The Corporate Transparency Act: FAQs

The Corporate Transparency Act (“CTA”) is a newly effective federal law that requires certain entities to report their owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Below are the frequently asked questions we have been addressing with clients. As we receive additional questions or FinCEN provides additional guidance, we will update the information provided.

1. What is the CTA?

 The CTA is a federal statute enacted as part of the Anti-Money Laundering Act of 2020. The intent of the CTA is to enhance the ownership transparency on entities to combat criminal, corruption, and terrorist activities. The entities that must report their Beneficial Owners are Reporting Companies. Generally, the federal government wants to know who owns or controls certain entities to prevent bad actors from using shell companies to hide their activities. The CTA is very broad and sweeps in many legitimate entities.

The reporting obligations under the CTA began January 1, 2024 and FinCEN’s website for receiving Beneficial Ownership Information Reports (“BOIR”) is live. Here is the link to the FinCEN website.

2. What is a Reporting Company?

A Reporting Company is an entity that must file a BOIR with FinCEN. Reporting Companies are divided into two groups: (1) Domestic Reporting Companies and (2) Foreign Reporting Companies.

A Domestic Reporting Company is generally any entity that is created by filing a document with a secretary of state or similar office in the U.S. For Virginia, filings with the Commonwealth of Virginia State Corporation Commission are a filing with “the secretary of state or similar office.” For North Carolina, an entity created through a filing with the North Carolina Secretary of State would be a Domestic Reporting Company.

A Foreign Reporting Company is generally any entity formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or similar office.

3. Can Reporting Companies be exempt from reporting?

 Most of the exemptions from reporting are for entities that are already subject to separate regulatory obligations to report ownership information. The 23 exemptions are as follows:

· Securities reporting issuer	· Other Exchange Act registered entity	· Financial market utility
· Governmental authority	· Investment company or investment adviser	· Pooled investment vehicle
· Bank	· Venture capital fund adviser	· Tax-exempt entity (exclusively certain 501(c), 527(a), and 4947(a) entities)
· Credit union	· Insurance company	· Entity assisting a tax-exempt entity
· Depository institution holding company	· State-licensed insurance producer	· Large operating company
· Money services business	· Commodity Exchange Act registered entity	· Subsidiary of certain exempt entities (wholly owned by certain entities exempt from reporting)
· Broker or dealer in securities	· Accounting firm	· Inactive entity
· Securities exchange or clearing agency	· Public utility

The qualifications for each exemption are detailed and fact specific. Entities should consult their legal advisors as to whether they may meet the criteria for particular exemptions. The exemptions are narrowly tailored and many entities may not qualify for any exemption. Exemption qualification is generally analyzed on an entity-by-entity basis. An entity can gain or lose its exempt status depending on changes to the entity and its owners.

Exemptions of note are:

A. Tax-exempt entity: To qualify, the entity must be one of the following:

1. An organization that is described in Section 501(c) of the Internal Revenue Code of 1986, as amended (“Code”) (determined without regard to Section 508(a) of the Code) and exempt from tax under Section 501(a) of the Code.
2. An organization that is described in Section 501(c) of the Code, and was exempt from tax under Section 501(a) of the Code, but lost its tax-exempt status less than 180 days ago.
3. A political organization, as defined in Section 527(e)(1) of the Code, that is exempt from tax under Section 527(a) of the Code.
4. A trust described in paragraph (1) or (2) of Section 4947(a) of the Code.

Not all entities that are exempt from taxation qualify as “tax-exempt entities” for the CTA reporting exemption. For example, many homeowner associations (or HOAs) are exempt from taxation, but do not qualify for the “tax-exempt entity” exemption from the BOIR filing obligation because they are not tax-exempt under Section 501(c)(3) of the Code (nor any of the other Code sections listed above).

B. Large Operating Company: To qualify, the entity must meet all of the following criteria:

1. Employ more than 20 full-time employees in the U.S.;
2. Have an operating presence at a physical office within the U.S.; and
3. Have filed a federal income tax return (or informational return) for the prior year for more than $5 million of U.S. gross receipts or sales.

The gross receipts or sales may be aggregated in certain circumstances, but the employees are counted on an entity-to-entity basis.

C. Inactive entity: To qualify, the entity must meet all of the following criteria:

1. The entity was in existence on or before January 1, 2020.
2. The entity is not engaged in active business.
3. The entity is not owned by a foreign person, whether directly or indirectly, wholly or partially.
4. The entity has not experienced any change in ownership in the preceding 12-month period.
5. The entity 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.
6. The entity does not otherwise hold any kind or type of assets, whether in the U.S. or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

4. What is a “Beneficial Owner”?

A Beneficial Owner is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise:

1. Exercises Substantial Control over a Reporting Company; or
2. Owns or controls at least 25% of the Ownership Interests of the Reporting Company.

The definitions of “Substantial Control” and “Ownership Interests” were intentionally made very broad by FinCEN. For example, an individual exercises “Substantial Control” over a Reporting Company if the individual meets any of four general criteria: (1) the individual is a senior officer; (2) the individual has authority to appoint or remove certain officers or a majority of directors of the Reporting Company; (3) the individual is an important decision-maker, which includes decisions regarding the business, finances, or structure of the Reporting Company; or (4) the individual has any other form of substantial control over the Reporting Company. Ownership Interests includes any issued, but unexercised options.

Reporting Companies should consult with their legal advisors as to who may be a Beneficial Owner because the rules are not intuitive and cast a wide net. For example, the President of a corporation who is an employee, but not an owner, is likely a Beneficial Owner as a result of being a “senior officer.”

