The Corporate Transparency Act: A Primer

I. Introduction and Purpose of the CTA

This is a basic primer describing the Corporate Transparency Act (“CTA“) which was enacted into federal law on January 1, 2021 as part of the Anti-Money Laundering Act of 2020 and became effective January 1, 2024.  The purpose of this Primer is to describe the CTA for the benefit of business owners and operators in simple straightforward language with a focus on the actions needed to comply with the requirements of the CTA.

For context, the stated purpose of the CTA as published in the federal regulations is to enhance beneficial ownership transparency in the U.S. in order to: “protect the U.S. financial system from illicit use and impede malign actors from abusing legal entities, like shell companies, to conceal proceeds of corrupt and criminal acts.”

 The CTA is intended to provide law enforcement with information about business enterprises and the ownership of those enterprises for the purpose of providing law enforcement with this information for detecting, preventing, and punishing money laundering, terrorism, human trafficking and use of U.S. businesses to mask the identities of the individuals who own and control the entities and who ultimately are behind such crimes. Concealing such information can undermine U.S. national security, economic fairness, and the integrity of the U.S. financial system.

The CTA establishes a federal standard for incorporation practices that require disclosure of ownership information at the point of incorporation or organization of business enterprises on the state level. This is a federal law and not a series of state laws, and is the first of its kind to monitor and maintain a database of ownership of small and early-stage business entities.

NOTE: The use of capitalized terms in this Primer is to distinguish certain terms that have specific definitions under the CTA and its regulations, but which are not capitalized in the statute or the regulations. Legal citations are not provided for the statute or regulations quoted but are available upon request.

II. Obligations and Penalties of the New Law

Reporting obligations are at the core of the CTA. The essential tasks required are for owners, managers, and officers of business entities to file certain types of reports with U.S. Department of the Treasury’s Financial Crimes Enforcement Network (known as “FinCEN“) to be maintained in a federal database.

Specifically, the statute requires certain types of domestic and foreign entities, called “Reporting Companies” to submit specified reports to FinCEN regarding the entity itself and its owners.  The ownership information is defined as “Beneficial Ownership Information” or “BOI” of the Reporting Company.  It’s important to remember that the Reporting Company is the responsible party obligated to file the reports and not the advisors, lawyers, or accountants who serve the Reporting Company. Under the CTA, Reporting Companies are required to report to FinCEN certain identifying information pertaining to its “Beneficial Owners” and “Company Applicants” as defined by the CTA.   Including providing evidence of the authenticity of the Beneficial Owners and Company Applicants in the form of personal identifying documents, such as driver’s licenses or passports.

There are serious penalties for willfully violating the statute. The CTA makes it unlawful for any person to willfully provide, or attempt to provide, false or fraudulent BOI to FinCEN, or to willfully fail to report complete or updated BOI to FinCEN. There are federal civil and criminal offenses for violations of the CTA. Willful violations may result in a civil penalty of up to $500 for each day a violation continues or has not been cured ($15,000 per month) and fines up to $10,000 and imprisonment for up to two years (or both) for a criminal violation.

These penalties apply to “any person,” which includes individuals and entities, including the Reporting Company itself, who causes the failure to comply with the statute or any person who is a “Senior Officer of the entity at the time of the failure.”  “Senior Officer” is defined below in this primer.

Advisors to the Reporting Company, such as attorneys or accountants, will need to advise and assist the owners and officers of the business to prepare the certifications for filing because there are legal and other technical interpretations needed for any Reporting Company to comply with the CTA. However, the ultimate requirement for the filings are the responsibility of the Reporting Company.  The certification on the Beneficial Ownership Information Report (“BOIR”), which is the form that is filed online with FinCEN, states the following:

“I certify that I am authorized to file this BOIR on behalf of the reporting company. I further certify, on behalf of the reporting company, that the information contained in this BOIR is true, correct, and complete.”

III. The Three Reporting Categories

The CTA requires that the Reporting Company report information to FinCEN about three general groups of entities or individuals:

1. The Reporting Company itself;
2. The Beneficial Owner Information (BOI); and
3. The Company Applicants.

IV. Reporting Companies and the Exceptions – Who Must Report?

A. Reporting Companies

The first step for the owners and operators of any business entity is to determine if the CTA applies to their entity.

“Reporting Company” means any entity that is a corporation, limited liability company, or “other similar entity,” so the definition is fairly broad. “Other similar entities” means any entity that is created (in the case of a domestic Reporting Company) or registered to do business in the U.S. (in the case of a foreign Reporting Company) through a filing with a secretary of state (or any similar office) in a U.S. jurisdiction, such as the Virginia State Corporation Commission for Virginians.

