2024, set to take effect in 2026. Other states, including California and Massachusetts, are considering similar legislation.

What You Need to Do: Strategic Guidance for Business Owners

With the January 2025 CTA reporting deadline approaching, companies that have not yet filed their BOI Reports should act swiftly to ensure compliance. The following is a roadmap for CTA success:

1. Engage Legal Experts: At this stage of the year, consulting with legal professionals is crucial. Legal experts can provide efficient advice to ensure your BOI Reports are accurate and timely filed.

2. Review Your Entity Structure: Identify all entities in which you manage or have an ownership interest. For entities with more complex structures (i.e., joint ventures, tiered partnerships or corporations with many subsidiaries) determining beneficial ownership can be challenging.

3. Identify Beneficial Owners: Analyze who may qualify as a "beneficial owner" under the CTA. This includes individuals with substantial control or those who own at least 25% of the entity. In some situations, legal analysis will be required.

4. Gather Beneficial Ownership Information: Collecting the required information--such as names, addresses, and identification documents--from each beneficial owner will take time. For joint ventures, determining responsibility for filing BOI Reports and negotiating roles can add complexity.

5. Update Governing Documents: Ensure that legal counsel reviews and updates bylaws, operating agreements, and partnership agreements to include provisions for collecting and reporting beneficial ownership information. These documents must empower officers, directors, managers and general partners to obtain the necessary information from the responsible parties.

As we move further into the CTA's first year of implementation, businesses must remain proactive in their compliance efforts. The mid-year point is an opportunity to review and adjust corporate governance practices, ensuring they meet the new requirements and are prepared for future regulatory developments. By taking proactive steps now, companies can avoid a last-minute rush and be well prepared for the year-end deadline.