By: Robert K. Feldman
Attorney at Law
©2023 RKF Law Offices LLC
The Corporate Transparency Act (CTA) is going into effect on January 1, 2024, affecting millions of small businesses.
Purpose of the Corporate Transparency Act.
The focus of the CTA is to expose ownership of the controlling parties of shell companies and other entities with limited or no operations, as Congress believes disclosure of those principals may help avert money laundering and other financial crimes. The Corporate Transparency Act (CTA), enables the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) to create a registry of certain entities and their ownership, referred to as “Reporting Companies.” Reporting Companies under the CTA include corporations, limited liability companies, limited partnerships, certain trusts, and other business enterprises that are either organized or registered to do business under any state law. Reporting Companies must submit a Beneficial Ownership Information Report (BOI) to FinCEN.
How does it affect the real estate sector?
The US Treasury has more recently focused their attention on the residential real estate transactions where Treasury believes criminals are using anonymous, all-cash purchases of residential real estate to launder or hide the proceeds of crime or to engage in other criminal activities including tax and securities fraud. Since 2016, FinCEN under its Residential Real Estate Geographic Targeting Order program has been collecting information about certain residential real estate transactions in the United States. Treasury is also beginning to monitor the U.S. commercial real estate sector as well.
Who are Reporting Companies that must Report under the CTA?
Under the CTA, a Reporting Company includes any corporation, limited liability company, or other similar entity created by filing organizational documents or required to qualify to do business with the secretary of state or similar office in any U.S. state or territory or, with any federally recognized Indian Tribe, including any foreign enterprise doing business in the U.S. Certain types of trusts required to register under state law may also be required to report under the CTA.
What are the Reporting Requirements?
Effective January 1, 2024, newly created Reporting Companies must file with FinCEN a report containing disclosure of information regarding: (i) the entity; (ii) each individual responsible for filing the organizational documents with the state (or qualifying the company to do business in the US); and (iii) details of all “Beneficial Owners” of the Reporting Company. Reporting Companies in existence prior to January 1, 2024, need not include information regarding the party that organized the entity.
What is Beneficial Ownership?
Beneficial ownership refers to information about the individuals who directly or indirectly own or control a company. A beneficial owner is any individual (i) who directly or indirectly exercises “substantial control” over the Reporting Company, or (ii) who directly or indirectly owns or controls 25 percent or more of the “ownership interests” of the Reporting Company. An individual can exercise “substantial control” over a Reporting Company if they direct, determine, or exercise substantial influence over important decisions the Reporting Company makes. Important decisions include decisions about a Reporting Company’s business, finances, and structure and may include senior officers or individuals who have authority over the appointment or removal of senior officers and may include a majority of the board of directors of the Reporting Company.
What Information Must be Reported to FinCEN?
Reporting Companies must disclose the company name and trade name, address for principal place of business in the US, and the applicants IRS taxpayer identification number. Reporting Companies are also obligated to disclose information on all Beneficial Owners, including name, birthdate, residential address, and an image of an acceptable identification document. Any Reporting Company organized after January 1, 2024, must report all of the foregoing, as well as the personal information of the individual that organized the entity, including name, birthdate, residence address and an image of an acceptable identification document. An acceptable identification document includes a current driver’s license, a state issued identification card, a passport, or if a foreign national without US identification, a current passport issued by a foreign government.
Who is exempt from reporting requirements of the CTA?
The CTA provides twenty-three (23) categories of entities that are exempt under the CTA because those entities are already subject to reporting under federal or state regulation, including publicly traded companies, banks, credit unions, money transmitters, securities brokers and dealers, tax-exempt entities, insurance companies, state-licensed insurance carriers, pooled investment vehicles, public utilities, and accounting firms. Subsidiaries of any exempt company are similarly exempt from reporting.
There is also an exemption for what’s called a “large operating company”. A large operating company is an entity that (i) employs more than 20 full-time employees in the United States, (ii) has an operating presence at a physical office within the United States, and (iii) has filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales.
Note the CTA does not apply to sole proprietorships, certain general partnerships, unregistered foreign entities, unincorporated associations, and wealth planning trusts, as they typically are not required to register with the state. Also, not every form of filing with a state government gives cause to file a BOI, for example, an application for a federal Tax Identification Number, an application for a trade name or fictitious name certificate with the state, or an application for professional licensure or registration will not trigger a BOI filing.
When must information be reported to FinCEN?
A Reporting Company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial BOI. A Reporting Company created or registered after January 1, 2024, and but prior to January 1, 2025, will have 90 calendar days after receiving notice of the company’s state registration to file its initial BOI report. Reporting Companies created or registered on or after January 1, 2025, have 30 calendar days from the date state registration is effective to file BOI reports. Changes or corrections to BOI reports must be filed within 30 days after any change or after discovering inaccurate information.
What is a FinCEN Identifier?
A Reporting Company may obtain a FinCEN identifier by checking a box on the BOI; or if not obtained with the initial BOI filing, may submit a later application to obtain the FinCEN Identifier. An individual may also apply for a FinCEN identifier. A FinCEN Identifier is useful where there are multiple Reporting Companies or individuals, and the FinCEN Identifier can be inserted in lieu of company or individual details, avoiding redundancy and expediting reporting.
How are BOI reports submitted to FinCEN?
The initial BOI report and all updates and corrections are filed electronically with FinCEN through FinCEN’s "Beneficial Ownership Secure System." There is no fee for filing the reports.
Who will have access to reported beneficial ownership information and for what purpose?
FinCEN is authorized to disclose BOI information to a limited group including: (i) federal agencies engaged in national security, intelligence and law enforcement, (ii) state law enforcement agencies with a court order, (iii) the U.S. Treasury Department, (iv) financial institutions, (v) government regulators of financial institutions, and (vi) certain foreign authorities requesting information through a U.S. agency. Regulators will also have access to Beneficial Ownership information as part of their oversight of financial institutions.
What are the Penalties for Violating CTA?
Companies subject to the CTA should be aware of the steep penalties for failure to abide by the reporting requirements of the Act. Filing false information to FinCEN or failing to report complete information to FinCEN can result in fines up to $10,000 and imprisonment for up to two years.