The standard specified by the CTA is “whether an entity is created by a filing…”  So, a filing that forms an entity with any state triggers the reporting requirements.  Other types of state filings for entities, such as amendments, qualifications to do business, or domestications, do not trigger reporting requirements – only the creation or registration of an entity.

Reporting Companies, include but are not limited to:

• Corporations;
• Limited Liability Companies;
• Limited Partnerships;
• Business Trusts;
• Any other entity that is created by the filing of a document with a secretary of state or any similar office under the law of a state.

B. Exceptions

There are 23 specified exceptions from the filing requirements that are listed in the statute. The main exemptions are for industries and entities that are already heavily regulated and otherwise must report entity information to the U.S. Government such as banks, public utilities, broker-dealers, publicly traded companies, and similar entities. The most important of these exemptions for present purposes are: (i) Inactive Entities; (ii) Tax Exempt Entities; (iii) “Large Operating Companies,” and (iv) Wholly Owned Subsidiaries of Exempt Entities.

1. Inactive Entities. (Must meet all six criteria below to qualify):

• Entity was in existence on or before January 1, 2020;
• Not presently engaged in active business;
• Not owned by a foreign person, whether directly or indirectly, wholly or partially;
• No change in ownership in the preceding 12-month period;
• Has not “sent or received” any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period; AND
• Does not otherwise hold any kind or type of assets, including any ownership interest in any entity.

2. Tax Exempt Entities. These are generally Internal Rev. Code 501 (c) organizations but with certain qualifications. Some trusts are exempt from filing reports.

3. Large Operating Companies. (Must meet all 3 criteria below to qualify)

• Employs more than 20 full-time employees in the U.S. (not consolidated with other entities);
• Previous year’s consolidated federal tax return demonstrates more than $5 million of “gross receipts or sales in the aggregate” excluding from sources outside the U.S. (using consolidated return for a group) — note that a tax return for the entity needs to be filed so single member LLCs would not qualify); AND
• “An operating presence at a physical office” in the U.S.

Because of this exemption Reporting Companies are generally small to medium-sized private entities that are not otherwise regulated or required to provide information covered by the CTA to the U.S. Government.

4. Subsidiaries That are Owned 100% by an Exempt Entity.

V. Beneficial Owner Information.  Who Is a Beneficial Owner?

The CTA defines “Beneficial Owner” using a two-prong definition, either of which may be used to define a Beneficial Owner:  ownership or control of 25% of the ownership interests or the exercise of “Substantial Control” of the Reporting Company.

A. An individual who owns or controls at least 25% of the ownership interests of a Reporting Company.

Ownership interests include:

• Equity, stock, or similar instruments
• Any capital or profits interest in an entity
• Any instrument convertible into any share of equity
• Any put, call, straddle, or other option, to buy or sell any equity interest as set forth in 1,2, and 3 above
• Other instruments, contacts, arrangements, understandings, relationships, or mechanisms used to establish ownership

“Ownership or control” of ownership interest may be direct or indirect ownership or control through any contract, arrangement, understanding, or other relationship or in any other way, including:

1. Joint ownership;
2. Ownership through another individual acting as a nominee, intermediary, custodian, or agent;
3. For trusts holding ownership interest in a Reporting Company the Beneficial Owner could be a trustee, a beneficiary, or a grantor as:
   (i)  A trustee of the trust or other individual with the authority to dispose of trust assets;
   (ii)  A beneficiary who is the sole permissible recipient of income and principal from the trust or as a beneficiary who has the right to demand a distribution of or withdrawal of substantially all of the assets from the trust; or
   (iii)  A grantor or settlor who has the right to revote the trust or otherwise withdraw the assets from the trust.
4. Ownership or control of one or more intermediary entities that separately or collectively own or control ownership interests of the Reporting Company.

Ownership is calculated as if all options and warrants are fully exercised, so the ownership is determined on a fully diluted basis.

The applicable percentage is the greater of the total (i) voting power of all classes of ownership interests, or (ii) combined value of the ownership interests of the individual, that is, the ownership calculation is by vote or by value.

If ownership interests cannot be determined with reasonable certainty then an individual who owns or controls 25% of any class or type of ownership interest of the Reporting Company will count as a Beneficial Owner.