5. What kind of information must be reported?

If the entity is a Reporting Company and no exemption applies, then two kinds of information must be reported to FinCEN in a BOIR for entities existing (or registered for Foreign Reporting Companies) before January 1, 2024:

1. Information about the Reporting Company such as the entity’s name, address, state of formation (or registration), and its taxpayer identification number.
2. The Reporting Company must also report the full legal name, date of birth, current residential address, a driver’s license or passport number, and a scanned copy of such driver’s license or passport of each Beneficial Owner of the Reporting Company.

For entities formed (or registered for Foreign Reporting Companies) on or after January 1, 2024, the Reporting Company must also report the full legal name, date of birth, current address, a driver’s license or passport number, and a scanned copy of such driver’s license or passport of each Company Applicant of the Reporting Company.

As a substitute for the information listed above, a Reporting Company, Beneficial Owner, or Company Applicant may provide their unique “FinCEN Identifier”.

6. Who is a Company Applicant?

A Reporting Company may have a maximum of two Company Applicants. A Company Applicant is:

1. The individual who directly files the document that creates (or registers) the Reporting Company; and
2. If more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing.

Company Applicant reporting only applies to entities formed (or registered for Foreign Reporting Companies) on or after January 1, 2024.

7. What is the deadline for initial report to FinCEN?

Deadlines for the initial BOIR vary based on when the Reporting Company was formed (or registered to do business in a U.S. state for a Foreign Reporting Company).

Domestic Reporting Companies
Reporting Company Formation	Timing Requirement for Initial BOIR
Domestic Reporting Company formed before January 1, 2024	Must file initial BOIR by January 1, 2025
Domestic Reporting Company formed on or after January 1, 2024 and before January 1, 2025	Must file initial BOIR within 90 calendar days of formation
Domestic Reporting Company formed on or after January 1, 2025	Must file initial BOIR within 30 calendar days of formation

Foreign Reporting Companies
Reporting Company Formation	Timing Requirement for Initial BOIR
Foreign Reporting Company registered before January 1, 2024	Must file initial BOIR by January 1, 2025
Foreign Reporting Company registered on or after January 1, 2024 and before January 1, 2025	Must file initial BOIR within 90 calendar days of registration
Foreign Reporting Company registered on or after January 1, 2025	Must file initial BOIR within 30 calendar days of formation

8. This a one-time report, right?

No, but the BOIR is not an annual report. After the initial BOIR is filed with FinCEN, the Reporting Company must report (a) any corrections to its BOIR within 30 days after the Reporting Company becomes aware of or had reason to know an inaccuracy and (b) any changes to its BOIR regarding the Reporting Company or the Beneficial Owners within 30 days of the change. Changes to the Reporting Company can include a change in name, address, reporting exemption status, etc. Changes to Beneficial Owners can include changes in residential address, death, ownership interest transfers (i.e., sales or purchases), officers or directors of the Reporting Company, etc.

The Company Applicant information is only provided once upon the filing of the initial BOIR for applicable Reporting Companies and need not be updated for changes.

9. Are there penalties for not filing?

Yes, there are federal criminal and civil penalties for noncompliance. A person who willfully violates the reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues and to criminal penalties of up to 2 years imprisonment and a fine of up to $10,000. Potential violations include willfully failing to file a BOIR, willfully filing false beneficial ownership information, or willfully failing to correct or update previously reported beneficial ownership information. Both entities and individuals, including individuals that cause the filing failure or are a senior officer of the Reporting Company at the time of the failure, can be held liable.

A Beneficial Owner can be held liable for refusing to provide the required information to the Reporting Company. FinCEN can bring an enforcement action against an individual who willfully causes a Reporting Company’s failure to submit complete or update beneficial ownership information to FinCEN.

Entities should consider whether to update their organizational and employment documents to include language requiring Beneficial Owners to provide their information for the Reporting Company to make a timely, complete, and accurate BOIR.

10. I don’t want my information available to the public. Who has access to the BOIRs?

The BOIRs are not on a publicly accessible database. FinCEN released regulations that restrict access to the BOIRs for certain reasons to federal, state, local, and tribal officials, as well as certain foreign officials who submit a request through a U.S. federal government agency, financial institutions with the consent of the Reporting Company, regulators of financial institutions, and the Department of Treasury.

There are civil and criminal penalties for any person who knowingly discloses or uses information obtained through a BOIR submitted to FinCEN without authorization.

Wondering where to find more information and help with CTA issues?

Sands Anderson has a team focused on addressing CTA-related questions for clients. If you have questions or need advice regarding the CTA, please reach out to your Sands Anderson contact and they will route you to a team member.

For additional resources from Sands Anderson, below are some helpful links:

• Corporate Transparency Act: A Primer: Link
• HOAs Inadvertently Caught in Federal Crossfire: Ten Things You Need to Know About Community Associations and the Corporate Transparency Act: Link

For additional resources from FinCEN, below are some helpful links:

• FinCEN BOIR homepage: Beneficial Ownership Information Reporting | FinCEN.gov
• FinCEN FAQs: Beneficial Ownership Information Reporting | FinCEN.gov
• FinCEN Small Entity Compliance Guide: Small Entity Compliance Guide | FinCEN.gov

FinCEN has been updating its guidance regularly.

Disclaimer: The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your legal advisers. This summary is not intended, and should not be construed, as accounting, business, financial, investment, legal, tax, or other professional advice, services, or opinion provided by Sands Anderson PC. Sands Anderson PC shall not be responsible for any loss incurred by any person who relies on this summary.