B. Any individual who, directly or indirectly, exercises “Substantial Control” over the Reporting Company.

This prong of the definition of Beneficial Owner requires more information and analysis than the 25% prong. Substantial Control” is defined by any one or more of the following, a person who:

1. Serves as a “Senior Officer” of the Reporting Company. “Senior Officer” means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title who performs a similar function.  This does not include corporate secretaries and treasurers, unless these officers exercise control in other ways. The key is “…performing the functions of a Senior Officer, or otherwise has authority indicative of substantial control.”
2. Has authority over the appointment or removal of any Senior Officer or a majority of the board of directors (or similar body, for example a board of managers in an LLC);
3. Directs, determines, or has substantial influence over important decisions made by the Reporting Company, including the following decisions regarding:
   a.  The nature, scope, and attributes of the business of the Reporting Company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;
   b. The reorganization, dissolution, or merger of the Reporting Company;
   c. Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the Reporting Company;
   d. The selection or termination of business lines or ventures, or geographic focus, of the Reporting Company;
   e. Compensation schemes and incentive programs for Senior Officers;
   f. The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;
   g. Amendments of any substantial governance documents of the Reporting Company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or
4. The catch all category – anyone who has any other form of substantial control over the Reporting Company.

Control can be “direct or indirect” through the following means:

• Board representation
• Ownership or control of a majority of the voting power or voting rights
• Control over intermediary entities
• Formal or informal business relationships or arrangements
• Contracts, voting agreements, understandings or arrangements

The CTA regulations don’t comment on whether each individual or groups of individuals who are members of a board of directors or managers meet the criteria of substantial control.  For example, does an individual board member who can vote together with other board members constitute a Beneficial Owner by him or herself, even if their control is only effective when voting with a group of like-minded directors or managers who constitute a majority?  The answer is not clear in the statute or regulations.

The regulations specify that FinCEN requirements are “…intended to prevent sophisticated bad actors from structuring their relationships to exercise substantial control of Reporting Companies with the formalities typically associated with such control in ordinary companies.”

VI. Applicant.  Who Is a Company Applicant?

A  Company Applicant is:

1. The individual who “directly files the document (Articles of Incorporation, Articles of Organization, or similar filings) to create or register the Reporting Company;” and
2. The individual who is “primarily responsible for directing or controlling such filing” if more than one individual is involved in the filing process to create a company.

A Reporting Company can have either have either one or two Company Applicants.

For purposes of two applicants, the person who files plus the person most responsible for causing the filing are each defined as a Company Applicant.

For any non-U.S. Reporting Company, any individual who files the document that first registers the foreign reporting company in the U.S., including any individual who “directs or controls” that filing is the Company Applicant.

In Virginia this would explicitly apply to “incorporators” and “organizers” who file  Articles of Incorporation or Articles of Organization.

VII. Content of the Reports Filed with FinCEN. What Must Be Reported?

A. Reporting Company Information

1. Name
2. Trade name or DBA
3. Address of principal place of business
4. IRS Taxpayer Identification Number (EIN)

Reporting requirements do NOT require filing Social Security Identification Numbers.

B. Beneficial Owner and Company Applicant Information

1. Full legal name of the individual
2. Date of birth
3. Complete current address (street address)
4. An image of the Company Applicant’s photo ID which must be either a non-expired passport or a non-expired driver’s license.

The applicant must file a copy of the document from which the unique identifying number was obtained (a photocopy of passport or driver’s license).

Once the driver’s license or Passport is on file with FinCEN, the Reporting Company, Beneficial Owner, or the Company Applicant can obtain a FinCEN Identifier to avoid presenting a driver’s license or passport photo for each filing, as explained in more detail below.

An important exception to reporting of Company Applicant Information is that Reporting Companies created or registered to the state reporting agency before January 1, 2024 are not required to report information for any Company Applicant.

VIII. Types of Reports. What Are the Types of Reports To Be Filed?

A. “Initial Reports” are required for:

1. Reporting Companies created and registered after Jan. 1, 2024
2. Reporting Companies created and registered before Jan. 1, 2024
3. Foreign Reporting Companies registered to do business in the U.S.
4. Any entity that no longer meets the criteria for any exemption, an entity that moves from exempt statue to non-exempt status.

B. “Updated Reports” are required for:

1. Any changes to required information previously submitted to FinCEN concerning Reporting Companies or Beneficial Owners, including moving from being an exempt company to a Reporting Company or vice versa.
2. Changes to the Beneficial Ownership of a Reporting Company (for example: deaths, buyouts, ownership percentage changes, address changes, name changes).
3. Any changes in the reported information (for example: address changes, name changes, driver’s license photo, or ID numbers on driver’s license or passport).

C. “Corrected Reports” are required for:

Correcting inaccuracies in any report previously filed.

IX. Reporting Deadlines.   When Do the Reports Need To Be Filed?

A. Initial Reports

1. Reporting Companies that are created or registered after Jan. 1, 2024, the Initial Report must be filed no later than 90 calendar days from the earlier of the receipt of “actual notice” or the when the state provides “first public notice” of the filing with the state agency (State Corporation Commission in Virginia) of the Articles of Incorporation, Articles of Organization, or other state formation filing.   This 90-day time deadline applies only to Initial Reports filed during 2024.  After January 1, 2025 the deadline to file Initial Reports will be 30 calendar days after creation or registration of the Reporting Company.
2. Reporting Companies created or registered prior to Jan. 1, 2024 must file its Initial Report prior to January 1, 2025. Therefore, all of the existing Reporting Companies created prior to Jan. 1, 2024 must file Initial Reports in calendar year 2024.

B. Updated Reports

30 calendar days after the date on which the change occurs.

C. Corrected Reports

30 calendar days after the Reporting Company “becomes aware” or has “reason to know” of the mistake or inaccuracy. However, the 30-day corrected reports are deemed to be filed on time if it is filed no later than 90 calendar days after the date on which the inaccurate report was filed regardless of when discovered.

X. Obtaining a FinCEN Identifier and Filing Reports. Where and How Can Reporting Companies File These FinCEN Reports?

A FinCEN identifier (a unique number identifying an individual or entity) may be obtained by the Reporting Company and any individual Beneficial Owner or Company Applicant. Once obtained, an existing FinCEN identifier may be supplied by the Reporting Company in lieu of the detailed individual information for any “Beneficial Owner” and any “Company Applicant,” which means without having to send a photocopy of your driver’s license or passport again.  Once you have the FinCEN Identifier you would only need to provide your identifier.  Your data underlying your FinCEN number would already be on file with FinCEN.

1. The Application can be made online in a simple, menu-driven, application process.
2. The up-to-date FAQs on Beneficial Ownership Information Reporting is located on the web at www.fincen.gov/boi-faqs.

By incorporating or organizing an entity with a state, the Company Applicant will not be seamlessly brought to FinCEN to complete the FinCEN application. The federal and state processes currently are not consolidated.  The incorporations with the state are separate from the FinCEN filing. Virginia SCC FAQs are now available here: Virginia SCC – CTA FAQs. Virginia does provide an abbreviated notice and reminder concerning the CTA filing but information filed with Virginia is not ported or otherwise made available to FinCEN for use in making the FinCEN filing. The Reporting Company must go to the FinCEN URL and start the application process separately.  BOI E-FILING is located at www.fincen.gov.

XI. The BOSS Database. What Is That?

The Beneficial Ownership Secure System (“BOSS”) is the database of information collected by FinCEN under the CTA. It is not opened to the public for browsing or searching, but only for filing FinCEN reports.

The data is maintained by FinCEN for no fewer than five years after the date on which the Reporting Company terminates.

XII. Reported Information. Who is Authorized to Access Reported Information?

The Secretary of the Treasury has announced that the department will establish, by regulation, certain protocols and processes to protect the security and confidentiality of any Beneficial Ownership Information but these regulations have yet to be published.

Information on the FinCEN Database is not publicly available but may be released under certain conditions. Before FinCEN will release reported information, it must receive, through appropriate protocols, the following:

1. A request from any federal Agency engaged in national security, intelligence, or law enforcement activity, for use in furtherance of such activities.
2. A request from officers and employees of the Department of the Treasury, including the IRS, for tax administration purposes.
3. A request from a state, local, or tribal law enforcement agency if a court of competent jurisdiction has authorized the law enforcement agency to seek the information in criminal or civil investigation.
4. A request from the federal agency on behalf of a law enforcement agency, prosecutor, or judge of another country under an international treaty, agreement, or convention.
5. A request made by a financial institution subject to customer due diligence requirements, with the consent of the Reporting Company.

There are penalties for improper access to the information in the BOSS Database.

This Primer is for general informational purposes only, and does not constitute the provision of accounting, business, financial, investment, legal, tax, or other professional advice or services.  This summary is not intended to substitute for the individualized professional advice for your particular business or personal circumstances. Please consult your professional advisors before making any decisions that may affect your business or individual finances.  Sands Anderson PC shall not be responsible for any loss incurred by any person who relies on this Primer.